The temporary full expensing of assets was one of many measures the Government introduced to stimulate the economy during the COVID-19 pandemic. When it was introduced, it was announced that businesses with an aggregated turnover of less than $50 million were eligible for a full income tax deduction on eligible business assets purchased and installed ready for use by 30 June 2020.
This measure was subsequently extended a number of times, until the final date of 30 June 2023.
While this measure is also applicable for businesses with turnover from $50 million to $5 billion (with restrictions for additional assets), this article focuses on the businesses with less than $50 million turnover.
As the 30 June 2023 deadline approaches, it is a good time for businesses to assess their capital requirements to see if it is beneficial to make asset acquisitions in this financial year.
Please consider the following points while assessing your capital requirements:
- The temporary full expensing write off is limited to the business portion of the asset. If an asset is used 20% for private purposes, the business tax deduction is limited to 80% of the cost of the asset.
- Motor vehicles are deductible up to the depreciation cost limit only ($64,741 for the 2023 financial year).
- Some assets are excluded from these measures including horticultural plants, software allocated to a software development pool, and capital works deductions (for example buildings).
- The taxpayer is eligible for the deduction from the time the asset is installed and available for use. (Many major items of plant and equipment have a lead time which may result in the deduction being unavailable for the 2023 financial year.)
- The tax deduction is only of benefit in the current financial year when there is taxable income at a level where tax is payable. If a business has experienced a significant downturn it may not benefit fully from this immediate write off in the 2023 financial year. However, losses may be carried forward to offset taxable income in future financial years.
- Cash flow remains vital for businesses given the uncertainty in the current economy. Businesses must have the cash flow to pay for the assets, or the means to obtain and service finance arrangements.
- Small businesses with turnover less than $10 million that have previously chosen to apply the simplified depreciation rules must use the temporary full expensing measure on all assets that meet the criteria.
Once the temporary full expensing measures cease on 30 June 2023, unless a further extension of time or new measure is enacted, the previous depreciation rules will apply from 1 July 2023.
This means that businesses will depreciate all capital assets under the Uniform Capital Allowances rules subject to the effective life of an asset. Small businesses will be able to access the Simplified Depreciation rules which includes pooling of assets. Whether a small or medium business, the lucrative tax write off for the full cost of an asset under the temporary full expensing measure will cease and depreciation of assets will revert back to pre 2019 rules for businesses (pre 2015 rules for small businesses using simplified depreciation).
As the temporary full expensing measures apply to assets in place and ready to use before June 30, please contact your Accru Advisor at your earliest convenience so we can discuss the benefits with you and help you plan for your purchases.