The ATO has finalised the guidance on Temporary Full Expensing ('TFE') for eligible businesses by issuing Law Companion Ruling LCR 2021/3 on 22 December 2021.
Now that we are on the downward slope towards the end of the financial year, eligible businesses, particularly SMEs, should consider these TFE rules and the impacts on their tax and cash flow planning.
Operation of TFE
Eligible businesses can deduct the full cost of eligible depreciating assets on the provision that they are first used or installed ready for taxable use between 6 October 2020 and 30 June 2022 (with a proposal to extend this to 30 June 2023).
Second element costs on eligible assets, such as costs to upgrade plant and equipment are also eligible. Entities with an aggregated turnover of less than $50 million can also claim TFE on second-hand assets.
It’s a shopper’s dream that there is no threshold to the cost of an asset, however certain assets are still excluded from TFE.
The following are some examples of assets not eligible for TFE:
- Capital Works;
- Assets costing less than $1,000 if the entity has chosen to use a low-value pool;
- Primary producers’ assets that can be deducted under Subdivision 40-F if the ITAA 1997 such as fodder storage assets, horticultural plants, fencing assets, or a water facility;
- Assets not connected with Australia and that it is reasonable to conclude will never be located in Australia;
- Assets that had a balancing adjustment event happen in the year of acquisition.
Additional exclusions apply to entities with an aggregated turnover of $50 million or more with the primary exclusion being in relation to the acquisition of second-hand assets.
Additional points to consider
Eligible businesses should be aware that cars are still restricted to the car limit. In effect, the maximum deduction for a car cannot exceed $59,136 for 2020-21 and $60,733 for 2021-22.
Small Business Entities (SBEs) cannot opt-out of temporary full expensing on an asset-by-asset basis therefore pool balances must be fully expensed. This may be useful for certain companies who can claim the loss carry back and obtain a refund for prior year taxes paid back to the 2019 financial year.
However, if there is no eligibility for loss carry back, the full expensing of the SBE pool can be problematic as it can result in losses being trapped in the entity and being subject to loss recoupment tests in the future (e.g. Continuity of Ownership Test).
If your Trust makes a loss and also has an entitlement to franking credits from a dividend, that loss may also result in a loss of the franking benefit.
SBEs can choose to opt out of the SBE pooling rules, however, and until 30 June 2022, will not be prevented from re-applying those rules in the future. For the 2022 financial year, this provides the SBE with some flexibility in determining what assets to claim TFE against.
Related parties must also be mindful that arrangements made between them that enable a deduction but do not increase the groups' business asset base, may invoke the Anti-avoidance Provisions in Part IVA ITAA 1936.
Of course, if an asset is claimed under TFE, there will be no further depreciation of that asset in the future and a sale of that asset will give rise to a balancing adjustment so the impact on future years' tax should also be considered.
It’s January, why do I need to think about this now?
Lodging your business tax return is probably the furthest thing on your mind at this point, however, there may be good cash flow reasons to think about your claims.
- If you are making PAYG Instalments based upon a prior tax return with a lesser TFE claim, you may be able to vary those instalments down to pay a smaller instalment now, or even get a refund if you have overpaid your September 2021 instalment;
- Loss carry back requires sufficient franking credits in the company’s franking account, so if you expect a loss from TFE, you will need to monitor your franking account and the amount of dividends you pay, in order to maximise the refund opportunities;
- Will claiming TFE result in carried forward tax losses which are subject to loss recoupment tests? For trusts, perhaps it is better to opt-out and pay a lower average rate of tax at the beneficiary level, rather than claim a loss in the current year and be subject to higher profits and potentially higher beneficiary tax rates in the future.
For more information
If you have any questions regarding temporary full expensing or whether your business is eligible, please contact your local RSM office.