12th May, 2021
If you’re a business owner, understanding Temporary Full Expensing and its transition from the Instant Asset Write-Off could help you build your business under testing times.
Last year, the Morrison Government announced a raft of measures designed to boost economic recovery following the COVID-19 pandemic.
Chief among them was the creation of ‘Temporary Full Expensing’: a tax incentive that allowed businesses making up to $5 billion to write off any eligible expense immediately, instead of down the track.
As a result, national investment in machinery and equipment skyrocketed in the December quarter 2020-21 to some of the highest levels we’ve seen in recent times.
And the flow-on impacts of additional investment may be already felt. Australia’s economy has rebounded from the COVID-19 slump faster than expected; at least some of the thanks for that can arguably be attributed to measures designed to reinvigorate the nation’s economic activity.
In order to maintain support for businesses throughout the recovery, the Government announced it will extend Temporary Full Expensing – as well as Tax Loss Carry‑Back – in last night’s Federal Budget, providing an additional $20.7 billion in tax relief.
Both schemes are estimated to boost GDP by around $2.5 billion in 2020‑21 and create around 60,000 jobs by the end of 2022‑23.
If you’re a business owner, it can pay to make the most of both measures. Here’s a quick overview of how they work, and what’s changed since the last Federal Budget.
Temporary Full Expensing was introduced in last year’s Federal Budget to remove the claim limit on depreciating assets, with the aim of making it easier for businesses to buy new equipment and make other investments.
And before that we’d witnessed the growth of the Instant Asset Write-Off, which started off fairly modestly in 2015, allowing small businesses to claim the depreciation of work purchases right away rather than over a set period of time.
Before last year, the Instant Asset Write-Off was a useful – if limited – benefit to small businesses looking to grow. While they could claim the depreciation of an asset immediately, claims were capped at $30,000.
But, as the pandemic spread and the gears of the economy began to grind to a halt, the Government stepped in, increasing the write-off limit to $150,000 until 31 December, when it would decrease to $1,000, with the idea that it would be replaced by Temporary Full Expensing from that date on. Temporary Full Expensing was announced to have no purchasing limit.
And, as of yesterday’s Budget announcements, eligible businesses can now make much-needed investments, including the cost of improvements to existing assets, and write off the depreciation without a cap until June 30, 2023.
As we’ve written before, you need to follow certain rules when claiming an asset.
For starters, the asset needs to have been purchased within the time period specified by the Government – in this case, between October 6, 2020 and June 2023. You also have to use it, or have it installed and ready for use within this time period.
It’s important to note that this tax break won’t result in an immediate cash refund against business investments, rather it’s a deduction designed to reduce your taxable profit. If you operate as a company and spend, say, $40,000 on a capital purchase (net of GST), then assuming a tax rate of 27.5 percent, the company will receive a 27.5 per cent deduction, which equates to a $11,000 reduction in tax. This means that the company will still have a net cash outlay of $29,000 on this purchase.
Don’t forget to pro-rate the deduction for private use. To claim the full deduction, the asset has to be used solely for business purposes. If you operate as a sole trader or in a partnership and there has been some personal use of the asset, the deduction needs to be pro-rated to reflect this.
You also have to actually be in business to claim the depreciation – having an ABN is not enough.
These are just some of the criteria that apply when you consider claiming an asset using Temporary Full Expensing. We recommend speaking with a specialist tax advisor before making any decisions regarding your situation.
Want to hear more about what the 2021 Federal Budget means for small business?
See our expert panel featuring the The Hon. Stuart Robert MP, Minister for Employment, Workforce, Skills, Small and Family Business, Dr Craig Latham, Deputy, Small Business and Family Enterprise Ombudsman and Helen Lea, Chief Employee Experience Officer, MYOB, discuss what the Budget means for your small business (from Friday 21 May at 9:30am-10:15 AEST). View it here today.