Temporary full expensing (‘TFE’) provides support for businesses, and it encourages investments. An eligible business may claim an immediate tax deduction for the business portion of the cost of an asset in the year that it is first used or installed and ready to be used for a taxable purpose.
Let’s look at the impacts of the Temporary Full Expensing rules for small to medium enterprises.
The Australian Taxation Office has issued advice on Temporary Full Expensing for eligible small to medium businesses by releasing the Law Companion Ruling LCR 2021/3 on 22 December 2021.
We inch closer towards the end of the financial year, eligible businesses, especially SMEs, ought to look at these TFE rules and the impacts it will have on their cash flow and tax planning.
How does the TFE work?
Businesses that are eligible for the TFE may deduct the total cost of eligible depreciating assets on the condition that they have been used or installed and set for taxable use between the period of 6 October 2020 and 30 June 2022 (with a proposal to increase this to 30 June 2023).
Expenses on qualifying assets, such as costs to upgrading equipment are also eligible. Entities with an aggregated turnover of less than $50 million may also claim TFE on second-hand assets.
It is great for buyer’s having no threshold to the cost of an asset, although some assets remain excluded from TFE.
Below are some examples of assets which are not eligible for TFE:
- Assets which had a balancing adjustment event happen in the year of acquisition;
- Capital Works;
- Primary producers’ assets which may be deducted under Subdivision 40-F if the ITAA 1997 such as fodder storage assets, horticultural plants, fencing assets, or a water facility;
- Assets which cost under $1,000 if the entity has chosen to use a low-value pool;
- Assets which are not connected with Australia and that it is reasonable to conclude will never be located in Australia.
Extra exclusions apply to entities which have an aggregated turnover of $50 million or more with the primary exclusion being in relation to the acquisition of second-hand assets.
Other key points to consider
Eligible businesses must be aware that cars are still restricted to the car limit. The maximum deduction for a car must not exceed $59,136 for 2020-21 and $60,733 for 2021-22.
Small Business Entities (SBEs) are not able to opt-out of temporary full expensing on an asset-by-asset basis, as a result pool balances need to be fully expensed. This can be useful for those companies who claim the loss carry back and receive a refund for prior year taxes paid back to the 2019 financial year.
Although, if a business is not eligible for loss carry back, the full expensing of the SBE pool can be an issue as it may result in losses being trapped in an entity and would be subject to loss recoupment tests in the future (for example; Continuity of Ownership Test).
If a Trust makes a loss but still is eligible for franking credits from a dividend, the loss can also result in losing the franking benefit.
SBEs may opt out of the SBE pooling rules if they choose, although, and until 30 June 2022, they will not be stopped from re-applying those rules in the future. For the 2022 financial year, this offers SBEs with a little flexibility in deciding which assets to claim the TFE against.
Associated parties need to keep in mind that arrangements made between them which allow a deduction but do not increase the groups’ business asset base, may invoke the Anti-avoidance Provisions in Part IVA ITAA 1936.
However, if an asset is to be claimed under TFE, there will not be any further depreciation of that particular asset going forward and a sale of that asset will lead to an increase to a balancing adjustment so the impact on future years’ tax need to also be considered.
It’s only the start of the year. Why do I need to know about this now?
We know that lodging your business tax return may be the last thing on your mind right now, but there can be great cash flow reasons to consider for your claims.
- Does claiming TFE result in carried forward tax losses that are subject to loss recoupment tests? So, for trusts, it may be better to opt-out and pay a reduced average tax rate at the beneficiary level, rather than claiming a loss in the current financial year and being subject to larger profits and possibly a higher beneficiary tax rate in the future;
- Loss carry back needs adequate franking credits in the company’s franking account, so if you are expecting a loss from TFE, then you will have to keep an eye on your franking account and the number of dividends you pay, to maximise the refund opportunities;
- If you make PAYG Instalments based on a prior year tax return with a smaller TFE claim, you might be eligible to vary those instalments down to pay a lower instalment now, or may even receive a refund if you have overpaid your September 2021 instalment.
Should you have any queries about Temporary Full Expensing, please do not hesitate to contact our team on: (03) 8393 1000.