As a business owner in Australia, understanding and leveraging tax benefits is a powerful tool that can help you take control of your financial resources and confidently navigate the business landscape.
One benefit was the temporary full expensing scheme, which ended on 30 June 2023. This scheme significantly boosted businesses by allowing them to claim immediate deductions for the total cost of eligible assets.
Let’s take a detailed look back at what it entailed, how businesses benefited from it, and what has replaced it in the 2024-25 financial year.
What Was Temporary Full Expensing?
Temporary full expensing was a powerful tax benefit introduced by the Australian government to stimulate business investment and support economic recovery during the COVID-19 pandemic.
Under this scheme, eligible businesses could claim an immediate deduction for the full cost of eligible depreciating assets and capital assets in the year they were first used or installed ready for use, between 6 October 2020 and 30 June 2023.
This meant that businesses could claim the entire amount upfront instead of claiming depreciation over several years, as per the normal rules. This immediate deduction provided a significant cash flow boost and incentivised businesses to invest in new assets, upgrade existing ones, and expand their operations.
Eligibility Criteria for Eligible Assets
To have been eligible for temporary full expensing, your business must have met one of the following criteria:
- Had an aggregated turnover of less than $5 billion, or
- Been a corporate tax entity that satisfied the alternative income test, or
- Been a small business entity with an aggregated annual turnover of less than $10 million
The types of assets eligible for temporary full expensing were quite broad, including:
- New assets: This included brand-new assets purchased from suppliers.
- Second-hand assets: If your aggregated turnover was under $50 million, you could also claim temporary full expensing for second-hand assets.
- Improvements to existing eligible assets: If you made improvements to assets that were already eligible for temporary full expensing, you could also claim the full cost of those improvements.
However, certain assets were excluded from the scheme, such as:
- Capital works: Assets that are classified as capital works, such as buildings and structural improvements, were not eligible for temporary full expensing. These assets continue to be deductible under the capital works provisions.
- Assets in a low-value pool or software development pool: Assets allocated to these specific depreciation pools were excluded from temporary full expensing.
- Certain primary production assets: The scheme did not apply to some assets used in primary production, such as water facilities, fencing, and horticultural plants.
How Businesses Benefited from Temporary Full Expensing Deductions
Temporary full expensing provided significant benefits to eligible businesses. By claiming the full cost of an asset upfront, businesses could reduce their taxable income and improve their cash flow. This extra cash could then be reinvested into the business, enabling growth and expansion.
For example, let’s say a business purchased a new piece of equipment for $200,000 on 1 July 2022 and started using it immediately. Under temporary full expensing, the business could claim the full $200,000 as a deduction in their 2022-23 tax return.
Without this scheme, the business would have had to depreciate the asset over its effective life, claiming only a portion of the cost each year.
This immediate deduction was particularly beneficial for profitable businesses looking to reduce their tax liability. By bringing forward deductions that would otherwise be spread over future years, businesses could optimise their tax position and free up cash for other purposes.
Additionally, including items that quickly lose market value in depreciation deductions can further reduce annual taxes.
It is also important to recognise and claim the business portion of assets to optimise tax deductions under the temporary full-expensing scheme. Accurately reporting the business portion when completing tax returns can maximise eligible deductions.
Current Situation: Normal Depreciation Rules Apply
As of 1 July 2023, temporary full expensing has ended, and normal depreciation rules now apply. This means that assets purchased on or after this date must be depreciated over their effective life, per the ATO’s guidelines.
The ‘effective life’ of an asset is the period over which it can be expected to be used by any entity for a taxable purpose, or the period over which it can be expected to be used by any entity before it is likely to be scrapped, sold for no more than scrap value, or abandoned. This treatment of assets still stands for the 2024-25 financial year. The simplified depreciation rules allow small businesses to qualify for instant asset write-offs.
However, small businesses with an aggregated turnover of less than $10 million can access a different form of accelerated depreciation.
They can claim an immediate deduction for the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2024. Businesses can also opt out of temporary full expensing on an asset-by-asset basis. To do this, they must notify the ATO in their tax return by indicating the assets for which they are choosing not to claim the immediate deduction.
Furthermore, as part of the 2024-25 Federal Budget, the government has announced an extension of this $20,000 instant asset write-off threshold for small businesses until 30 June 2025. However, it’s important to note that the legislation to enact this extension formally is still before Parliament and has not yet been passed into law. This means that while the extension is proposed, it is not yet guaranteed, and businesses should stay updated on the progress of the legislation.
Planning for the Future
With the end of temporary full expensing, it’s crucial for businesses to plan their asset purchases and consider the tax implications. This proactive approach will ensure you’re prepared for the post-expensing era.
When an asset that has been fully expensed is sold in the future, the full proceeds will be taxable. This is because the asset’s cost will have been entirely written off, leaving no further deductions available. As a result, businesses may face a higher-than-normal tax bill in the year of sale.
To manage this, businesses should plan ahead and consider setting aside a portion of the sale proceeds to cover future tax liability. They should also factor in the timing of asset sales and how this may impact their overall tax position. Additionally, it is essential to ensure that improvements or relocations of existing depreciating assets occur before the specified deadline to qualify for accelerated tax deductions.
FAQs
1. Can I still claim temporary full expensing for assets purchased after 30 June 2023? No, temporary full expensing is no longer available for assets purchased on or after 1 July 2023.
The scheme officially ended on 30 June 2023, and assets purchased after this date must be depreciated under the normal rules based on their effective life. To qualify for the immediate deduction, it’s crucial to have purchased and installed any eligible assets ready for use by the 30 June 2023 deadline. Improvements made to existing eligible depreciating assets during the specified period can be fully deducted.
2. What has replaced temporary full expensing in the 2024-25 financial year?
In the 2024-25 financial year, normal depreciation rules apply for most businesses, where assets are written off over their effective life. This means that the cost of an asset is spread over the number of years it is expected to be used in the business, in line with the ATO’s depreciation schedules.
However, small businesses with an aggregated turnover of less than $10 million can still access accelerated depreciation in the form of the $20,000 instant asset write-off. This allows them to claim an immediate deduction for the full cost of eligible assets costing less than $20,000, provided they are first used or installed ready for use between 1 July 2023 and 30 June 2024. Businesses can choose to apply temporary full expensing on an asset-by-asset basis and must notify the ATO in their tax return.
The government has announced plans to extend this $20,000 threshold until 30 June 2025, but the extension is still subject to the passage of legislation through Parliament.
3. How can small businesses benefit from the $20,000 instant asset write-off?
Small businesses with an aggregated turnover of less than $10 million can take advantage of the $20,000 instant asset write-off to immediately deduct the full cost of eligible assets. This can provide a significant cash flow boost and reduce the business’s taxable income in the year of purchase.
To be eligible, the asset must:
- Cost less than $20,000 (excluding GST)
- Be purchased and first used or installed ready for use between 1 July 2023 and 30 June 2024 (or 30 June 2025, subject to the proposed extension being passed into law)
- Be used for a taxable purpose in the business.
- Office furniture, computer equipment, tools, and vehicles used for business purposes may qualify as assets.
Small businesses can reduce their tax payable by claiming the full deduction upfront and reinvesting the savings into growing their operations. It’s important to keep accurate records of asset purchases and discuss specific asset eligibility with a tax professional.
4. What should businesses consider when planning for the future, post-temporary full expensing?
With temporary full expensing no longer available, businesses must take a strategic approach to asset purchases and tax planning. Some key considerations include:
- Timing of asset purchases: Businesses should consider the timing of asset purchases and how this aligns with their depreciation schedules and overall tax position. Purchasing assets just before the end of the financial year may allow for a larger deduction in that year’s tax return.
- Effective life of assets: When selecting assets to purchase, businesses should consider their effective life and how this impacts the depreciation rate. Assets with a shorter effective life will generally provide larger deductions in the earlier years.
- Proceeds from asset sales: Businesses should plan for the tax implications of selling assets that were previously claimed under temporary full expensing. As the full cost will have been deducted, any proceeds from the sale will be fully taxable. Setting aside funds to cover this future tax liability is prudent.
- Balancing tax deductions with cash flow: While claiming deductions can reduce tax payable, businesses should also consider their cash flow needs. In some cases, spreading deductions over multiple years may be beneficial to smooth out cash flow.
- Seeking professional advice: Given the complexity of tax laws and each business’s unique circumstances, it’s advisable to seek guidance from a qualified tax professional. They can help businesses navigate the post-temporary full expensing landscape and optimise their tax position.
Key Takeaways
- Temporary full expensing was a tax incentive that allowed eligible businesses to claim an immediate deduction for the full cost of eligible assets purchased and installed ready for use between 6 October 2020 and 30 June 2023.
- The scheme provided businesses with a significant cash flow boost and encouraged investment in new assets and upgrades.
- As of 1 July 2023, temporary full expensing has ended, and normal depreciation rules based on effective life now apply for most businesses.
- Small businesses with an aggregated turnover of less than $10 million can still access the $20,000 instant asset write-off for eligible assets until 30 June 2024 (or 30 June 2025, subject to the proposed extension being legislated).
- Businesses should carefully plan their asset purchases and consider the tax implications, particularly the treatment of proceeds from the future sale of fully expensed assets.
- Seeking professional tax advice is recommended to navigate the complex tax landscape and optimise business outcomes in the post-temporary full expensing environment.
Disclaimer: This information is general in nature and does not consider your personal circumstances. You should consider the appropriateness of the information with regard to your own objectives, financial situation and needs before acting on it. And, as always, professional advice is recommended.
