Deduct the full cost of depreciable assets

The Government is supporting Australian businesses to invest, grow and create more jobs through targeted tax incentives.

Business investment will support Australia’s short term economic recovery and longer term productive capacity and wage growth.

Investment in new technology and new ways of operating will help firms adapt to the structural changes induced by COVID-19.

The Government is providing a temporary tax incentive to support new investment and deliver significant cash flow benefits to businesses.

Temporary Full Expensing

Businesses with turnover up to $5 billion will be able to deduct the full cost of eligible depreciable assets of any value in the year they are installed until 30 June 2022.

The incentive will apply to around $200 billion worth of investment, including 80 per cent of investment in depreciable assets by non-mining businesses.

The cost of improvements to existing eligible depreciable assets made during this period can also be fully deducted.

Full expensing supports businesses that invest as it significantly reduces the after-tax cost of eligible assets, providing a cash flow benefit.

The measure also creates a strong incentive for businesses to bring forward investment before it expires.

Full expensing builds on the enhanced instant asset write-off and the accelerated depreciation previously announced through the Backing Business Investment incentive.

Eligible businesses that acquire eligible new or second-hand assets under the enhanced $150,000 instant asset write-off by 31 December 2020 will also have an extra six months, until 30 June 2021, to first use or install those assets.

Full expensing will stimulate investment from its announcement, supporting economic activity in 2020–21 and onwards until the measure concludes.

Temporary full expensing – example 1

Grace owns an agricultural company, Grace’s Grains Pty Ltd, which has an aggregated annual turnover of $20 million for the 2021–22 income year.

Grace’s Grains Pty Ltd purchases a combine harvester for $600,000, exclusive of GST, on 1 July 2021.

Without temporary full expensing, Grace’s Grains Pty Ltd would claim a total tax deduction of around $180,000 for 2021–22, with the remainder of the cost being depreciated over future years.

Under temporary full expensing, Grace’s Grains Pty Ltd will instead claim a deduction of $600,000 for the full cost of the combine harvester in 2021–22, approximately $420,000 more than before.

At the 2021–22 tax rate for small and medium companies of 25 per cent, Grace’s Grains Pty Ltd will pay around $105,000 less tax in 2021–22.

This will improve the company’s cash flow and help Grace reinvest and grow her business.

Temporary full expensing – example 2

Fred’s Medical Services Pty Ltd has an aggregated annual turnover of $200 million for the 2021–22 income year.

Fred’s Medical Services Pty Ltd engages Shane’s Software Pty Ltd to create a new medical database for $400,000, exclusive of GST. The in house software is first installed and used on 1 July 2021.

Without temporary full expensing, Fred’s Medical Services Pty Ltd would claim a total tax deduction of $80,000 for the 2021–22 income year, with the remainder of the cost being depreciated over future years.

Under temporary full expensing, Fred’s Medical Services Pty Ltd will instead claim a deduction of $400,000 for the full cost of the software in 2021–22, which is $320,000 more than before. Fred’s Medical Services Pty Ltd will pay $96,000 less tax in 2021–22.

This will improve the company’s cash flow and help the business invest and grow.

Increased demand due to temporary full expensing from customers such as Fred’s Medical Services Pty Ltd also helps Shane’s Software Pty Ltd to grow, enabling Shane to hire more staff.

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Temporary loss carry-back

The Government will also allow companies with turnover up to $5 billion to offset losses against previous profits on which tax has been paid, to generate a refund. Loss carry-back will be available to around 1 million companies that employ up to 8.8 million workers.

Losses incurred up to 2021-22 can be carried back against profits made in or after 2018-19.

Eligible companies may elect to receive a tax refund when they lodge their 2020-21 and 2021-22 tax returns.

This measure will provide further cash flow support and promote investment by encouraging more businesses to take advantage of full expensing.

This measure is estimated to deliver $4.9 billion in tax relief to businesses over the forward estimates, and $3.9 billion over the medium term.

Full expensing significantly reduces the after-tax cost of eligible assets, providing a cash flow benefit. It creates a strong incentive for businesses to bring forward investment before it expires.

Full expensing builds on the enhanced instant asset write-off and the accelerated depreciation previously announced through the Backing Business Investment incentive.

Temporary loss carry-back – example 1

Jamie owns a coffee bean wholesaling company, Jamie’s Coffee Pty Ltd, which has an aggregated annual turnover of $51 million. In 2018–19, Jamie’s Coffee Pty Ltd made a tax profit of $5 million and paid $1.5 million in income tax.

Due to the impact of COVID-19 restrictions on customer demand and its ability to trade, Jamie’s Coffee Pty Ltd makes a tax loss of $2 million in 2019–20.

Under the treatment of losses in current law, Jamie’s Coffee Pty Ltd would carry these losses forward until it made a taxable profit.

Under temporary loss carry-back, when the company lodges its 2020–21 company tax return, it will receive a tax refund of $600,000 in recognition of this loss and tax paid in 2018–19.

Continuing into 2020–21, reduced trading means Jamie’s Coffee Pty Ltd makes another tax loss of $500,000. The company paid sufficient tax in 2018–19 to also offset the loss from 2020–21 resulting in a further refund of $150,000.

Jamie’s Coffee Pty Ltd uses its $750,000 refund to help it to stay in business and retain its employees, and support the transition back to business as usual.

Temporary loss carry-back – example 2

Bogong Builders Pty Ltd has aggregated annual turnover of $60 million for the 2021–22 income year. On 1 July 2021, Bogong Builders Pty Ltd purchases a truck-mounted concrete pump for $1 million, exclusive of GST.

The company’s taxable income for 2021–22 was $600,000 before the purchase.

Without temporary full expensing, Bogong Builders Pty Ltd would claim a tax deduction of around $300,000, resulting in a taxable profit of $300,000, and a tax bill of $90,000.

Under temporary full expensing, Bogong Builders Pty Ltd will instead deduct the full cost of the asset of $1 million, resulting in a tax loss of $400,000.

Under temporary loss carry-back, Bogong Builders Pty Ltd offsets this tax loss against profits in 2018–19, resulting in a tax refund of $120,000.

Without the refund, the company may have had to defer the investment until their cash flow position recovered, or may not have purchased the new pump at all.

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