Significant changes to temporary full expensing and instant asset write offs for the 2024 financial year
As the financial year draws to a close, businesses need to take certain steps to ensure they do not miss out on the accelerated tax deductions provided by the Temporary Full Expensing (TFE) rules. What actions should businesses take to maximise their tax benefits for this year?
Temporary Full Expensing (TFE), which allows for the immediate deduction of eligible depreciating assets, is set to expire at the end of the 2023 financial year. At that point, the Instant Asset Write Off (IAWO) will once again apply.
To capitalise on accelerated tax deductions, businesses must adhere to the Temporary Full Expensing (TFE) rules. These rules enable a complete deduction of eligible depreciating assets in the year they are first used or installed for a taxable purpose before 30 June 2023. It's crucial for eligible businesses to be mindful of this specific timeline to avoid any potential loss of tax benefits.
Merely contracting for asset purchase or even becoming the asset owner by 30 June 2023 is insufficient to meet the requirements. Taxpayers should understand that TFE operates on a Temporary Full Expensing scheme basis, and it applies on an asset-by-asset basis. This means that each eligible asset needs to meet the eligibility criteria and be used or installed ready for use within the specified timeline to claim Temporary Full Expensing.
Business entities, including small businesses and corporate tax entities, with an aggregated turnover of less than a certain threshold should consider this expensing incentive. The cost threshold for eligible assets under the Temporary Full Expensing rules should also be carefully noted.
Rules from 1 July 2023
Starting from 1 July 2023, the tax treatment of depreciating assets will change, and will be required to be written off over the assets effective lives.
For small business entities using simplified depreciation, the Instant Asset Write Off threshold for asset costs will revert to $1,000. This marks a change from the previous threshold of $20,000, which has been in effect since 12 May 2015, and has been continuously extended and increased thereafter (see the following table). There is a plan to raise the threshold to $20,000, however the legislation has not yet been finalised.
Additionally, small business taxpayers who had general small business pools should resume using them, as the Temporary Full Expensing (TFE) rules made pooling redundant and allowed for a full write-off of pool balances as of 30 June 2021.
Small business entities that had not previously elected into the general small business pool (whether by choice or because they only qualified as small business entities this year) may consider doing so for the 2023 year. By doing this, they can bring the tax written down values of eligible depreciating assets into the pool in 2023 and have the opportunity for a full write-off of the pool balances below $20,000 at the end of the financial year.
For other taxpayers, there will be no Instant Asset Write Off available starting from 1 July 2023. However, assets with a cost of less than $1,000 can be allocated to a low value pool if the taxpayer chooses to do so. Business taxpayers can treat expenditures of up to $100 as revenue in nature under PS LA 2003/8 and deduct them in full. Non-business taxpayers, such as employees, can rely on a statutory rule that allows a full deduction for the cost of depreciating assets costing $300 or less.
What is Temporary Full Expensing?
Temporary Full Expensing (TFE) allows businesses to claim a tax deduction for assets used (or installed for use) in their business, regardless of the cost of the asset.
To be eligible for TFE, your business must meet the following requirements:
Have an aggregated turnover of less than $5 billion
Purchase and first use (or install and be ready for use) the eligible new assets between 7:30pm AEDT on 6 October 6 2020 and 30 June 2023
Businesses with an aggregated turnover of less than $50 million can also take advantage of the Temporary Full Expensing (TFE) measure for eligible second-hand depreciating assets. Furthermore, the cost of improvements made to eligible assets is also included under TFE.
If your business does not meet the criteria for Temporary Full Expensing (TFE) or is ineligible, you may still be able to take existing assets and claim a deduction under the Instant Asset Write-Off scheme. To apply for this scheme, the assets must have been:
Purchased by 31 December 2020
First used or installed and ready for use by 30 June 2021
How does Temporary Full Expensing work?
The use of Temporary Full Expensing (TFE) can vary depending on factors such as your total aggregated turnover, the number of assets acquired and used during the tax year, and the total cost of those assets. The specific details of how TFE is applied will be determined by these factors.
As an illustration, let's take the case of a restaurant located in Sydney with an annual turnover of $2.4 million. The restaurant management decides to undertake various upgrades, including replacing kitchen equipment, investing in herb plants, refurbishing the main dining room, and upgrading the iPads used for their point-of-sale system.
The cost of these assets totals $91,000, which includes $65,000 for kitchen equipment, $10,000 for new furniture for the dining room, $10,000 for second-hand furniture, and $6,000 for new iPads.
When the restaurant owner prepares their tax return for the tax year in which these assets were purchased (2022-23), they are entitled to claim the full $91,000 as an immediate tax deduction for that financial year under the Temporary Full Expensing measure.
Due to the restaurant's aggregated turnover being below $50 million, they qualify to claim deductions for second-hand depreciating assets. This eligibility allows them to benefit from the provisions regarding second-hand assets.
However, if the restaurant had an aggregated turnover of more than $50 million, they would only be able to claim $81,000 as a tax deduction, as the $10,000 for the second-hand dining room furniture would not be eligible.
An example of an TFE
Barry owns a manufacturing company and recently acquired a printing machine for the purpose of cutting during the production process.
The cost of the machine was $80,000 (without GST) and it was delivered and set up for use prior to June 30, 2022.
As his business qualifies for the small business tax rate of 25%, Barry is eligible to claim an immediate deduction for the entire amount, which will decrease his income tax bill by $20,000 ($80,000 x 0.25).
What is an Instant Asset Write Off?
Businesses that satisfy specific eligibility criteria have the opportunity to claim a tax deduction for assets used for business purposes through the Instant Asset Write-Off scheme. This means your business receives an immediate tax deduction for your asset in your next tax return rather than receiving a deduction over a number of years, resulting in cash sooner for your business.
Businesses can use the Instant Asset Write-Off for multiple assets, provided that the cost of each individual asset is below the specified threshold. Moreover, this write-off opportunity extends to both new and second-hand assets.
To be eligible for the write-off, the assets must have been purchased and put into use during the same tax year in which the write-off is claimed.
Eligible businesses that qualify for Instant Asset Write-Off on an asset have certain criteria that must be met, including:
The total income of your business and any associated businesses (aggregated turnover) must be below $10 million
The asset must have been purchased, used, or installed between 1 July 2023 and 30 June 2024
The cost of the asset must be less than $20,000
The threshold will apply on a per-asset basis
An asset which is valued at $20,000 or more can continue to be placed in a small business simplified depreciation pool
Example: Instant Asset Write-Off of a business and personal use asset
Paul made a purchase on 18 May 2018, acquiring a new computer and printer. The computer was priced at $6,800 and he used it for 80% of the time in his capacity as a sole trader. The printer, on the other hand, was acquired for $700 and was dedicated solely to business purposes.
Paul calculated the portion of the computer's usage that qualifies for a deduction under the instant asset write-off, amounting to $5,440 (80% of $6,800). As for the printer, he is eligible to claim the full cost of $700.
In his tax return, Paul included the combined total of $6,140.
Examples of tax-deductible assets for hospitality businesses
The Instant Asset Write Off and Temporary Full Expensing (TFE) apply only to depreciating assets. A depreciating asset is an item that is expected to decline in value over time and has a limited effective life, meaning it will not continue to work as expected indefinitely.
Hospitality businesses have a wide range of depreciating assets that they may acquire and utilize. Examples of such assets include tools and equipment like microwaves, ovens, coffee machines, and fridges. Additionally, technology assets such as computers, laptops, tablets, bump screens, printers, and EFTPOS terminals are commonly used. Furniture items like chairs, tables, and sofas are also considered depreciating assets in this context. Furthermore, motor vehicles such as cars, motorcycles, and delivery vans can also fall under this category.
There are car limits for each financial year; for 2022/23, it is $64,741, and for 2023/24, it is $68,108.
What are the exceptions?
The Instant Asset Write Off and Temporary Full Expensing (TFE) schemes only cover depreciating assets, so certain exceptions do not qualify and are excluded from these schemes.
These exceptions include capital works (such as structural improvements), horticultural plants, intangible assets (such as franchises), assets that are leased out or expected to be leased out for more than 50% of the time on a depreciating asset lease, software allocated to a software development pool, and land and buildings.
It's worth noting that there are special rules that apply to in-house software acquired or developed for business use, and these rules do not apply to payments made to use software in your business, such as point-of-sale software.
Where can small businesses purchase eligible assets?
Prior to making substantial purchases, it is crucial to thoroughly assess the eligibility of the asset for a write-off and evaluate its potential impact on your business.
The main purpose of the Instant Asset Write Off and Temporary Full Expensing (TFE) schemes is to promote business investment and growth, rather than solely focusing on reducing taxable income. Consequently, it is important to base your decisions on your present business requirements and long-term objectives. Acquiring substantial assets can have immediate financial and cash flow implications, so careful consideration should be given to these factors.
There are several suppliers that offer equipment that is eligible for the Instant Asset Write-Off to hospitality businesses.
What happens if I make a purchase greater than a write-off amount?
There is no limit on the cost of assets that can be deducted under Temporary Full Expensing, as long as the asset is eligible and not specifically excluded or limited under the scheme. This means that the full cost of an asset can be written off against your profits, regardless of whether the asset costs $100 or $1 million, as long as your business is eligible for full expensing.
Under the Instant Asset Write-Off, assets equal to the write off threshold or higher must be pooled.
Additionally, there is no limit on the number of capital assets that a business can acquire.
Are there exclusions or limits for Instant Asset Write-Offs?
There are several categories of assets that are not eligible or have modified rules for full expensing under the Instant Asset Write Off and TFE schemes. These include:
Buildings and other assets that are eligible for capital works deductions
Assets located overseas
Some primary production assets (such as fencing and water facilities) that already have an existing instant write-off scheme in place
Assets that are not used in a business
So-called "expensive" cars, which are defined as vehicles that cost more than the "car limit," cannot be depreciated at all. The car limit is $64,741 for the 2023 Financial Year, and $68,108 for the 2024 Financial Year.
This rule has been in place for many years and has been carried over to the TFE scheme to prevent businesses from using taxpayer money to purchase lavish luxury cars.
Motor vehicles that are not considered cars for tax purposes are not subject to the expensive car limit. This means that commercial vehicles such as vans, buses, and trucks that are bought and used for work purposes can have their full cost depreciated, regardless of the total.
Some larger utes are also considered commercial vehicles rather than cars if they have a carrying capacity of more than one ton.
If a business purchases one of these utes, which may cost more than the car limit, they may be able to fully write off the cost of the vehicle as a deduction using TFE.
Assets that are not used in a business
It's important to note that the TFE scheme does not apply to capital assets that are used in a non-business capacity, such as assets purchased by investment property owners or assets used in employment.
For example, office furniture is eligible for TFE when acquired by a business but not when acquired by someone in employment.
If you use an asset for both business and personal purposes, any deduction you claim under TFE must be apportioned accordingly. For example, if you purchase a new computer for $2,500 and use it 50% for business and 50% for personal purposes, you can only claim a deduction for $1,250.
Temporary Full Expensing ends on 30 June 2023.
From 1 July 2023:
Medium and large businesses will have no immediate deduction mechanism, but may continue to apply PS LA 2003/8, for low-cost business assets costing up to $100, including GST, so $90.01 excluding GST
Small Business Enterprises (SBEs) will be able to use the Instant Asset Write Off threshold which will be temporarily increased to $20,000 for eligible depreciable assets (per asset) first used or installed ready for use between 1 July 2023 and 30 June 2024
Assets costing $20,000 or more are added to the small business general use pool and depreciate at 15% in the first income year and 30% each year thereafter
Expect that pool balances less than $20,000 on 30 June 2024 will need to be fully deducted under s 328-210 of the ITAA 1997
Causbrooks gives you a client manager supported by a team of knowledgeable small business experts. We’re here to take the guesswork out of running your own business.
Get in touch with us to set up a consultation or use the contact form on this page to inquire whether our services are right for you.
Any advice contained in this document is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.