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Temporary full expensing allows businesses to claim an immediate deduction for the business portion of eligible new depreciating assets.

Small businesses can also claim an immediate deduction for the business portion of eligible second-hand depreciating assets.

The asset must be first used or installed ready for use for a taxable purpose between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

Instant asset write-off also allows an immediate deduction.

The threshold for each asset is $150,000 for assets purchased by 31 December 2020 and first used between 12 March 2020 and 30 June 2021. Different thresholds and eligibility apply before 12 March 2020.

Backing business investment – accelerated depreciation

Backing business investment allows eligible businesses to claim the cost of new depreciating assets at an accelerated rate.

It applies to the 2019–20 and 2020–21 income years.

Only one incentive can apply for each asset, so you should determine which incentive is right for your business.

Eligible businesses, for the 2019–20 and 2020–21 income years, may be able to deduct the cost of new depreciating assets at an accelerated rate using the backing business investment – accelerated depreciation rules.

For each new asset, the backing business investment – accelerated depreciation deduction applies in the income year that the asset is first used or installed ready for use for a taxable purpose.

You claim the deduction when lodging your tax return for the income year. The usual depreciating asset arrangements apply in the subsequent income years that the asset is held.

If you are eligible for backing business investment – accelerated depreciation, you can choose to not apply these rules to an asset. The choice can be made on an asset-by-asset basis but cannot be changed once made.

For most businesses you must:

• make the choice in your tax return
• notify us by the day you lodge your tax return for the income year to which the choice relates.

Eligible businesses

Businesses are eligible for the backing business investment – accelerated depreciation deduction if they have an aggregated turnover of less than $500 million in the year they are claiming the deduction. The deduction is available in the 2019–20 and 2020–21 income years.

Eligible assets

To be eligible to apply the accelerated rate of deduction under backing business investment, the depreciating asset must:

• be new and not previously held by another entity (other than as trading stock)
• be first held on or after 12 March 2020
• first used or first installed ready for use for a taxable purpose on or after 12 March 2020 until 30 June 2021
• not be an asset to which an entity has applied either
  • temporary full expensing
  • the instant asset write-off rules

There is no limit on the number of eligible assets that you can apply accelerated depreciation to in an income year under backing business investment.

Eligible assets do not include:

• second-hand depreciating assets
• some specific Division 40 assets subject to low value and software development pools
• certain primary production assets (water facilities, fencing, horticultural plants or fodder storage assets), unless you are a small business entity that chooses to apply the simplified depreciation rules to these assets
• buildings and other capital works for which you can deduct amounts under Division 43
• assets that
  • will never be located in Australia
  • will not be used principally in Australia for the principal purpose of carrying on a business
• other specific capital asset and expense deductions
• assets you were committed to acquiring before 12 March 2020.

There is no limit on the cost of an eligible asset, unless it is a passenger vehicle.

You cannot claim a backing business investment – accelerated depreciation deduction if you use temporary full expensing or instant asset write-off for the same asset.

Working out your deduction

Different rules apply when working out your deduction, depending on whether you are using the simplified depreciation rules for small businesses.

Small business entity

If you are a small business with an aggregated turnover less than $10 million, and you use the simplified depreciation rules, you add to your general small business pool assets that:

• cost $150,000 or more (instant asset write-off applies to assets costing less than this)
• are eligible for backing business investment – accelerated depreciation
• are not eligible for temporary full expensing.

You then deduct an amount equal to 57.5% (rather than 15%) of the business portion of a new depreciating asset in the year you add it to the pool. In later years the asset will be depreciated under the general small business pool rules.

Normal rules apply to assets allocated to the general small business pool that are not eligible for backing business investment – accelerated depreciation.

2020 Federal Budget: How it affects small business & business depreciation.

 The JobMaker Plan: eligible businesses with an aggregated turnover under $5 billion will get an immediate tax deduction for the full cost of new eligible depreciable assets acquired, start to use or installed ready for use between 7:30pm AEDT on 6 October 2020 and 30 June 2022.

For small and medium sized businesses (with aggregated turnover under $50 million), full expensing also applies to eligible second-hand assets.

The existing enhanced instant asset write-off incentive has been extended for 6 months to 30 June 2021 and is available for assets first used or installed ready for use before that date.

Small businesses (with aggregated turnover under $10 million) can deduct the balance of their simplified depreciation pool at the end of the income year while full expensing applies.

The provisions that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out of the regime will continue to be suspended.

STOP PRESS: LATEST FEDERAL GOVERNMENT POLICIES FOR BUSINESSES DURING COVID-19:

For Sole Traders and Businesses with aggregated annual turnover of < $500 million 

(1) The increased instant asset write-off

The instant asset write-off threshold has been increased from $30,000 to $150,000 and expanded access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million). This applies from 12 March 2020 until 30 June 2020, for new or second‑hand assets first used or installed ready for use in this timeframe.

The higher IAWO (Instant asset write-off) threshold provides cash flow benefits for businesses that will be able to immediately deduct purchases of eligible assets each costing less than $150,000. The threshold applies on a per asset basis, so eligible businesses can immediately write‑off multiple assets.

 

The IAWO is due to revert to $1,000 for small businesses (turnover less than $10 million) from 1 July 2020.

(2) Backing Business Investment (BBI) 

A time limited 15 month investment incentive to support business investment and economic growth over the short term, by accelerating depreciation deductions. This applies to eligible assets acquired from 12 March 2020 and first used or installed by 30 June 2021. Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset cost

The Benefit & Eligibility Rules

 

• (1) benefit — deduction of 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance  of the asset’s cost
• (2) eligible businesses — businesses with aggregated turnover below $500 million
• (3) eligible assets — new assets that can be depreciated under Division 40 of the Income Tax Assessment Act 1997 (i.e. plant, equipment and specified intangible assets, such as patents) acquired after announcement and first used or installed by 30 June 2021. Does not apply to second -hand Division 40 assets, or buildings and other capital works depreciable under Division 43
•      
•  (4)  Applies to eligible assets acquired from 12 March 2020 and first used or installed by 30 June 2021.

 

        Apply at the ATO website link below.

STOP PRESS: LATEST ATO LAW RESIDENTIAL RENTAL PROPERTIES 2018

under new laws in ATo publication ‘rental properties 2018’:for contracts after 9th May 2017 there is no more depreciation for second hand plant assets in residential rental properties purchased for deriving rental income only unless the property is used for conducting a business including a rental property business or you are an excluded entity. if you rented the property after 9th May 2017 having purchased it earlier then no second hand assets can be depreciated. 

newly built buildings or substantially renovated buildings in which all or substantially all the building is removed or replaced which had contract dates after 7.30pm 9th may are eligible for plant depreciation providing no one was eligible to claim that plant depreciation earlier and either you acquired it new before anyone had occupied it or you acquired it within 6 months of construction completion

stop press: excluded entities can claim depreciation on plant in residential properties with contracts after 9th may 2017

an excluded entity that can claim depreciation on second hand plant assets in residential properties with contracts signed after 9th may 2017 are:

 

Depreciation rights for property owners on leasehold land

I have often been asked whether property investors in property built on leased land are entitled to depreciation on that property.

The ATO has ruled that lessees of land that hold a depreciating asset that is fixed to leased land are the holders of those assets for the time they have the right to remove those assets. Hence, as the holders of those assets they have the right to depreciation on those assets. 

If a lessee or owner of certain other rights over land eg. an easement improves the land with a depreciating asset that person is the holder of the asset if the asset is for their own use even though they have no right to remove it from the land eg an asset like an irrigation system on a farm. They remain the holder for the time that the lease or right exists. Hence, as the holder of the asset the lessee can claim depreciation on that asset.

 

Starting from the 2012-2013 financial year small businesses will also be allowed to depreciate most other assets in a single pool at a 30% rate. The long life pool no longer exists. If you had a long life pool its closing balance is rolled over to form part of the opening balance of the general small business pool for the 2012-2013 financial year.

 

Business & Rental Property Claims for Flood/Cyclone Damage

The repair or replacement of damage a natural disaster causes to a rental property or tangible business assets affects the expenses you can claim & the income you need to report for rental properties but insurance payouts for work related items or houses used as business premises is not taxable.

These insurance payouts don’t have to be included as income in your tax return.

If the destroyed asset was a depreciating asset then an insurance payout less the closing adjustable value of the depreciating asset at it’s time of destruction is then treated as income or as a deduction in your tax return depending on whether the insurance payout was greater than the closing adjustable value (which is income) or the insurance payout was less than the closing adjustable value (which is a deduction). (A depreciating asset is an eligible asset under current ATO legislation that is used in the production of income either in a business or a rental property).

Where a depreciating asset was destroyed/loss by a bushfire then you may be able to offset any amount of assessable income from an insurance payout with the cost of replacing that asset. The destruction or loss of an asset is an involuntary disposal of a depreciating asset in which the balancing adjustment amount such as income where the insurance payout is greater than the closing adjustable value is offset against the cost of acquiring one or more replacement assets.

For depreciating assets used wholly or partially for private purposes then the percentage use of that asset for private purposes expressed as a percentage of its total value is treated as a capital gain (insurance payout greater than its private use percentage of total value) or capital loss.

 

An insurance payout for damaged or destroyed houses that were not only ever used as a principal place of residence need to be taken into account for Capital Gains Tax (CGT)purposes. If the house was only ever used as a principal place of residence there is no CGT applicable. If you used the house as a rental property then the insurance payout has to be deducted from the cost base ie. what you originally paid for the house less any capital works deductions (Division 43) claimed during income production years to calculate CGT.

You can claim deductions for repair to property where it is tenanted or genuinely available for rent. For the cost of repairs to be an allowable deduction your property would have to be rented out immediately prior to repairs being needed & the damage being repaired would have to have occurred during the rental period.

Cost of repairs to rental properties can be claimed as deductions providing you do not have to re-build or replace an entire structure which is identified as a separate item of capital equipment like a fence, stove, kitchen cupboards or a refrigerator. This means you cannot claim the entire replacement cost in the year it was incurred but you may be able to claim the cost over a number of income years as a depreciating asset deduction (Division 40 plant) or capital works deductions (Division 43). An improvement of the asset that is new, improves the income generating ability of the asset & is not a mere like for like replacement of that asset can also be claimed as a depreciating asset deduction or capital works deduction. If you receive an insurance payout for these repairs then this is treated as assessable income.

A repair to depreciating assets in a rental property is an allowable deduction. For example if you just repair carpet damaged by flood you can claim a deduction for the repair. If you replace that whole flood damaged carpet then you can claim a deduction for the closing adjustable value of the carpet that was removed and depreciation on the new carpet. Initial repairs for example remedying defects, damage or deterioration that existed at the date you acquired the property are regarded as capital expenditure & can be claimed as capital works deductions.

When a property is destroyed by a natural disaster the costs to rebuild can be depreciated as capital works and depreciating assets (plant). If the rental property that is destroyed had eligible capital works deductions then the closing adjustable value (or the remaining capital works expenditure which has not yet been deducted at the time of destruction) can be deducted but this closing adjustable value is reduced by any compensation you receive for the capital works destruction. This applies even if the destruction is voluntary. The deduction can be claimed in the income year in which the destruction occurs