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The Australian government has extended the temporary full expensing measure, providing a significant opportunity for businesses to fully expense the cost of new depreciable assets, improvements to existing eligible assets, and second-hand assets in the first year of use. This measure, introduced in the 2020-21 Budget, has now been extended until 30 June 2023. This extension allows businesses to claim an asset’s cost as fully deductible upfront rather than spreading the deduction over the asset’s life, regardless of the asset’s cost. Legislation passed by Parliament last month extends the rules to cover assets that are first used or installed ready for use by 30 June 2023.
What Deductions Can Be Expensed?
Under the temporary full expensing measure, businesses can fully expense the cost of:
- New depreciable assets: This includes machinery, equipment, and other tangible assets that are used in the business.
- Improvements to existing eligible assets: Enhancements or upgrades to assets that are already in use can also be fully expensed.
- Second-hand assets: Businesses can claim the full cost of second-hand assets, providing flexibility in asset acquisition.
However, it is important to note that some expenses are excluded. Improvements to land or buildings that are not treated as plant or as separate depreciating assets in their own right are excluded. Expenditure on these improvements would still normally be claimed at 2.5% or 4% per year.
Benefits of Immediate Deductions
The extension of immediate deductions offers several benefits to businesses:
- Cash flow improvement: By allowing businesses to claim the full cost of assets upfront, this measure can significantly improve cash flow, enabling businesses to reinvest in growth and operations.
- Tax savings: Immediate deductions reduce taxable income, resulting in lower tax liabilities for the year in which the assets are purchased.
- Encouragement for investment: This measure incentivizes businesses to invest in new and improved assets, fostering innovation and productivity.
Considerations for Companies
For companies, it is important to note that the loss carry back rules have not yet been extended to 30 June 2023 – we’re still waiting for the relevant legislation to be passed. If a company claims large deductions for depreciating assets in a particular income year and this puts the company into a loss position, then the tax loss can generally only be carried forward to future years.
However, the loss carry back rules allow some companies to apply current year losses against taxable profits in prior years and claim a refund of the tax that has been paid. At this stage, the loss carry back rules are due to expire at the end of the 2022 income year, but we are hopeful that the rules will be extended to cover the 2023 income year as well.
Strategic Planning for Asset Purchases
Businesses should strategically plan their asset purchases to maximize the benefits of the temporary full expensing measure. Here are some tips:
- Timing: Ensure that assets are first used or installed ready for use by 30 June 2023 to qualify for the immediate deduction.
- Asset selection: Focus on acquiring assets that will enhance productivity and efficiency in your business operations.
- Consultation: Work with your accountant or financial advisor to understand the implications of the measure on your tax position and to plan your asset purchases accordingly.
Conclusion
The extension of the temporary full expensing measure provides a valuable opportunity for businesses to enhance their operations and improve cash flow through immediate deductions. By understanding the eligibility criteria and strategically planning asset purchases, businesses can maximize the benefits of this measure. Stay informed about potential changes to the loss carry back rules and consult with financial professionals to ensure you are making the most of the available tax incentives. This proactive approach will help your business thrive in a competitive market.
Read more budget updates from our blog. Go to the ATO’s website to learn more.
