Over the last two years, there has been a range of government incentives introduced to encourage investment in the Australian economy. The economic effects of COVID-19 were substantial, and the impact is being felt even today. Since places of business were closed and consumption limited, business investment was also delayed or otherwise deprioritised.
‘Temporary full expensing’ is one such measure the government introduced to stimulate business investment demand. It supports Australian businesses by allowing eligible businesses to claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed, ready for use for a taxable purpose.
Let’s take a look at what it takes to be eligible, how other tax incentives compare, and whether the associated loss carryback as a result of applying full expensing is applicable for your business’s situation.
Overview of eligibility
You must confirm your eligibility with your accountant. Still, in general, you will be eligible if you are a business with an aggregated turnover of less than $5 billion (most of us!) and a corporate entity for tax purposes. More important is the eligibility of the asset you want to expense. It must be a depreciating asset with the following conditions:
- It must be brand-new or second-hand only if your turnover is less than $50 million.
- It must be owned on or after the 6th of October 2020.
- It must be first used or installed for taxable purposes between the 6th of October 2020 and the 30th of June 2023.
Keep in mind that there are some exclusions. For example, software development is not eligible, nor are certain primary production assets such as water facilities, fencing and similar, a subset of buildings and other capital works and assets that won’t be used principally in Australia.
Explaining loss carry back
In many cases, claiming a temporary full expense as an immediate deduction may cause your taxable position to swing to a loss. The typical process is to carry this tax loss forward into future tax years, offsetting future taxable income. However, under this scheme, you may be eligible for a refundable tax offset under ‘loss carry back.’
To be eligible, you need to be a small business entity (less than $5 billion in turnover) and a company, corporate partnership, or public trading trust. You also need to have had a tax liability for the previous year so that the carry-back offset can be applied.
Essentially, entities get the offset by carrying back the tax loss in the current year to the previous year’s tax liability, deducting the loss in the earlier year using the loss year’s tax rate. It’s a refundable tax offset, so if the liability is more than offset, you’ll receive a cash refund or otherwise a reduction in debt owed to the ATO. It can be claimed for this financial year (2021-22) and next, while being applied to any of the previous years’ returns.
Comparing tax depreciation incentives
There are a range of tax depreciation incentives implemented by the government in response to COVID-19. You can read more about each one on the ATO’s website, though the key message is that you can only apply one to each eligible asset. For example, you can’t apply temporary full expensing to an asset that’s already subject to the instant asset write-off. You will need to apply the specifics to your situation, but generally, the order of application is as follows:
- Temporary full expensing
- Instant asset write-off
- Backing business investment
- General depreciation rules
Take advantage with a business loan
Given the above, it may be an excellent opportunity for your business to bring forward your investment plans to take advantage of the tax benefits. Purchasing significant assets upfront may strain your cash flow, but there are solutions. For example, a business loan may be an intelligent solution to get the assets you need to generate additional income while reaping the tax benefits of temporary full expensing, loss carryback as well as the interest paid on the loan.
It all depends on your individual business’s financial circumstances and tax position. When it comes to business loans and other business funding, Capital Plus Finance is a broker that has your best interests at heart. With a panel of many lenders, The Capital Plus Finance team will do everything we can to help you qualify for a suitable solution for your business. Please call us anytime to find out more or have an obligation-free chat about your situation.