In all the COVID-19 support excitement, don’t forget other valuable measures

The big-ticket COVID-19 stimulus changes such as JobKeeper payments and the cash flow boost seem to be what many clients are clamouring for information about, but it may pay to remind your relevant clients that other reforms, like the instant asset write off and accelerated depreciation, are not to be overlooked.

The income tax law was amended to increase the cost threshold below which certain business entities can access an immediate deduction for the full cost of depreciating assets — from $30,000 to $150,000 (GST exclusive).

For answers to some common questions about the instant asset write off changes, click here to scroll down automatically

This change to the rules is only available from 12 March to 30 June 2020.  For an asset to be eligible for the instant asset write-off it must be first used for a taxable purpose in the same period.  Alternatively, the asset must be installed and ready for use in that period.

In the Federal Budget announced on 2 April 2019, the Federal Government extended the instant asset write-off to businesses that have a turnover of between $10 million and $50 million.  This was in addition to small businesses that have a turnover of less than $10 million.

The instant asset write-off will now also apply to businesses that have an aggregated turnover of less than $500 million.  However, it will only apply to these businesses for the above period. 

This means that there will be two periods that accountants/tax agents must think about in relation to purchases of assets in the year ending 30 June 2020.  The first period is from 1 July 2019 to 11 March 2020.  Eligible assets costing less than $30,000 can be written off completely in this period by businesses that have an aggregated turnover of less than $50 million.  From 12 March 2020 to 30 June 2020, eligible assets costing less than $150,000 (GST exclusive), can be written off by businesses that have an aggregated turnover of less than $500 million.

Note that for a car that costs above the luxury car cost limit, only the cost limit of the car can be claimed as an immediate tax deduction in the period to 30 June 2020. This is because the relevant provisions refer to the “adjustable value” of the asset and the first element of the cost of a car is reduced to the car limit if the cost exceeds that limit.

It should be noted that from 1 July 2020, the instant asset write-off threshold will revert to its original level of $1,000 (unless legislative changes are made in the meantime) and will only be applicable for businesses with an aggregated turnover of less than $10 million. 

Accordingly, the COVID-19 instant asset write off measure offers a strong incentive for most businesses to obtain a significant tax deduction that will no longer exist in the new financial year.

Accelerated depreciation
This provides an incentive for businesses with aggregated turnovers of less than $500 million a year to invest in plant and equipment and other depreciating assets.

Specifically, the bill amends the income tax law to temporarily allow businesses with aggregated turnovers of less than $500 million in an income year to deduct capital allowances for depreciating assets at an accelerated rate of 50% of the cost of an asset.  This will be in addition to the normal depreciation that is claimed on the cost of the asset after deducting the 50% amount.

Generally, to be eligible to apply the accelerated rate of deduction, the depreciating asset must satisfy a number of conditions, including that the asset:

  • is new and has not previously been held by another entity (other than as trading stock or for testing and trialling purposes);
  • is an asset for which an entity has not claimed depreciation deductions, including under the instant asset write-off rules; and
  • is first held, and first used or installed ready for use, for a taxable purpose between 12 March 2020 and 30 June 2021.

A small business entity (that is, an entity with turnover below $10 million using the simplified depreciation rules) can deduct depreciation at the rate of 57.5% for the “taxable purpose” proportion of the cost (or the adjustable value) of a “qualifying depreciating asset” where it is added to the general small business pool and it is held and used, or installed ready for use, between 12 March 2020 and 30 June 2021 (inclusive).

Here are several questions on which Tax & Super members have been seeking clarification in regard to the instant asset write off changes.

Is the $150,000 instant asset write-off subject to the luxury car limit of $57,581 or can it apply to luxury cars purchased for up to $150,000?
For depreciation purposes, the cost of a vehicle is reduced to the car limit. This is because the provision that gives a taxpayer an instant asset write-off refers to the “adjustable value” of the asset. The term “adjustable value” is further defined to mean the cost of an asset if it has not been used or been installed ready for use for a taxable purpose. However, the cost of an asset consists of two elements, these being the first element and the second element. Subsection 40-230(1) ITAA97 states that the first element of the cost of a car is reduced to the car limit if the cost exceeds that limit. Therefore, for a car that costs above the cost limit, the cost limit of the car can be claimed as an immediate tax deduction (and no more) in the period to 30 June 2020 if all the necessary conditions have been satisfied.

Are property improvements eligible for the $150,000 instant asset write-off?
Under the measures contained in the Coronavirus Economic Response Package Omnibus Bill 2020, the threshold is increased from $30,000 to $150,000 for amounts that are included in the “second element” of an asset’s cost as defined in s 40-190 ITAA 1997 (effectively subsequent capital expenditure relating to that asset).

Such amounts can be immediately deducted under this measure if (a) the cost of the related asset was subject to the instant asset write-off in an earlier year, and (b) the amount is included in the second element of the asset’s cost during the period commencing on 12 March 2020 and ending on 30 June 2020.
Source: Coronavirus Economic Response Package Omnibus Bill 2020, Sch 1

Can general pool balances under $150,000 be fully written off at 30 June 2020?
The amendments in the Coronavirus Economic Response Package Omnibus Bill 2020 provide that if the balance of a small business entity’s general small business pool is less than $150,000 at the end of an income year that ends on or after 12 March 2020 but before 1 July 2020, then the entity can claim a deduction for the entire balance of the pool.
Source: Coronavirus Economic Response Package Omnibus Bill 2020, Sch 1

Will “supply chain disruptions” that prevent an asset being installed ready for use before 30 June 2020 be taken into account?
There is currently nothing in the legislation (or any government announcements) for the new instant asset write-off to cater for this, or to provide any flexibility in relation to the requirement that the depreciating asset be first used or installed ready for use for the period from 12 March 2020 and ending on 30 June 2020.
Source: Coronavirus Economic Response Package Omnibus Bill 2020, Sch 1

For much more information on the COVID-19 reforms, see our COVID-19 Essentials page

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