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Explaining temporary full expensing for small business

Have you heard about temporary full expensing but are unsure if suitable for your business? This temporary measure introduced by the Australian Government allows businesses to claim an immediate deduction for the full cost of eligible assets. It’s one of several measures and tax incentives designed to help businesses recover from the impact of COVID-19.

What is temporary full expensing?

Temporary full expensing allows eligible businesses to deduct the full cost of eligible depreciating assets of any value, in the year they are first held, first used or installed ready for use for a taxable purpose.

The cost of improvements to existing eligible depreciating assets made during this period can also be fully deducted.

As part of the 2021–22 Federal Budget, the Australian Government announced it will extend the temporary full expensing for an additional year. This measure is not yet law.

Who is eligible?

Any business with an aggregated turnover of less than $5 billion is eligible to use temporary full expensing. An alternative income test applies for corporate tax entities with an aggregated turnover of more than $5 billion.

Your business can immediately deduct the business portion of the cost of eligible new depreciating assets, and cost of improvements to existing assets, in their 2020-21 and 2021-22 income tax returns.

For businesses with an aggregated turnover of less than $50 million, temporary full expensing also applies to the business portion of eligible second-hand depreciating assets.

Is my asset eligible?

You can claim the cost of any eligible asset required for your business (eg. the business portion of a new or used car, computers or tools/equipment).

There is no general limit on the cost of eligible assets you can claim, but there are specific cost limits on certain assets, such as passenger vehicles to which the car limit may apply.

The depreciating asset must be:

  • new or second-hand (if it is a second-hand asset, your aggregated turnover is below $50 million)
  • first held by you at or after 7.30pm AEDT on 6 October 2020
  • first used or installed ready for use by you for a taxable purpose (such as a business purpose) between 7.30pm AEDT on 6 October 2020 and 30 June 2022.

Certain primary production assets and buildings or other capital works are excluded under these measures. See the Australian Taxation Office (ATO) website for a full list of asset exclusions.

How can I claim temporary full expensing?

Your will be able to claim a temporary full expensing deduction in your 2020-21 tax return.

From July 2021, additional labels and updated instructions will be available for 2020-21 tax returns at ato.gov.au

You can choose to ‘opt-out’ of temporary full expensing for an income year on an asset-by-asset basis and claim a deduction using other depreciation rules.

You must notify the ATO in your income tax return that you have chosen not to apply temporary full expensing to the asset.

The choice to opt out is unchangeable and you must notify the ATO of the income year to which the choice relates by the day you lodge your income tax return.

If you use the simplified depreciation rules, temporary full expensing rules with some modifications apply.

How is it different to other tax depreciation methods?

Between temporary full expensing, the instant asset write-off and backing business investment initiatives, there are a number of depreciation methods available.

To work out which depreciation method is right for your circumstances, see the ATO’s high level snapshot of each of these methods and speak to your accountant or tax professional.

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