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Temporary Full Expensing of Depreciating Assets (TFEDA) : A Guide for Australian Businesses

words by Mark

Temporary Full Expensing of Depreciation Assets (TFEDA) is a tax relief initiative that was announced by the Australian government in October 2020. It’s good news for business owners, but you could be forgiven for missing some of its finer points amongst all the budget-speak.

In this article, we’ve outlined in plain terms exactly what temporary full expensing is, what it means for your business, and how it can impact your tax returns in the coming financial years.

What is temporary full expensing?

Temporary full expensing allows businesses to deduct the full cost of new or used capital assets that are first used or installed by 30 June 2022. This could be any kind of depreciable equipment you use to generate commercial profit, from vehicles to any form of plant and machinery.

Here are the specifics:

  • Businesses can deduct the full cost of eligible capital assets acquired from 7.30pm (AEDT), 6 October 2020 and first used or installed by 30 June 2022.
  • Full expensing also applies to the cost of improvements to existing eligible assets.
  • For businesses with less than $50m annual turnover, full expensing also applies to second-hand assets.
  • Larger businesses ($50-$500m annual turnover) can also fully expense second-hand assets purchased by 31 December 2020, provided they cost more than $150k and are first used/installed by 30 June 2021.

Temporary full expensing (of depreciating assets)

How does temporary full expensing affect tax loss carry back?

Eligible companies can carry back tax losses from financial years ending 2020, 2021, and 2022 to offset taxes paid in previous years from FY 2019 onward.

Temporary full expensing can be used to generate these tax losses, which are then carried back to secure a refund on tax paid in previous years. For example, a business with $3m annual trading profit that fully expenses $4m in new equipment will show a tax loss of $1m. This is then ‘carried back’ to offset tax paid in previous years.

Check our examples below for more information.

What if tax losses cannot cover prior tax paid?

In the event that a business does not have sufficient losses in 2021 to fully recapture the prior two years of tax paid, it will still have until 30 June 2022 to do so. Effectively, this gives extra time to finance new equipment and write it off under temporary full expensing.

Alternately, if tax losses in 2021 and 2022 are not fully utilised through ‘carry back’ opportunities, they can be carried forward to offset taxes paid on future profits.

Temporary Loss “Carry Back” opportunities

Temporary full expensing and simplified depreciation pools

Temporary full expensing also extends to simplified depreciation pools. Small businesses can get the balance of their simplified depreciation pool fully expensed at the end of the 2021 and/or 2022 financial years.

Examples of temporary full expensing

Here are three examples of temporary full expensing in effect with different businesses:

Temporary full expensing and loss carry back for an SME

Dynamite Demolition & Excavations Pty Ltd (DDE) has an annual turnover of $20m, and the business spent around $3m on new and used equipment in the 2021 financial year. As DDE’s annual turnover is below $50m, they can fully expense 100% of this investment.

As DDE is likely to show a trading profit of around $1m in 2021, the 100% expensing of this $3m investment will result in DDE showing a $2m loss on their 2021 Tax Return.

As a result, DDE will not have to pay their 26% company tax bill for 2021 ($260,000). Not only this, but DDE will also be able to ‘carry back’ the $2m tax loss and secure a refund on any tax they paid on profits in FY 2019 and FY 2020.

Temporary full expensing used with a simplified depreciation pool

Ascension Crane Hire Pty Ltd (ACH) has an annual turnover of $8m. Over the years they have bought many cranes and support vehicles, all of which have been added to a simplified depreciation pool with a closing balance of $3m as at 30 June 2020.

ACH has a trading profit of $1m for the year ended 30 June 2021. This would have usually created a tax bill of $260,000 (26% company tax rate for 2021), however temporary full expensing allows ACH to deduct the entire depreciation pool balance of $3m.

This Temporary full expensing therefore allowed ACH to show a loss for tax purposes of $2m in 2021 ($1m profit less the $3m tax write off). As a result, ACH can also carry back their $2m loss to secure a refund on tax paid in the prior two financial years (2019 & 2020) up to the level of the $2mil tax loss and/or carry that loss forward into 2022 and beyond.

Temporary full expensing and loss carry back for a $50-$500m business

Simmons Shoring and Piling Pty Ltd (SSP) has an annual turnover of $70m and spent around $8mil on new machinery in the 2021 financial year.

As their annual turnover is more than $50mil, SSP can fully expense 100% of the cost of new equipment (used equipment is also eligible provided each item was purchased before 31 December 2020 for less than $150k).

With a projected profit of $4m in 2021, the 100% expensing of the $8m in new equipment will result in SSP showing a $4m loss on their 2021 Tax Return.

This means SSP will not have to pay their $1.04mil tax bill for 2021 (26%), and can ‘carry back’ the $4m tax loss to secure a refund on tax paid in the prior 2 financial years (2019 & 2020) up to the level of the $4mil tax loss and/or carry that loss forward into 2022 and beyond.

 
Disclaimer

The above information is provided at a conceptual level and is not provided as formal tax advice. We advise all business owners to seek independent tax advice with respect to these matters. 

Mark O’Donoghue, Founder & CEO Finlease

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