As part of the response to the widespread economic impact of COVID-19, the Federal Government announced in the 2020-21 Budget that it will allow a deduction for the full cost of certain depreciating assets acquired and used by eligible businesses. Consequently, the ATO has altered the depreciating rules, affecting R&D tax claims for periods including 6 October 2020 onwards. The changes represent an important enhancement to the R&D Tax Incentive for companies that may be purchasing tangible assets for use in R&D Activities over the coming years and applying the Temporary full expensing (TFE) provisions.
Previously, small businesses could accelerate the depreciation of certain assets under the Instant Asset Write-Off (IAWO), however, this would preclude them from being claimed under the R&D Tax Incentive. The recent addition of TFE permits the accelerated depreciation of certain assets while still allowing them to be claimed under R&D.
The Government introduced and augmented stimulus measures to encourage investment and allow eligible entities to claim an immediate deduction for the cost of an asset in the year the asset is first installed ready for use.
TFE provided for under subdivision 40-BB of the INCOME TAX ASSESSMENT ACT 1997:
- applies for assets an R&D entity first acquires/installs between 7:30 pm AEDT on 6 October 2020 (the 2020 Budget time) and 30 June 2022
- temporary full expensing supersedes the instant asset write-off scheme and is available to a bigger pool of businesses, those with a group turnover of up to $5 Billion
- it completely removes the $150,000 cost limit on the individual asset.
|Date (asset first used or installed ready for use)||Turnover below $50m||Turnover above or equal to $5 billion||
Threshold (Individual asset must be less than this amount)
From 7.30 pm 6 October 2020 to 30 June 2022
|Sub-Division 40BB Second-hand assets can be included Therefore R&D claim can be made for the proportionate R&D use.||Sub-Division 40BB Therefore R&D claim can be made for the proportionate R&D use.||
No limit on asset cost (other than cars)
Interaction_of_tax_depreciation_incentives as part of the Economic Stimulus Measures provided by the Australian Taxation Office provide detailed descriptions to help businesses identify the best depreciation incentive for their business.
Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets. The qualified new assets must be first held, and first used or installed ready for use for a taxable purpose, between 7:30 pm AEDT on 6 October 2020 and 30 June 2022. For businesses with an aggregated turnover of less than $50 million, TFE also applies to the business portion of eligible second-hand depreciating assets. If the income year ends on 30 June, deductions under TFE are only available in the 2020–21 and 2021–22 income years.
Expenditure included in the cost of a tangible depreciating asset is generally ineligible for a notional deduction under the R&D expenditure provisions. Notional deductions for the decline in value of R&D depreciating assets must be considered under the R&D decline in value provisions, and are available to a company under SECTION 355-310. For qualified new assets acquired, first used, or installed ready to be used for a taxable purpose, between 7:30 pm AEDT on 6 October 2020 and 30 June 2022, temporary full expensing is available under sub-Division 40BB, and therefore, your R&D use of the asset in the first year determines your notional R&D deduction for the entire cost of the asset.
The ATO’s guidance on Tangible Depreciating R&D Assets has not yet been updated to detail the interaction between the R&D Tax Incentive and the transition between the Instant Asset Write-off and TFE programs. The ATO has confirmed that:
- Where a company deducts the cost of an asset using the instant asset write-off provided for under section 328-180 of the INCOME TAX (TRANSITIONAL PROVISIONS) ACT 1997, it CANNOT claim the tax write-off amount as a notional R&D deduction for the purposes of Subsection 355-310;
- Where a company deducts the cost of an asset using the Temporary Full Expensing provided for, under subdivision 40-BB of the INCOME TAX ASSESSMENT ACT 1997, it CAN claim the tax write-off amount as a notional R&D deduction for the purposes of Subsection 355-310. The amount of the notional deduction for R&D tax purposes must be apportioned where there is any non-R&D use of the asset.
If you need assistance as to which treatment will provide the most benefit to your business, both in the immediate term and across the life of any eligible asset, then please get in touch with one of our friendly specialists at TCF Services | Ryan
Please note: The above is a review of current legislation and TCF/Ryan’s interpretation of this ATO update. It should not be treated as tax advice. You should seek guidance from your tax agent to determine which depreciating incentive is suited for your business.
Shak Akhter – Senior R&D Manager – TCF Services/Ryan Tax Services Australia
Dr. Rob Judd – Practice Manager, R&D – TCF Services/Ryan Tax Services Australia