In response to the economic challenges posed by the COVID-19 pandemic, the Australian Government implemented temporary full expensing in 2020 to stimulate business investment and foster economic growth.
This measure allowed eligible businesses to claim an immediate deduction for the total cost of qualifying depreciable assets. However, with the expiration of temporary full expensing on June 30, 2023, businesses now have until the end of the 2022-23 financial year to take advantage of this incentive. This article explores the implications of the transition from temporary full expensing to an improved version of the Instant Asset Write-Off and highlights the potential impact on businesses, explicitly concerning research and development (R&D) eligibility.
Understanding Temporary Full Expensing
Temporary full expensing was introduced as an enhanced version of the Instant Asset Write-Off scheme. Under temporary full expensing, eligible businesses could immediately deduct the total cost of qualifying assets, including equipment, machinery, and technology. This deduction allowed businesses to lower their investment costs and benefit from immediate tax deductions.
Eligibility Criteria: Businesses must have an aggregated turnover of less than $5 billion or meet the alternative income test to qualify for temporary full expensing. The scheme covers eligible new and second-hand assets and improvements made to existing assets. Small business entities using simplified depreciation rules can also benefit from this incentive.
Transition and Improved Instant Asset Write-Off
Although temporary full expensing will not be extended, the Australian Government has introduced improvements to the Instant Asset Write-Off scheme to continue supporting businesses. From July 1, 2023, until June 30, 2024, small businesses with an aggregated turnover of less than $10 million can deduct the total cost of qualifying assets up to $20,000. This threshold applies on a per-asset basis, allowing small businesses to write off multiple assets instantly. Assets valued at $20,000 or more can still be depreciated through the small business simplified depreciation pool.
Potential Impact on R&D Eligibility
No legislation has passed concerning the impact of the improved Instant Asset Write-Off on R&D eligibility. The outcome will depend on whether the budget measure receives passage as an amendment to Division 40, making the write-off eligible, or as Section 328-D, making it ineligible.
Case Studies: To illustrate the potential benefits of temporary full expensing, we present two scenarios. In the first scenario, a business applies temporary full expensing, taking advantage of immediate deductions. This approach boosts cash flow, lowers tax liabilities, and enables upgrades that improve productivity and energy efficiency. In the second scenario, a business that opts out of temporary full expensing experiences consistent deductions over multiple years.
Considering the Best Approach: Every business is unique, and owners should apply for temporary full expensing or opt-out after carefully considering the options. Business owners should consult with accountants or financial advisors to assess the potential gains and losses specific to their operations. The choice should consider expected tax liabilities, cash flow needs, and the desire to improve productivity.
During the challenging times of the pandemic, temporary full expensing has played a crucial role in encouraging business investments and boosting economic growth in Australia. Businesses have until June 30, 2023, to take advantage of this incentive as the expiration date approaches. The following fiscal year will continue to support investments with the improved Instant Asset Write-Off scheme, which sets a $20,000 threshold for small businesses.
However, the impact on R&D eligibility will be determined once legislation passes. We encourage business owners to consult with professionals to make informed decisions, maximise the benefits, and navigate the transition smoothly.
Book a Consultation with Our Consultants
If you’re a business owner looking for more information on how the transition from temporary full expensing to the improved Instant Asset Write-Off scheme affects your specific circumstances, we highly recommend booking a consultation with one of our experienced R&D tax consultants.
Our experts can provide personalised guidance, assess the potential impact on your business’s R&D eligibility, and help you make informed decisions to optimise your benefits. Don’t hesitate to reach out today and navigate the transition smoothly.