Following the Federal Budget announcement in early October 2020, some businesses may be understandably confused or at least puzzled by the term 'temporary full expensing'. An accounting measure, it's not a concept that would be widely encountered in general business activities. But it is highly relevant to business asset acquisitions. Acquisitions such as cars, commercial vehicles, trucks and many types of business equipment and machinery.
While you might choose to leave the technical aspects of bookkeeping and your accounts to your accountant, it can be beneficial for purchasing decision-makers to have a better understanding of measures available to the business.
We’ve done the research on your behalf, referred to the experts and present this basic explanation of temporary full expensing and how your business may benefit from this measure with your purchases.
Temporary full expensing is an accounting measure where the full amount of the costs related to the purchase of an asset are fully deducted as expenses in one financial year. Essentially a form of accelerated depreciation. Under normal accounting rules and regulations, assets would be depreciated over time. The ATO sets the percentage per year that assets can be depreciated. So businesses only receive that amount of tax deduction on the asset purchase in any one year.
Under full expensing, the full amount is deducted in the one year. By having this increased tax deduction, the taxable income of a business is reduced, less tax paid which allows more funds for general cash flow expenses or further investments.
‘Temporary’ refers to this only being applicable to a specific time-frame or period. More on that below.
Differentiation: Full Expensing versus IAWO
In regard to the budget and the current investment allowances on offer, confusion arises in considering temporary full expensing (TFE) with the current Instant Asset Write-Off measures. The IAWO has been available since March 2020, also with a limited timeframe, and most business owners will have got their heads around how this works. Many SMEs have already taken advantage of IAWO with the acquisition of assets under $150,000.
So what can TFE offer that IAWO doesn’t already provide? The answer is in the size of the business and the cost of the assets. And in relation to the budget, with the deadline.
Both TFE and IAWO are accelerated depreciation measures and offered by the Federal Government as investment allowances to stimulate the economy in the post-COVID recovery. To boost investment and spending in the current recession.
Time to drill down into the detail around eligibility.
- IAWO is limited to businesses with aggregated turnover of less than $500 million.
- Temporary full expensing is available to businesses with turnover up to $5 billion. To put that in context, it is reported that only a handful of Australian businesses are in the ‘over $5 billion turnover’ category.
- With IAWO, the value of the asset that could be realised is limited to $150,000
- With temporary full expensing, there is no maximum value on the asset purchase. Eligible businesses can now invest in equipment and machinery valued at over $150,000 and deduct the purchase price in the financial year of purchase – temporarily!
- Prior to the budget announcement the deadline for IAWO was 31 December 2020. You’re likely to be well aware of this as many lenders, including Jade Finance, as well as manufacturers and equipment suppliers have been reminding buyers for some months.
- The Budget has extended the deadline to 30 June 2021.
- The timeframe for temporary full expensing is very specific. The assets must be acquired after TEF was introduced, that is the time/date the Treasurer brought down the Budget Bill – precisely 7.30pm AEDT on Tuesday 6 October 2020. The end date is 30 June 2022.
- Both IAWO and TFE relate to new assets.
- But some second-hand assets may be eligible under the IAWO for SMEs.
- From the ATO information sourced, it appears that businesses with under $50m turnover can claim second-hand assets valued under $150,000 if purchased prior to 31 December 2020 and installed and being used in the business by 30 June 2021.
With all accounting measures, we strongly recommend you consult with your own accountant to receive clarity over your individual business position and asset eligibility.
Selecting the Appropriate Finance
Now you hopefully have a better understanding of the investment allowances on offer, it’s time to address the type of finance that you need to utilise to benefit from these measures. The key is in the term ‘depreciation’.
It’s logical that a business can’t depreciate, that is claim a tax deduction, for an asset that it does not own. Ownership is the significant term when selecting the appropriate finance product if you want to realise the TFE or IAWO benefits.
With leasing and rent to own, the ownership of the asset is retained by the lender until such time as the borrower finalises the loan. With Chattel Mortgage, the borrower takes ownership of the asset once the finance and sale contracts are settled. This entitles the borrower to depreciate the asset.
Chattel Mortgage therefore is suited to IAWO and TFE.
Leasing and rent to own do offer borrowers other tax benefits. Unlike Chattel Mortgage where only the interest included in repayments is tax deductible, the lease/rental payments of leasing are considered an operating expense and hence tax deductible.
Both IAWO and temporary full expensing offer businesses potential benefits in regard to asset acquisitions. Benefits can also be realised when sourcing the cheapest finance deal which Jade Finance can assist with. Our cheap personal finance deals are permanent!
To discuss asset finance, please contact us and speak with one of our Jade Finance consultants. Call 1300 000 008
DISCLAIMER: THIS ARTICLE INCLUDES INFORMATION, DATA, SPECS, DETAILS AND MATERIALS SOURCED FROM EXTERNAL SOURCES SUCH AS MANUFACTURERS, SUPPLIERS, GOVERNMENT DEPARTMENTS AND OTHER ORGANISATIONS AND NO LIABILITY IS ACCEPTED FOR ERRORS IN THE REPRESENTATION OR PRESENTATION OF SUCH INFORMATION. THE ARTICLE IS PRESENTED AS GENERAL INFORMATION ONLY AND IS NOT INTENDED AS SPECIFIC FINANCIAL ADVICE FOR INDIVIDUALS AND BUSINESSES. THOSE REQUIRING ADVICE IN REGARD TO THEIR INDIVIDUAL CIRCUMSTANCES ARE DIRECTED TO SEEK INDEPENDENT ADVICE FROM THEIR FINANCIAL ADVISOR OR CONSULTANT.