House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. Josh Frydenberg MP)

Chapter 2 Backing business investment

Outline of chapter

2.1 Schedule 2 to this Bill amends the income tax law to temporarily allow businesses with aggregated turnover of less than $500 million in an income year to deduct depreciation expenses at an accelerated rate, in those income years that the asset was first used or installed and ready for use for a taxable purpose if it meets certain conditions.

2.2 Generally, to be eligible to apply the accelerated rate of deduction, the depreciating asset must satisfy a number of conditions including that the asset:

•

is new and has not previously been held (and used or installed ready for use) by another entity (other than as trading stock or for testing and trialling purposes);

•

is an asset for which an entity has not claimed depreciation deductions, including under the instant asset write-off rules; and

•

is first held, and first used or installed ready for use for a taxable purpose between 12 March 2020 and 30 June 2021 (inclusive).

2.3 Under the amendments, different rules apply depending on whether or not an entity is using the simplified rules for capital allowances for small businesses.

2.4 An entity with aggregated turnover of less than $500 million in the income year that does not use the simplified depreciation rules may deduct an amount at an accelerated rate for qualifying assets.

2.5 A small business entity (generally, an entity with an aggregated turnover less than $10 million in the income year) that uses the simplified depreciation rules may deduct an amount equal to 57.5 per cent (rather than 15 per cent) of the taxable purpose proportion of the adjusted value of a qualifying depreciating asset added to the general small business pool in an income year.

Context of amendments

2.6 The Backing Business Investment measure encourages businesses to continue to make investments, supporting economic growth over the short term.

2.7 The ITAA 1997 contains uniform capital allowance rules for recognising the decline in value of different types of capital assets.

2.8 Deductions are available for assets that have a limited effective life and can be reasonably expected to decline in value over their period of use (depreciating assets). They are generally governed by the uniform capital allowance rules in Division 40 of the ITAA 1997.

2.9 Generally, under the uniform capital allowances rules, entities may deduct an amount for the decline in value of a depreciating asset over the period they hold the asset.

2.10 However, this deduction is only available to the extent that the decline in value of the asset is attributable to it being used, or installed ready for use, for a taxable purpose. Generally, this means that the asset must be used or installed for use for the purpose of producing assessable income.

2.11 The decline in value of an asset is generally determined based on the effective life of the asset, which is the expected period of use of an asset of that kind. Special rules that either modify the effective life or provide for the decline in value to be calculated on a different basis may apply to certain assets.

2.12 However, a small business entity (generally, an entity with an aggregated turnover less than $10 million in an income year) may choose to apply the simplified rules for capital allowances for small business entities in Subdivision 328-D of the ITAA 1997. Under this regime, the cost of assets below a threshold amount can be immediately deducted in the year in which they are first used or installed ready for use (referred to as the 'instant asset write-off').

2.13 Where assets cost more than the instant asset write-off threshold, eligible small business entities using the simplified rules for capital allowances can include the cost of these assets in a general small business pool. In this pool, the assets are depreciated in the income year they are first used or installed ready for use at a rate of 15 per cent of the taxable proportion of the adjustable value of a depreciating asset, and then at a rate of 30 per cent in following years.

2.14 Under the law in operation prior to these amendments, an instant asset write-off can also be applied by eligible medium sized businesses in the 2019-20 income year (section 40-82 of the ITAA 1997). These businesses have aggregated turnover of $10 million or more, but less than $50 million in an income year. Schedule 1 to this Bill expands access to the instant asset write-off rules to entities with an aggregated turnover of $10 million or more but less than $500 million in the income year.

2.15 Under the law in operation prior to these amendments, eligible entities can apply the instant asset write-off rules for assets that cost less than $30,000 in the 2019-20 income year. Schedule 1 to this Bill increases the threshold below which depreciating assets can be immediately written off from $30,000 to $150,000 from 12 March 2020 to 30 June 2020.

Summary of new law

2.16 The amendments in Schedule 2 to this Bill provide an incentive to businesses with aggregated turnover of less than $500 million in an income year to invest, by allowing them to deduct the cost of depreciating assets at an accelerated rate. The accelerated depreciation deduction applies in one income year only, being the income year that the assets are first used or installed ready for use for a taxable purpose.

2.17 The amendments apply differently depending on whether an eligible entity is using the simplified rules for capital allowances for small business entities.

2.18 An entity with aggregated turnover of less than $500 million in the income year that does not use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997 may be eligible to deduct an amount under the Backing Business Investment measure. However, the asset must be a qualifying asset (including not having been immediately deducted under the instant asset write-off rules). The amount the entity can deduct in the income year the asset is first used or installed ready for use for a taxable purpose is:

•

50 per cent of the cost (or adjustable value where applicable) of the depreciating asset; and

•

the amount of the usual depreciation deduction that would otherwise apply but calculated after first offsetting a decline in value of 50 per cent.

2.19 A small business entity (generally, an entity with an aggregated turnover of less than $10 million in an income year) that uses the simplified depreciation rules may be eligible to deduct an amount equal to 57.5 per cent (rather than 15 per cent) of the taxable purpose proportion of the adjustable value of a qualifying depreciating asset added to the general small business pool for an income year.

2.20 Generally, depreciating assets are qualifying assets if they are:

•

new assets that have not been previously held (and used or installed ready for use) by another entity (other than as trading stock or for testing and trialling purposes);

•

assets for which an entity has not claimed depreciation deductions, including under the instant asset write-off rules; and

•

assets first held, and used or installed ready for use for a taxable purpose between 12 March 2020 and 30 June 2021 (inclusive).

Comparison of key features of new law and current law

Detailed explanation of new law

2.21 The amendments in Schedule 2 to this Bill are intended to stimulate and support economic activity by providing a temporary incentive for business to undertake capital investment and enhance their future productive capacity. The new law achieves this policy objective by providing an accelerated deduction for new capital assets for entities with aggregated turnover of less than $500 million in an income year. The accelerated rate of deduction will help provide these businesses with a boost to cash flow from their capital investments.

2.22 The accelerated depreciation deductions apply for eligible entities with aggregated turnover of less than $500 million in an income year if they meet certain conditions. The way that the accelerated rates of depreciation are calculated is dependent on whether the entity is eligible for, and has chosen to apply the simplified depreciation rules for small businesses.

Temporary accelerated depreciation deductions for entities with aggregated turnover of less than $500 million not using the simplified rules for small businesses

2.23 Entities with aggregated turnover of less than $500 million in an income year that do not use the simplified depreciation rules for small business under Subdivision 328-D of the ITAA 1997 (whether because they choose not to or they are ineligible to use them) calculate the decline in value of depreciating assets under the uniform capital allowances rules in Division 40 of the ITAA 1997.

2.24 The amendments provide for a larger deduction for qualifying assets first held and used or installed ready for use between 12 March 2020 and 30 June 2021 (inclusive) for their decline in value in the first year the asset is used or installed ready for use for a taxable purpose if certain conditions are met.

2.25 For the avoidance of doubt, the amendments will apply to entities that are eligible for the Research and Development Tax Incentive. This means that the amount of the deduction for the decline in value of a depreciable asset calculated under the accelerated depreciation measure will be used for calculating the notional deductions that can be claimed under the Research and Development Tax Incentive, providing the asset meets the requirements set out in section 355-305 of the ITAA 1997. This is consistent with current arrangements.

Eligibility to apply accelerated depreciation deductions

2.26 Generally, an entity is eligible for accelerated depreciation deductions if:

•

the income year is the year that the entity starts to use the asset, or has it installed ready for use for a taxable purpose;

•

the entity has aggregated turnover of less than $500 million for the income year; and

•

the asset is a qualifying asset.

[Schedule 2, item 7, subsections 40-120(1) and (2) of the ITTP 1997]

2.27 However, an entity is not eligible to claim the accelerated depreciation deductions if the decline in value of the asset has already been deducted under the instant asset write-off rules in section 40-82 of the ITAA 1997. [Schedule 2, item 7, paragraph 40-120(3)(a) of the ITTP 1997]

2.28 Similarly, an entity is not eligible to apply the accelerated depreciation deductions if the decline in value of the asset is worked out under:

•

Subdivision 40-E of the ITAA 1997, regarding low-value and software development pools; or

•

Subdivision 40-F of the ITAA1997, regarding certain primary production depreciating assets (such as water facilities, horticultural plants, fodder storage assets and fencing assets).

[Schedule 2, item 7, paragraph 40-120(3)(b) of the ITTP 1997]

2.29 Capital allowance arrangements described in Subdivisions 40-E to 40-K of the ITAA 1997 are not eligible for decline in value to be worked out under these amendments. Most of these arrangements either apply to pooled amounts, do not involve an asset or result in an immediate write-off of expenditure.

When an asset is a qualifying asset

2.30 Generally, a depreciating asset (including a statutory intangible asset under section 40-30(2) of the ITAA 1997) is a qualifying asset if, between 12 March 2020 and 30 June 2021 (inclusive):

•

the entity starts to hold the asset; and

•

the asset was first used, or installed ready for use for a taxable purpose.

[Schedule 2, item 7, subsection 40-125(1) of the ITTP 1997]

2.31 The term hold in relation to a depreciating asset is defined in section 40-40 of the ITAA 1997. The table under section 40-40 of the ITAA 1997 assists a taxpayer to understand who the holder of a depreciating asset is.

2.32 There are exclusions to qualifying assets under the general rules. These exclusions may apply where:

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a commitment to the asset was entered into before 12 March 2020;

•

the asset is a second hand asset;

•

Division 40 does not apply to the asset; or

•

the asset would not be in Australia.

Not qualifying - commitment to the asset before 12 March 2020

2.33 An asset held by an entity is not a qualifying asset if at any time before 12 March 2020 the entity:

•

entered into a contract where they would hold the asset;

•

started to construct the asset; or

•

started to hold the asset in some other way.

[Schedule 2, item 7, subsection 40-125(2) of the ITTP 1997]

2.34 The measure does not apply to assets where commitments to hold, construct or use the asset were entered into before 12 March 2020. The incentive is intended to stimulate new investment rather than benefiting investment that has already been committed to. [Schedule 2, item 7, subsections 40-125(3) and (4) of the ITTP 1997]

2.35 However, an option to enter into such a contract is not considered to be a commitment for these purposes because an option allows an entity to not enter into such a contract. [Schedule 2, item 7, subsection 40-125(5) of the ITTP 1997]

2.36 The same rules about the commitment to the asset before 12 March 2020 apply to partnerships where a partner has engaged in the relevant conduct. [Schedule 2, item 7, subsection 40-125(6) of the ITTP 1997]

Not qualifying - second hand assets

2.37 An asset held by an entity is not a qualifying asset if any of these second hand asset exclusions apply. An asset is not a qualifying asset if:

•

the entity has split or merged the asset. This ensures that the reconstitution of assets by splitting or merging them does not result in the reconstituted asset being a qualifying asset by starting to be held and being first used, or installed ready for use for a taxable purpose in the relevant income year. These relevant circumstances are dealt with under sections 40-115 and 40-125 of the ITAA 1997; or

•

the asset is held by an entity that is no longer a member of a tax consolidated group or a MEC group, where that tax consolidated group or MEC group which previously held the asset has applied the accelerated depreciation deduction.

[Schedule 2, item 7, paragraphs 40-125(7)(b) and (c) of the ITTP 1997]

2.38 Further, an asset is not a qualifying asset if the asset was held by another entity when it was first used, or installed ready for use. This ensures that the accelerated deduction is claimed only once by the entity that first held the new asset and not by subsequent holders. This rule:

•

does not apply if another entity held the asset as trading stock, or for testing or trialling purposes.

•

does not apply for intangible assets if the alternative rule applies instead.

[Schedule 2, item 7, paragraph 40-125(7)(a) of the ITTP 1997]

2.39 A specific rule for statutory intangible assets is required to ensure that genuinely new statutory intangible assets that have not previously been exploited qualify for the accelerated depreciation deductions.

2.40 An intangible asset may be a qualifying asset notwithstanding the exclusion under the rule about an asset not previously being held (and used or installed ready for use) under paragraph 40-125(7)(a) of the ITTP 1997. To qualify, the intangible asset must not have been used (for example, by the previous owner) for the purpose of producing ordinary income, or installed ready for use by the entity for any purpose (whether taxable or non-taxable). For the purpose of this rule, any ordinary income that arises from the disposal of that intangible asset to the entity that begins to hold the asset is disregarded. [Schedule 2, item 7, subsection 40-125(8) of the ITTP 1997]

2.41 Intangible assets are depreciating assets if they are included in subsection 40-30(2) of the ITAA 1997. These include:

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items of intellectual property;

•

in-house software;

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mining, quarrying or prospecting rights;

•

mining, quarrying or prospecting information;

•

spectrum licences;

•

datacasting transmitter licenses; and

•

telecommunications site access rights.

Example 1.1: In-house software

C Pty Ltd, undertakes a project to design a new gearbox for motorcycles. C Pty Ltd resolves to develop computer-aided engineering and simulation software to aid the design and development of the proposed gearbox. C Pty Ltd engages a developer to create this new software to C Pty Ltd's requirements, including testing the software before installing it.

As the developer's engagement constitutes reasonable testing or trialling, C Pty Ltd is not prevented from being eligible to claim the accelerated depreciation deduction for its in-house software by the previous trialling and testing.

Example 1.2 - Acquired intangibles

Pty Ltd undertakes research and produces knowledge that is patented. O Pty Ltd is unable to secure financing to commercialise the patent and instead sells the patent to P Pty Ltd. As the patent was not used to produce ordinary income by O Pty Ltd prior to its acquisition by P Pty Ltd, P Pty Ltd is eligible for the accelerated rate of depreciation for the acquired patent.

Not qualifying - where Division 40 does not apply

2.42 An asset held by an entity is not a qualifying asset if Division 40 of the ITAA 1997 does not apply to the asset due to section 40-45 of the ITAA 1997 (including for capital works and eligible work related items). [Schedule 2, item 7, subsection 40-125(9) of the ITTP 1997]

Not qualifying - assets not in Australia

2.43 An asset held by an entity is not a qualifying asset if:

•

it is reasonable to conclude, at the time the asset is first used or installed ready for use, that it will be not used principally in Australia for the principal purpose of carrying on a business; or

•

it is reasonable to conclude, at the time the asset is first used or installed ready for use, that it will never be located in Australia.

[Schedule 2, item 7, subsection 40-125(10) of the ITTP 1997]

Method for working out decline in value

2.44 There are different methods for working out the accelerated depreciation deduction depending on whether the income year the deduction is applied is the same year as the start time of the depreciating asset. The asset's start time is when it is first used or installed ready for use for any purpose, including a non-taxable purpose (see subsection 40-60(2) of the ITAA 1997). [Schedule 2, item 7, subsection 40-130(1) of the ITTP 1997]

2.45 That is, because an entity may only deduct amounts for decline in value when an asset is used for a taxable purpose, and the accelerated depreciation deduction can only apply once, the different methods for working out the accelerated depreciation deduction depend on whether:

•

the asset's start time occurred in the same income year that the asset was first used or installed ready for use for a taxable purpose; or

•

the asset's start time occurred in a prior income year than the income year that the asset was first used or installed ready for use for a taxable purpose.

2.46 There are also rules for working out decline in value and balancing adjustments after the accelerated depreciation deductions have been applied.

Income year is the same year as when the asset's start time occurred

2.47 Where the income year is the year in which the asset's start time occurs, accelerated depreciation is worked out as follows:

Decline in value in the income year = A + B


•   where A is 50 per cent of the asset's cost at the end of the current income year (disregarding any amount included in the second element of the asset's cost after 30 June 2021); and

•   where B is the decline in value of the asset worked out under Division 40 for the income year. In working out B, the asset's cost is reduced by 50 per cent.

[Schedule 2, item 7, subsection 40-130(2) of the ITTP 1997]

2.48 For an asset that is used only for a taxable purpose, an entity is broadly entitled to an upfront deduction of 50 per cent of the cost of the qualifying asset calculated for the income year the asset is first used or installed ready for use, plus the usual deductions for the asset under the uniform capital allowances rules under Division 40 in the income year worked out as if the cost were 50 per cent of the original cost.

2.49 However, the decline in value of the depreciating asset under this formula cannot be more than the asset's cost for that income year. This ensures that the deduction is limited to no more than the cost of the asset. [Schedule 2, item 7, subsection 40-130(3) of the ITTP 1997]

Income year that is after the asset's start time

2.50 Where the income year is later than the year in which the asset's start time occurs, accelerated depreciation is worked out as follows:

Decline in value in the income year = A + B


•   where A is 50 per cent of the sum of the asset's opening adjustable value for the income year (including any amount of the second element of its cost for that year), disregarding any amount included in that second element after 30 June 2021; and

•   where B is the decline in value of the asset under Division 40 for the income year:

-

when using the diminishing value method, the asset's base value for the year is reduced by the amount worked out in A; or

-

when using the prime cost method, the asset's first component in the formula in subsection 40-75(1) of the ITAA 1997 is reduced by the amount worked out in A. (There are additional special rules that apply when using the prime cost method. See paragraph 2.55.)

[Schedule 2, item 7, subsection 40-130(4) of the ITTP 1997]

2.51 The effect of this formula is to take into account circumstances where the asset's start time occurs before the income year in which the first business use of the asset occurs. This can occur where the asset was first used or installed ready for use for a non-taxable purpose in a prior income year but for a taxable purpose in a later income year. As the asset would have already experienced a decline in value in an earlier income year (although not deductible in that income year because it was used for a non-taxable purpose), the formula takes into account the opening adjustable value of that asset which would be lower than its cost because the asset has already experienced depreciation decline in value.

2.52 However, the decline in value of the depreciating asset under this formula cannot be more than:

•

the asset's base value for the year (when using the diminishing value method); or

•

the sum of the asset's opening adjustable value for the income year and any amount included in the second element of its cost for that year (when using the prime cost method).

[Schedule 2, item 7, subsection 40-130(5) of the ITTP 1997]

Additional rules for applying accelerated depreciation deductions

2.53 An entity is not eligible to apply the accelerated depreciation deductions if the accelerated depreciation deductions have already been applied in an income year. This provision ensures that the accelerated depreciation deduction is claimed only once, in the first applicable income year. [Schedule 2, item 7, subsection 40-135(1) of the ITTP 1997]

2.54 An entity that has applied the accelerated depreciation deductions for an asset must continue to work out depreciation deductions for following income years (where eligible) following the uniform capital allowances rules under Division 40 of the ITAA 1997. [Schedule 2, item 7, subsection 40-135(2) of the ITTP 1997]

2.55 An entity that uses the prime cost method of depreciation for the asset must follow adjustments under subsection 40-75(3) of the ITAA 1997 for later income years. This ensures that the correct value is used to work out deductions. [Schedule 2, item 7, subsection 40-135(3) of the ITTP 1997]

2.56 An entity that has applied the accelerated depreciation deductions to an asset must take this decline in value into account when working out any balancing adjustments under Subdivision 40-D of the ITAA 1997. [Schedule 2, item 7, subsection 40-135(4) of the ITTP 1997]

Temporary accelerated depreciation deductions for small businesses using the simplified depreciation rules

2.57 Small business entities that use the simplified depreciation rules under Subdivision 328-D of the ITAA 1997 are eligible to deduct an amount equal to 57.5 per cent (rather than 15 per cent) of the taxable purpose proportion of the adjusted value of a qualifying asset added to the general small business pool. [Schedule 2, item 8, section 328-182 of the ITTP 1997]

2.58 The amendments provide for a larger deduction for depreciating assets if certain conditions are met.

2.59 The conditions for the asset to be a qualifying asset are discussed above at paragraphs 2.29 to 2.43. Generally, an asset is a qualifying asset if, between 12 March 2020 and 30 June 2021 (inclusive):

•

the entity starts to hold the asset; and

•

the asset was first used, or installed ready for use for a taxable purpose.

Consequential amendments

2.60 Consequential amendments are made to the ITAA 1997 to ensure that the rules for jointly held depreciating assets (to which section 40-35 of the ITAA 1997 applies) also operate for assets to which the accelerated depreciation deductions may apply. [Schedule 2, items 1 and 2, subsections 40-35(1) and (3)]

2.61 Notes about the accelerated depreciation deductions are included in the ITAA 1997 to provide a description of these amendments and how they interact with the amendments made to the ITTP 1997. [Schedule 2, items 3 and 4, note 4 to section 40-65 and note 3 to 40-75]

Consolidation and accelerated depreciation deductions

2.62 Consequential amendments are also made to ensure that the value of a depreciating asset is not reset when an entity joins a tax consolidated group or MEC group (as a subsidiary member) for income tax purposes if the entity has benefited from accelerated depreciation deductions under this measure in an income year prior to joining a consolidated group. This prevents, in effect, an unintended double benefit that would otherwise arise in such circumstances.

2.63 Consequential amendments are also made to ensure that the tax cost of a depreciating asset is not uplifted when an entity joins a consolidated group or multiple entry consolidated group if the entity has benefited from the instant asset write-off measure in Schedule 1 to this Bill or from accelerated depreciation under this measure prior to joining the group. This prevents an unintended a double benefit that may otherwise arise in such circumstances.

2.64 Accordingly, where the instant asset-write off rules (under section 40-82) or the accelerated depreciation deductions has applied to a depreciating asset of the joining entity, the asset's tax cost setting amount is taken to be the lesser of:

•

the tax cost setting amount for the asset; and

•

the terminating value for the asset - subsection 705-30(3) specifies the terminating value for a depreciating asset to be equal to the adjustable value of the asset (as defined in section 40 85) at the joining time.

[Schedule 2, items 5 and 6, section 705-45 and subsection 705-45(2)]

Application and transitional provisions

2.65 The amendments in Schedule 2 to this Bill apply to income tax assessments for the 2019-20 and 2020-21 income years for depreciation assets that are first held, and started to be used or installed ready for use in the period 12 March 2020 to 30 June 2021 inclusive.