House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Housing and Assistant Treasurer, the Hon Michael Sukkar MP)

Chapter 1 - Temporary full expensing of depreciating assets and other amendments

Outline of chapter

1.1 Schedule 1 to the Bill amends the temporary full expensing and backing business investment provisions in the income tax law to provide greater flexibility for entities to access the concessions. Schedule 1 to the Bill also makes other clarifications to the operation of the temporary full expensing and temporary loss carry back provisions.

Context of amendments

1.2 Schedules 2 and 7 to the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 amended the income tax law to introduce the temporary loss carry back and temporary full expensing measures.

1.3 Schedule 2 to the Coronavirus Economic Response Package Omnibus Act 2020 amended the income tax law to introduce the backing business investment incentive.

1.4 Temporary full expensing allows eligible businesses to deduct the full cost of eligible depreciating assets that are first held, and first used or installed ready for use for a taxable purpose, between 2020-21 budget time and 30 June 2022. Businesses are also able to deduct the full cost of improvements to these assets and to existing eligible depreciating assets made during this period.

1.5 Temporary loss carry back allows eligible corporate tax entities to carry back a tax loss for the 2019-20, 2020-21 or 2021-22 income year and in effect apply it against tax paid in a previous income year as far back as the 2018-19 income year.

1.6 The backing business incentive allows businesses with an aggregated turnover of less than $500 million in an income year to temporarily deduct capital allowances for depreciating assets at an accelerated rate.

1.7 Together, these measures support Australian businesses to withstand the impacts of COVID-19 on their business, invest, grow and create jobs.

1.8 Following the implementation of the temporary full expensing measure several issues have been identified that need to be addressed in this Schedule to provide greater flexibility to access the concession so that it encourages new investment and delivers significant cash flow benefits to businesses.

1.9 All references to legislation are to the Income Tax (Transitional Provisions) Act 1997 unless otherwise specified.

Summary of new law

1.10 Schedule 1 to the Bill amends the temporary full expensing and backing business investment provisions in the income tax law to provide greater flexibility for entities to access the concessions.

1.11 In particular, Schedule 1 to the Bill:

•

provides an alternative mechanism to the existing test in the income tax law for working out if the $5 billion threshold applies to qualify for the temporary full expensing concession; and

•

allows entities to opt out of temporary full expensing and the backing business investment incentives on an asset-by-asset basis.

1.12 In addition, Schedule 1 to the Bill clarifies the intended operation of temporary full expensing by ensuring a balancing adjustment event occurs if a depreciating asset has its decline in value worked out under the temporary full expensing provisions and in a later income year the asset no longer meets the test regarding its use or its location in Australia.

1.13 Schedule 1 to the Bill also makes a minor clarification to the operation of the temporary loss carry back provisions.

Comparison of key features of new law and current law

Detailed explanation of new law

Alternative test - corporate tax entities with income under $5 billion

1.14 Schedule 1 to the Bill includes an alternative mechanism to the existing test in the income tax law for working out if the $5 billion threshold applies to qualify for the temporary full expensing concession.

1.15 An entity is eligible for temporary full expensing if:

•

the entity satisfies the existing test in section 40-155 of the existing law (about businesses with turnover under $5 billion); or

•

the entity satisfies the alternative test in new section 40-157 (about corporate tax entities with income under $5 billion). [Schedule 1, items 5 and 11, paragraphs 40-160(1)(d) and 40-170(1)(c)]

1.16 An entity satisfies the alternative test for an income year if:

•

the entity is a corporate tax entity at any time in the income year;

•

the entity's total ordinary and statutory income other than non-assessable non-exempt income is less than $5 billion for either the 2018-19 or the 2019-20 income year (including entities with substituted accounting periods in lieu of 30 June 2020 but only those with income years ending on or before 6 October 2020 (2020-21 Budget night)); and

•

the total cost of certain depreciating assets first held and used, or first installed ready for use, for a taxable purpose in the 2016-17, 2017-18 and 2018-19 income years (combined) exceeds $100 million.

[Schedule 1, item 4, subsections 40-157(1) and (2)]

1.17 If an entity's income year ends after 2020-21 Budget night under a substituted accounting period in lieu of the income year ending on 30 June 2020, the $5 billion income test applies for the 2018-19 income year only. The exclusion of the 2019-20 income year for late balancing entities with income years ending after 2020-21 Budget night is an integrity measure. It ensures that late balancing entities are not able to optimise or manage their income after Budget night to gain access to the concession. [Schedule 1, item 4, subparagraph 40-157(1)(b)(ii)]

1.18 The requirement to have a minimum total cost of depreciating assets for the 2016-17 to 2018-19 income years ensures that eligible entities have a track record of making substantial investments in Australia. The cost amount is an aggregated amount worked out over those three income years.

1.19 In order to calculate this total cost of investment:

•

the cost of each depreciating asset is identified by working out its cost (including the second element of the asset's cost) for the income year in which it was held and first used, or first installed ready for use, for a taxable purpose; and

•

the following costs are excluded - the cost of any intangible assets or depreciating assets that, at the time they were first used or installed ready for use, were not expected to ever be located in Australia or not expected to be used principally in Australia for the principal purpose of carrying on a business.

[Schedule 1, item 4, subsections 40-157(3) and (4)]

Additional exclusions if an entity qualifies for temporary full expensing under the alternative test

1.20 If a corporate tax entity qualifies for temporary full expensing because it applies the alternative test, certain assets do not qualify for temporary full expensing.

1.21 In particular, an asset does not qualify for temporary full expensing if:

•

it is an intangible asset;

•

it has been previously held by an associate of the entity (as defined in subsection 995-1(1) of the ITAA 1997); or

•

it is available for use, at any time in the income year, by an associate of the entity or an entity that is not an Australian resident.

[Schedule 1, items 7 to 10 and 12, subsection 40-160(2), heading to section 40-165, paragraph 40-165(1)(a), section 40-167 and subsection 40-170(1A)]

1.22 The alternative test does not affect the operation of the existing exclusions for assets under the temporary full expensing regime. Those exclusions continue to apply to any entity that qualifies for temporary full expensing by applying the alternative test.

1.23 The new exclusions do not apply to entities that are otherwise eligible for temporary full expensing under the existing law. In particular, if an entity qualifies for temporary full expensing by applying the existing turnover test, the new exclusions do not apply.

Choice to not apply temporary full expensing and the backing business investment incentive

1.24 Schedule 1 to the Bill allows an entity to make an irrevocable choice to opt out of temporary full expensing and the backing business investment incentive on an asset-by-asset basis for the purpose of working out its capital allowance deductions for an income year for each eligible asset. Accordingly, the entity can choose to apply either regime to calculate the decline in value for each eligible asset, but it cannot revoke that choice once it is made. This provides entities with greater flexibility in accessing these concessions. If the entity chooses to opt out of temporary full expensing or the backing business investment for an asset it may then apply the general capital allowance rules for that asset. [Schedule 1, items 2, 3, 6, 13 and 14, paragraph 40-120(1)(d), paragraph 40-160(1)(f), paragraph 40-170(1)(f) and section 40-190]

1.25 In the case of temporary full expensing, an entity makes this choice for a particular depreciating asset for each applicable income year.

1.26 In the case of the backing business investment incentive, an entity makes this choice for a particular depreciating asset for an income year and subsequent income years. The effect of the choice is different in this case because the backing business investment incentive provides for an accelerated decline in value that has an effect for the first income year as well as subsequent income years.

1.27 The choice for both temporary full expensing and the backing business investment incentive must be made in the approved form and must be given to the Commissioner of Taxation by the day the entity lodges its tax return for the income year to which the choice for an asset relates. [Schedule 1, items 2, 3, 6, 13 and 14, paragraph 40-120(1)(d), section 40-137, note to section 40-137, paragraph 40-160(1)(f), paragraph 40-170(1)(f) and section 40-190]

1.28 Under the existing law regarding approved forms, the Commissioner of Taxation may determine the manner in which the choice is required or defer the time for lodgement (among other things) (see sections 388-50 and 388-55 of Schedule 1 to the Taxation Administration Act 1953). This provides flexibility for the form of the election to be made in a way which balances the requirements of the Commissioner of Taxation needed to administer the taxation law, whilst not imposing onerous obligations on affected entities. [Schedule 1, items 3 and 14, note to section 40-137 and note to section 40-190]

1.29 If an entity makes a choice to opt out of temporary full expensing for an income year for an asset, existing sections 40-160 and 40-170 do not apply to work out the decline in value of that asset during the income year. Instead, the entity applies the standard capital allowance rules to work out the deduction for decline in value of that depreciating asset or if applicable, the backing business investment incentive.

1.30 If an entity makes a choice to opt out of the backing business investment concession for an asset, sections 40-130 and 40-135 do not apply to work out the decline in value of that depreciating asset that starts to be used, or installed ready for use, during the income year. Instead, the entity must apply the standard capital allowance rules to work out deductions for decline in value of that asset. As a result, the backing business investment rules cease to apply to that asset in the next income year (even if the entity does not specifically choose to opt out of the backing business investment incentive for that later income year) as the choice is irrevocable for later income years in relation to that asset.

1.31 The opt-out regime for temporary full expensing and the backing business investment incentive provide entities with flexibility to manage their affairs and choose the relevant capital allowance rules that they consider are appropriate in their circumstances for each asset.

Balancing adjustment event if asset is not used for the principal purpose of carrying on a business or is not located in Australia

1.32 Schedule 1 to the Bill clarifies the intended operation of the temporary full expensing provisions so that a balancing adjustment event occurs if a depreciating asset has its decline in value worked out under the temporary full expensing provisions and in a later income year:

•

either:

-

it becomes not reasonable to conclude that the entity will use the asset principally in Australia for the principal purpose of carrying on a business; or

-

it becomes reasonable to conclude that the asset will never be located in Australia; and

•

the asset continues to be held, used, or installed ready for use.

[Schedule 1, item 14, subsection 40-185(1)]

1.33 The balancing adjustment event applies in a later income year if a fully expensed asset ceases to be used primarily for carrying on a business and is instead applied for private use before the end of its effective life. It also applies if the asset is relocated outside Australia after it has been fully expensed and before the end of its effective life. Finally, it applies where an asset was intended to be relocated to Australia for business use but this does not occur.

1.34 This balancing adjustment event applies to all assets where their decline in value is worked out under the temporary full expensing regime, including assets that qualify because of the alternative test provided by Schedule 1 to the Bill or are eligible for temporary full expensing under the existing law prior to these amendments.

1.35 If such a balancing adjustment event occurs, the entity is treated in a similar way as if it ceased to use the asset, or have it installed ready for use for any purpose and the entity is expected to not use the asset again or have it installed ready for use again. This ensures that the temporary full expensing deduction is clawed back as intended in these circumstances. [Schedule 1, item 14, subsection 40-185(2)]

1.36 Schedule 1 to the Bill modifies the first element of cost rules in Division 40 of the ITAA 1997 so that the first element of cost of a depreciating asset where a balancing adjustment arises because of the operation of the amendments is the asset's termination value at the time of the event. [Schedule 1, item 14, subsection 40-185(3)]

1.37 If a balancing adjustment event occurs in relation to an asset that had been subject to temporary full expensing, the rules for temporary full expensing set out in Subdivision 40-BB no longer apply to work out the decline in value for that asset for a later income year. In these circumstances, there is nothing to preclude the entity from claiming any other capital allowances it is entitled to for that asset under the income tax law (for example, under the general rules in Division 40 of the ITAA 1997). [Schedule 1, item 14, subsection 40-185(4)]

Minor technical correction

1.38 Schedule 1 to the Bill makes a minor technical amendment to correct the heading to existing subsection 328-181(5) so that it refers to "Low pool value" which is consistent with the heading to section 328-210 of the ITAA 1997. Prior to the amendments, the heading referred to the "Low value pool". [Schedule 1, item 16, heading to subsection 328-181(5)]

Technical clarification - loss carry back

1.39 Schedule 1 to the Bill amends the temporary loss carry back concession in the income tax law to clarify and confirm that the choice under the temporary loss carry back measure must be to carry back a specified fixed dollar amount of an entity's tax loss to an earlier income year. An entity cannot, for example, specify that it will carry back a percentage of a tax loss. [Schedule 1, item 1, subsection 160-15(1) of the Income Tax Assessment Act 1997].

Application and transitional provisions

1.40 Schedule 1 to the Bill commences on the first day of the first quarter after Royal Assent. [Clause 2]

1.41 Whilst these amendments commence prospectively, they apply for a fixed period in relation to the 2019-20 and 2020-21 income years for the backing business investment provisions and also for a fixed period for the 2020-21 and 2021-22 income years for the temporary full expensing measure. However they are generally beneficial in operation and allow greater flexibility for entities to access the temporary full expensing and backing business investment provisions or to choose if they should apply.

1.42 To avoid doubt Schedule 1 contains an application provision that provides that the balancing adjustment event for the temporary full expensing measure applies even if the balancing adjustment event (balancing adjustment time) occurs before the commencement of Schedule 1 to the Bill. [Schedule 1, item 15]

1.43 The balancing adjustment event results in the market value of a depreciating asset being realised and the asset being subject to the standard depreciation rules instead. This is potentially less favourable treatment than if the temporary full expensing regime applied. The balancing adjustment event is an integrity provision that applies from the 2021-22 income year. In limited circumstances this provision may apply retrospectively. This might occur, for example, for early balancing entities in relation to the 2021-22 income year. This potential retrospective application is necessary to prevent depreciating assets being fully expensed and then in a later income year being applied for example solely for private use or removed from Australia or never used in Australia for business purposes.