Edited version of private advice

Authorisation Number: 1051817256064

Date of advice: 19 March 2021

Ruling

Subject: Temporary full expensing

Question

Is Company A eligible for temporary full expensing under Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 to deduct the business portion of the cost for the Asset?

Answer

Yes

This ruling applies for the following period:

For the income year ending on 30 June 20XY

The scheme commences on:

XX February 20XX

Relevant facts and circumstances

Company A

Company A is carrying on a business located in Australia.It was incorporated in Australia on XX/XX/XX.

Company A is not a small business entity with an aggregated turnover of less than $10 million, and therefore, has not applied the simplified depreciation rules.

Asset

Company A entered into contract with Company B to purchase an Asset on XX February 20XX.

Company A is the owner of the Asset.

Some of the relevant terms of the contract are as follows:

The asset was described as the Asset.

The total purchase price was $xxx (includes $xyz GST).

Payment terms being:

•         $xx deposit required on signing of the contract

•         $xy payment 2 weeks prior to installation

•         $xz payment on commissioning

•         $yz payment 60 days following commissioning.

Clause a (Delivery/ Installation) states that 'the goods will be deemed to be installed when Company B informs the buyer, either verbally or in writing, that the goods have been installed and are capable of commercial of commercial production'.

Clause c (Title of Goods) states that 'in no event shall title to the goods or any portion thereof pass to the buyer until the buyer has fulfilled all of its obligations under this agreement including, without limitation, payment in full to Company B of the total purchase price plus any other amount owing to Company B from the buyer under this or any other contract but the goods or any part thereof delivered shall be at the buyer's risk from the time of delivery to its premises and the buyer shall indemnify Company B against all loss or damage of the goods from whatsoever cause occurring after such time. The buyer will insure the goods in the name of Company B for the full price of the goods until payment to Company B of the whole of the purchase price'.

The installation process started from XX September 20XY to YY October 20XY. The set-up process was complex and required specialist engineers to install the asset.

The Asset was installed, ready for use and commissioned on YY October 20XY. The 'Confirmation of Handover' document from Company B to Company A dated YY October 20XY certified the handover and that it was operational.

Company A paid for the Asset as per the payment terms under the contract.

The Asset is located in Australia and is currently being used in the day to day running of the business.

Assumption

No balancing adjustment event happens to the Asset in the 20XY income year.

Company A will not make a choice under section 40-190 of the Income Tax (Transitional Provisions) Act 1997 in relation to the income year ending on XX June 20XY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 40-40

Income Tax Assessment Act 1997 section 40-45

Income Tax Assessment Act 1997 Subdivision 40-E

Income Tax Assessment Act 1997 Subdivision 40-F

Income Tax Assessment Act 1997 Division 43

Income Tax Assessment Act 1997 Subdivision 328-D

Income Tax (Transitional Provisions) Act 1997 Subdivision 40-BB

Income Tax (Transitional Provisions) Act 1997 section 40-150

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(1)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(2)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(3)

Income Tax (Transitional Provisions) Act 1997 subsection 40-150(4)

Income Tax (Transitional Provisions) Act 1997 section 40-155

Income Tax (Transitional Provisions) Act 1997 section 40-160

Income Tax (Transitional Provisions) Act 1997 subsection 40-160(1)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(a)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(b)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(c)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(d)

Income Tax (Transitional Provisions) Act 1997 paragraph 40-160(1)(e)

Income Tax (Transitional Provisions) Act 1997 section 40-165

Income Tax (Transitional Provisions) Act 1997 subsection 40-165(2)

Reasons for decision

Summary

The requirements for temporary full expensing under Subdivision 40-BB of the Income Tax (Transitional Provisions) Act 1997 are satisfied. Therefore, Company A is eligible for temporary full expensing and can deduct the business portion of the cost for the Asset that it first held and first used for a taxable purpose in the 20XY income year.

Detailed reasoning

All references refer to Income Tax (Transitional Provisions) Act 1997 (ITTP Act) unless otherwise stated.

The government has introduced new measures to support business investment as part of its Economic Stimulus Package in response to COVID-19. In particular, the temporary full expensing measure provides a temporary tax incentive to support new investment and deliver significant cash flow benefits by allowing eligible businesses to immediately 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 7.30pm AEDT on 6 October 2020 ('2020 budget time') and 30 June 2022.

The temporary full expensing provisions were enacted by the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 and amended by the Treasury Laws Amendment (2020 Measures No 6) Act 2020.

Company A is not a small business entity that has applied or can choose to apply the simplified depreciation rules in Subdivision 328-D of the Income Tax Assessment Act 1997 ('ITAA 1997'). Relevantly, the provisions for temporary full expensing is contained in Subdivision 40-BB.

The full expensing of the cost for the Asset is worked out under section 40-160. Subsection 40-160(1) relevantly states that for the purpose of Division 40 of the ITAA 1997 the decline in value of a depreciation asset you hold for an income year (the current year) is the amount worked out under subsection (3) if:

(a)  You start to hold the asset at or after the 2020 budget time; and

(b)  You start to use the asset, or have it installed ready for use, for a taxable purpose in the current year; and

(c)   You are covered by section 40-150 for the asset; and

(d)  You are covered for the current year by section 40-155 (about businesses with turnover under $5 billion);

(e)  No balancing adjustment event happens to the asset in the current year; and

(f)    You have not made a choice under section 40-190 in relation to the current year.

Subsection 40-150(1) provides that you are covered by this section for a depreciating asset if, on or before 30 June 2022:

(a)  You start to hold the asset; and

(b)  You start to use the asset, or have it installed ready for use, for a taxable purpose.

For the purposes of subsections 40-150(1) and 40-160(1), section 40-40 of the ITAA 1997 identifies who is taken to 'hold' a depreciating asset by focusing on the nature of the ownership interest. Item 10 of the table in section 40-40 of the ITAA 1997 provides that the owner (or the legal owner if there is both a legal and equitable owner) of a depreciating asset holds the asset. The depreciating asset is the Asset and Company A is the owner that acquired it through the contract entered into with Company B on XX February 20XX.

Clause 7(a) of the agreement provides that title to the good only passes to the buyer when it has fulfilled all of its obligations, including the payment in full of the total purchase price plus any other amount owing to Company B. Company A paid for the Asset as per the payment terms under the contract and those terms are as follows:

•         $xx deposit required on signing of the contract

•         $xy payment 2 weeks prior to installation

•         $xz payment on commissioning

•         $yz payment 60 days following commissioning.

The installation process for the Asset was from XX September 20XY to YY October 20XY. The set-up process was complex and required specialist engineers to install it. The Asset was completed, commissioned and installed ready for use on YY October 20XY only. Company A then started to use it to carry on its business in the same 20XY income year.

Company A became the legal owner of and started to hold the Asset when full payment was made to Company B after it was commissioned on YY October 20XY. Company A started to use the Asset for a taxable purpose in the income year ending XX June 20XY.

Additionally, the exceptions contained in section 40-150 do not apply in this case. The Asset is an eligible asset and the following requirements are satisfied:

•         The asset is not covered under Division 43 of the ITAA 1997 for buildings and other capital works. It is also not an asset to which section 40-45 of the ITAA 1997 states is an asset Division 40 of the ITAA 1997 does not apply, (subsection 40-150(2)).

•         It is located in Australia and is used principally in Australia for the principal purpose of carrying on its business, (subsection 40-150(3)).

•         It is not allocated to a low-value pool or a software development pool under Subdivision 40-E of the ITAA 1997, nor is it a primary production depreciation asset that can be deducted under Subdivision 40-F of the ITAA 1997, (subsection 40-150(4)).

Therefore, subsection 40-150(1) and paragraphs 40-160(1)(a) to (c) are satisfied.

Under section 40-155, a business qualifies for temporary full expensing if it is a small business entity for the income year with turnover under $5 billion. For the 20XX income year, Company A's aggregated turnover was just over $10,000,000. The estimated aggregated turnover for 20XY income year is also just over $10,000,000. Thus, it is an eligible business and section 40-155 and paragraph 40-160(1)(d) are satisfied.

It is noted that no balancing adjustment event happens or will happen to the Asset in the 20XY income year. Therefore, paragraph 40-160(1)(e) is satisfied.

It is also assumed Company A will not make a choice under section 40-190 in relation to the income year ending on XX June 20XY. Therefore, paragraph 40-160(1)(f) is satisfied.

Furthermore, Company A is not a business with turnover of $50 million or more. Therefore, the additional exclusions contained in section 40-165 have no application. This includes the exclusion in subsection 40-165(2) regarding a commitment it already entered into to hold the asset.

Accordingly, the requirements for temporary full expensing under Subdivision 40-BB are satisfied and Company A can deduct the business portion of the cost for the Asset that it first held and first used in the 20XY income year.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).