House of Representatives

Explanatory Memorandum

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

Chapter 6 Extension of temporary full expensing of depreciating assets

Outline of chapter

6.1 Schedule 6 to the Bill amends the income tax law to extend the temporary full expensing regime by 12 months, until 30 June 2023.

Context of amendments

6.2 In 2020, the Government introduced temporary tax incentives to support Australian businesses withstand the impacts of COVID-19, invest, grow and create more jobs. One of these temporary tax incentives was temporary full expensing.

6.3 Temporary full expensing supports businesses that invest as it significantly reduces the after-tax cost of eligible assets, providing a cash flow benefit. Temporary full expensing also creates a strong incentive for businesses to bring forward investment to access the tax benefit before it expires.

6.4 Under the current law the temporary full expensing regime will end on 30 June 2022.

6.5 For most entities, temporary full expensing is contained in Subdivision 40-BB of the ITTP Act. However, for small business entities (with an aggregated turnover of less than $10 million) that choose to apply the simplified depreciation rules, temporary full expensing is contained in modifications to those rules made by sections 328-180 and 328-181 of the ITTP Act.

6.6 The Government announced in the 2021-22 Budget that it will extend the temporary full expensing regime by 12 months. This means it will end on 30 June 2023.

6.7 The 12-month extension will provide eligible businesses with more time to access the tax incentive, including projects that require longer planning times and those affected by COVID-19 related supply disruptions.

Summary of new law

6.8 Schedule 6 to the Bill extends the temporary full expensing regime by 12 months, until 30 June 2023.

Comparison of key features of new law and current law

Detailed explanation of new law

6.9 Schedule 6 to the Bill amends the income tax law to extend the temporary full expensing regime by 12 months. Other than the extension, the operation of the temporary full expensing regime remains the same.

6.10 After 30 June 2023, the amount that can be deducted for the decline in value of depreciating assets will generally be worked out under the uniform capital allowance rules, subject to any adjustments required under section 40-180 of the ITTP Act.

Entities (other than entities that apply the small business simplified depreciation rules)

6.11 As a result, businesses with aggregated turnover below $5 billion (and corporate tax entities that meet the alternative eligibility test) can deduct the full cost of eligible depreciating assets of any value that are first held, and first used or installed ready for use for a taxable purpose between the 2020 budget time and 30 June 2023. The cost of improvements to existing eligible depreciating assets made during this period can also be fully deducted. [Schedule 6, items 1 to 3, subsection 40-150(1), paragraphs 40-160(3)(a) and (b), and paragraph 40-175((b) of the ITTP Act]

Small business entities that apply the simplified depreciation rules

6.12 Under the current temporary full expensing regime small business entities (with an aggregated turnover of less than $10 million) that choose to apply the small business simplified depreciation rules, access temporary full expensing through modifications made to those rules. The 'lock out' rules that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out of the regime continue to be suspended for income years that include 30 June 2023.

6.13 As a result, small businesses deduct the full cost of eligible depreciating assets of any value that are first held, and first used or installed ready for use for a taxable purpose between the 2020 budget time and 30 June 2023. The cost of improvements to existing eligible depreciating assets made during this period can also be fully deducted. Small businesses will also deduct the balance of their general small business pool between the 2020 budget time and 30 June 2023. [Schedule 6, items 4 to 9, subsection 328-180(1), the headings to sections 328-180 and 328-181, subsections 328-181(2) and (3), and paragraph 328-181(5)(b) of the ITTP Act]

Application and transitional provisions

6.14 Schedule 6 to the Bill commences on the first day of the first quarter following Royal Assent.