How to get a 100% deduction against your profits for capital assets

The temporary full expensing tax break is set to end in June 2023, but is the scheme of real benefit to your business? Mark Chapman, Director of Tax Communications at H&R Block, explains how full expensing works and which businesses will benefit most.

What is ‘full expensing’?

If you own your own business (rather than being employed by somebody else), you can write off all items of capital equipment acquired during the year against this year’s profits. There is no limit to the number of items or the amount claimed.

This is the last year that this tax break will be available so take advantage while you still can; the relief ends on 30 June 2023 and from then on, it is scheduled to be replaced by an instant asset write-off scheme which will only be available for assets costing less than $1,000.

Amongst the items you can claim are the following:

• Plant, equipment and tools
• Office furniture and equipment, like desks, chairs and cabinets
• Technology such as laptops, desktop computers, phones and tablets
• Motor vehicles (including cars costing less than $64,741)
• Furniture, kitchen equipment, TV sets and works of art for break-out or rest areas, reception areas or meeting rooms.

How do I claim full expensing?

The vast majority of Australian businesses can benefit from the tax break.

To be eligible, businesses must have an aggregated annual turnover of less than $5 billion. ‘Aggregated’ turnover means that the turnover of any parent company (including overseas parents) and subsidiaries need to be included.

In addition, businesses whose Australian income is less than $5 billion can also claim the tax break provided they have previously spent more than $100 million in the period 2016-17 through to 2018-19. This means that big international businesses (whose global turnover exceeds $5 billion) can potentially still benefit.

Full expensing applies to new depreciable assets and the cost of improvements to existing eligible assets.

Are second-hand assets eligible?

It depends. For small and medium-sized businesses (with aggregated annual turnover of less than $50 million), full expensing also applies to second-hand assets. For businesses with an annual turnover of $50 million or more, second-hand assets are excluded.

Which assets are excluded?

The following assets are not eligible for full expensing:

• ‘Expensive’ cars (meaning cars costing over $64,741) – but only the excess over $64,741 is disallowed
• Buildings and other assets that are eligible for capital works deductions
• Assets located overseas

Note: this is not a complete list. The full list of excluded assets can be found here.

Is it compulsory to claim full expensing?

Some business owners have rightly pointed out that claiming an immediate deduction for purchases of capital assets is not necessarily in the best interests of their business.

If a business is already running at a loss (or the deduction for capital assets will cause a loss), the business may struggle to make use of that loss. Whilst companies can potentially now carry a loss back to generate a refund of tax paid in earlier years, businesses operating through other structures (such as sole traders or trusts) must carry losses forward, so there is potentially very little benefit in generating large loss-making depreciation deductions in the current year. Sole traders, for instance, could find themselves losing access to the tax-free threshold, meaning that the depreciation deductions are basically wasted.

For businesses with a turnover of $10 million or more, full expensing will be, in effect, voluntary. Such businesses can opt-out, on an asset by asset basis, of full expensing and apply the normal depreciation rules to those assets.

Businesses with a turnover of less than $10 million can only opt out of temporary full expensing for an income year on an asset-by-asset basis, if they are not using the simplified depreciation rules. More information can be found at the ATO website here and here.

Check out this useful table on ato.gov.au that shows the interaction of tax depreciation incentives for different types of businesses.

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