as featured in the Farm Weekly issue 20 May 2021
In the recent Federal budget, the Government extended one of the most significant measures for the Ag sector coming out of last year's Covid 19 Economic Recovery Plan. The twelve-month extension of the Temporary Full Expensing of Depreciating Assets has been welcomed by most... but for some, it has been welcomed nervously. We will explain why, but first, let's summarise the rules with practical considerations around them.
Commencing 6 October 2020:
Less than $50 million turnover
Businesses with an aggregated turnover of less than $50 million will be able to deduct the cost of both new and second-hand assets first used or installed by 30 June 2023. Please note the 12-month extension is assuming the 2021/22 Budget is passed.
There is no upper limit to the cost of the asset. For example, a tractor purchased and delivered in June 2021 for $500,000 will be a full write-off in the 2020/21 financial year.
The construction of sheds and eligible farm buildings, including hay, machinery, and wool sheds, may fall under the full expensing. There are some restrictions on cars, so the Landcruiser wagon may not qualify!
With significant delays in the supply of machinery, it is important to note that the key date is not the day you sign the contract, but the day the asset is ready for use, which will generally be the day of delivery to the farm. Hence, if you are yet to order that new farm ute and making specific plans to include a full write-off this financial year, you have good reason to be nervous, as the dealer delivery lead times are growing and 30 June is fast approaching.
Ignoring some of the complex considerations, this is still a significant expansion of the previous instant asset write-off provisions that limit the write-off to assets costing less than $150,000 and first used or installed ready for use by 31 December 2020.
Less than $10 million turnover
Businesses with an aggregated turnover of less than $10 million will deduct the balance of their Small Business Pool (the written down tax value of all existing plant & equipment) at the end of 30 June 2021. This will include assets costing more than $150,000 acquired prior to 6 October 2020 and allocated to the Small Business Pool.
I cannot overstate the significance of this measure!
For example, if the value of the Small Business Pool is $2m, a tax deduction of $2m will arise in the 2020/21 financial year. If the $500K tractor mentioned above was also purchased, a depreciation deduction of $2.5m will arise in the 2020/21 financial year!
Opting Out
Legislation has been passed to allow business to opt out of temporary full expensing. However, it is not what we had hoped for and comes with strings attached. Small Business Entities that opt out of temporary full expensing must first opt out of the Simplified Depreciation Rules and are still required to write off all previously pooled assets. The option to re-enter the Simplified Depreciation Rules exits, but this will undo any benefit of opting out. Furthermore, a failure to opt back in by 30 June 2023 will result in a lackout from the Simplified Depreciation Rules for 5 years from the date of opting out. Our general view is that the benefits of the Simplified Depreciation Rules will outweigh any potential negative implications of temporary full expensing.
We have developed other strategies to balance the benefits of continuing with the Simplified Depreciation Rules while also depreciating new purchases over a longer period which can be tailored to specific businesses.
So are these measures a good thing, and what does the extension mean?
For many farmers, the next three financial years are likely to be a 'tax holiday'. The write-off of all plant will lead to minimal taxable income or tax losses carried forward into future years.
But what happens after that?
Beyond 2022/23, the sale of plant may result in unexpected taxable income. If the sold item belongs to the Small Business Pool, the profit could be offset against the purchase of other plant acquired in the year of sale. If the sold item doesn't belong to the pool (e.g. it was purchased after 6 October 2020 and written off), the resulting profit cannot be directly offset against other plant purchases. For example, the trade-in of the tractor mentioned above for $200,000 will result in a taxable profit of $200,000. If a $500,000 replacement is purchased, the deduction might be only $75,000. The net result is a taxable profit of $125,000! We point out though, these rules might change.
Debt reduction during the 'tax holiday' will be important given that some high tax years may follow.
If your depreciation pool is already high, further plant purchases prior to 30 June 2021 may not provide any tax benefits. In fact, it could be a tax disadvantage. For example, the purchase of plant could lead to a tax loss in a trading trust, meaning the loss of franking credits attaching to dividends and/or the missed opportunity to utilise individual tax-free thresholds.
As we work through our tax planning season, it is clear that the 2020/21 financial year is like no other from a tax planning perspective. The immediate write-off of plant is a radical measure and unlikely something you have ever budgeted for. Planning over the next few years will be imperative to avoid unexpected outcomes. For many, income tax will disappear entirely for a few years, but there could be a sting in the tail.
Next Step
To discuss this article further, we encourage you to contact Dale Woodruff on (08) 6274 6400, or your Byfields accountant.
Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.