Instant tax write off 2023: Who is eligible & how to claim?

To support Australia’s recovery from the pandemic, a package of relief measures are available to let businesses save on tax when investing in new capital assets. In this article, Mark Chapman, Director of Tax Communications for H&R Block, explains the instant tax write-off for capital expenses.

Temporary full expensing, or TFE for short – allows businesses to deduct the full cost of eligible capital assets from their profits for the year, rather than depreciating the cost over several years. TFE is scheduled to last until 30 June 2023 so it’s vital that businesses take advantage now.

For small businesses in particular, the measures could, with some fairly significant caveats, represent a significant opportunity to boost your bottom line.

What assets are included in the write-off?

Most Australian businesses can now immediately deduct the full business-related costs of all purchases of capital items – typically depreciating assets bought for the business, which could include:

• fixtures and fittings (such as shop or cafe fit-outs)
• technology, such as laptops, computers, EFTPOS systems and security equipment
• tools, plant and equipment
• office furniture
• motor vehicles such as utes, delivery vans and most cars (deductions for these are capped at a certain limit each financial year – $64,741 in 2022/23)
• motorbikes
• solar systems.

What eligibility criteria apply for instant tax write-offs?

To be eligible, businesses must have an aggregated annual turnover of less than $5 billion. This high turnover threshold means almost every Australian business is included in the scheme, although if you’re a medium to large business, bear in mind that ‘aggregated’ turnover means the turnover of any parent companies (including overseas parents) and subsidiaries need to be included.

That said, businesses whose aggregated turnover is more than $5 billion but whose Australian income is less than $5 billion can also claim the tax break, provided their aggregate turnover was less than $5 billion in either 2018/19 or 2019/20, and provided they have previously invested more than $100 million in tangible, depreciating assets in the period 2016/17 through to 2018/19.

This means that big international companies (whose global turnover often exceeds $5 billion) can potentially still benefit.

For example, initial media reports when TFE was first introduced suggested very large Australian-based businesses such as BHP, Telstra and Wesfarmers would still be ineligible, but the Australian arms of other multinationals such as Boeing, Nestlé and Coca-Cola may be able to claim the tax break.

TFE applies to new depreciable assets and the cost of improvements to existing eligible assets (even if the existing assets were acquired before the scheme started).

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

What happens if I make a purchase greater than a write-off amount?

There is no limit on the cost of assets that can be deducted. So, provided deductions for the asset are not specifically excluded or limited under the scheme (see below), it doesn’t matter what the cost of the asset is.

Whether the asset you purchase is $100 or $1 million, the full cost can be written off against your profits, provided both the asset and your business are eligible for full expensing.

There is no limit on the number of capital assets you can acquire.

Are there exclusions or limits for instant tax write-offs?

The main categories of assets that are not eligible for full expensing are:

1. ‘expensive’ cars (for the 2022/23 financial year, this means cars costing more than $64,741)
2. buildings and other assets that are eligible for capital works deductions
3. assets located overseas
4. some primary production assets (such as fencing and water facilities) that already have an existing instant write-off scheme in place
5. assets that are not used in a business.

Expensive cars

So-called expensive cars can be written off up to the ‘car limit’ (currently $64,741 excluding GST), but anything over that cost cannot be depreciated at all. That rule has been in place for many years in relation to car depreciation and has been carried over to TFE. The rule exists, basically, to prevent businesses from spending up on lavish luxury cars at the taxpayer’s expense.

Motor vehicles that aren’t regarded as cars for tax purposes are not covered by the expensive car limit.

This means that commercial vehicles such as vans, buses and trucks that are bought and used for work purposes can be fully written-off, whatever their cost.

Crucially – for tradies, for example – some larger utes are also regarded as commercial vehicles rather than cars. Basically, if the ute has a carrying capacity of over one tonne (the dealer or manufacturer should be able to confirm this), it isn’t regarded as a car and the car limit does not apply.

As some bigger, more luxurious utes do cost more than $64,741, this gives a potential opportunity for a business to purchase the vehicle and write-off the entire cost as a deduction using TFE.

Assets that are not used in a business

Note this last exclusion prevents TFE claims for capital assets used in a non-business capacity, such as assets purchased by investment property owners or assets used in your employment.  Office furniture, for example, is eligible for TFE when acquired by a business but not when acquired by someone in employment.

Any deduction you can claim under TFE must also be apportioned if you use the asset for both private and business purposes. For example, if you purchase a new computer for $2,500 and use it 50% in your business and 50% for personal purposes, you can only claim a deduction for $1,250.

What timing applies for instant tax write-offs?

The tax break applies to assets acquired through to 30 June 2023.

It is worth pointing out that any assets purchased must either be in use or installed and ready for use by 30 June 2023 in order to qualify. If assets have been ordered and paid for but haven’t actually arrived at your premises (or they have arrived but they are still sitting in boxes in a corner of your workplace), the instant deduction cannot be claimed on them.

From 1 July, 2023, the instant write off is currently legislated to be available only for assets costing up to $1,000.

In addition, it will only be available to small businesses (ie, those with a turnover of less than $10 million). This means that businesses must take advantage of the tax break in the next few months.

How do I claim the instant tax write-off?

Claims need to be made through your tax return, so the first opportunity to make a claim will arise when you lodge your return.

Make sure you keep all the purchase documentation you need to prove your purchase.

What changes have been made with the instant tax write-off?

An instant write-off scheme existed before 6 October, 2020, but it was more limited in scope.

The maximum asset cost was capped at $150,000 and the turnover threshold for eligible businesses was capped at $500 million. In practice, that was generous enough for most small businesses, so even if you made asset purchases before the start of TFE, chances are you’ll still be able to claim a full tax deduction.

Are there any catches?

Potentially, yes. If you dispose of an asset that you’ve previously written off, the full sale proceeds are then included in your assessable income for the tax year that you make the sale. So, what the government gives with one hand, it may (at least partially) take away later.

Some business owners have also 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 would cause a loss), the business may struggle to make use of that loss.

While 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, the government has announced that “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 are not able to opt out. Such businesses must use full expensing, even if it does not produce the best tax outcome for them.

This lack of flexibility is arguably the most significant downside of the new scheme, particularly for the small business sector that makes up the bulk of the Australian economy.

Final thoughts

While this measure is undeniably generous and potentially expensive, it does suffer from the same problem as the old instant asset write-off.

Namely, businesses need either the cash or borrowing capacity to invest in new capital assets in order to benefit from the tax break.

With some businesses unable or unwilling to borrow, take up may depend on how much business confidence has been restored.

Cover image source: RomanR/Shutterstock.com

About Mark Chapman

Mark Chapman is Director of Tax Communications at H&R Block and is a regular commentator on tax matters for a variety of Australian broadcast and print media outlets, including Money Magazine, My Business magazine, The Australian Financial Review, The Daily Telegraph, The Age and The Business Spectator.

Mark is an author, Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales. Follow him on LinkedIn.