Article by Dale Woodruff
as featured in the Farm Weekly issue 19 November 2020
The 2020-21 Federal Budget was all about Government spending, tax cuts, and tax concessions to increase jobs and drive a recovery from the COVID-19 Pandemic. The most significant measure for the Ag sector is the Temporary Full Expensing of Capital Assets.
In summary, the new rules (commencing 6th Oct 2020) are:
- 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 30th Jun 2022. There is no upper limit to the cost of the asset. For example, a tractor purchased & delivered in February 2021 for $500,000 will be a full write off in the 2020/21 financial year.
This is a significant expansion of the current 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 31st Dec 2020.
- Businesses with an aggregated turnover of less than $10 million can deduct the balance of their simplified depreciation pool balance at the end of 30th Jun 2021. This will include assets costing more than $150,000 acquired prior to 6th Oct 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 (the written down tax value of all existing plant & equipment) is $800,000, a tax deduction of $800,000 will arise in the 2020/21 financial year. If the $500K tractor mentioned above was also purchased, a depreciation deduction of $1.3m will arise in the 2020/21 financial year!!
Are these measures a good thing or just a short term ‘sugar hit’ leading to financial pain in the future?
For many of our clients, the 2020/21 and 2021/22 financial years will 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 2021/22, the sale of plant may result in unexpected taxable income. If the sold item belongs to the 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 6th Oct 2020 and written off), the resulting profit cannot be offset against other plant purchases. For example, the trade-in of the tractor mentioned above for $200,000 will result in a 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!
Debt reduction during the 2021 and 2022 ‘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 30th 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.
The 2020/21 financial year will be like no other from a tax planning perspective. The immediate write off of plant is a radical measure the likes of which I haven’t seen in my 27 years as a tax accountant. Planning will be imperative to avoid unexpected outcomes. For many, income tax will disappear entirely for a couple of years, but there could be a sting in the tail.
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.