Private ruling: Temporary full expensing
Date of advice: 11 August 2022
Published: November 2022
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the Company eligible to claim a deduction in relation to the cost of a depreciating asset (the asset) in the year ended 30 June 20XX under of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A) which relates to the temporary full expensing (TFE) measures? | A1: Yes. However, the amount that the Company can deduct in the year ended 30 June 20XX can only be determined after it makes an estimate of the taxable purpose proportion, as required by section 328-205 of the ITAA 1997. | Q2: If the answer to question 1 is no, can the Company work out the decline in value of the asset under the TFE measure in Subdivision 40-BB of the IT(TP)A and claim a deduction for that decline in value under section 40-25 of the ITAA 1997 in the year ended 30 June 20XX? | A2: As the answer to Question 1 was yes, this question has not been answered. | Q3: If the answers to question1 and, if answered, question 2 are no, can the Company claim a deduction for the decline in value of the asset under Division 40 of the ITAA 1997 based on the effective life of the asset as determined under either section 40-95 or 40-100 of the ITAA 1997? | A3: As the answer to Question 1 was yes, this question has not been answered.

Relevant facts and circumstances: 1. The Company conducts its income producing activities at several different locations in a State of Australia. 2. For the year ended 30 June 20XX Company A was a small business entity (SBE) as defined in subsection 328-110(1) of the ITAA 1997 and chose to use the simplified depreciation rules under section 328-180 of the ITAA 1997. 3. During the year ended 30 June 20XX the Company purchased the asset. 4. The company first used the asset before 30 June 20XX. 5. Details of how the asset has and will be used in relation to the Company's income producing activities were provided with the ruling application.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Subdivision 328-C | Income Tax Assessment Act 1997 Subdivision 328-D | Income Tax Assessment Act 1997 subsection 40-25(7) | Income Tax Assessment Act 1997 section 40-27 | Income Tax Assessment Act 1997 section 40-30 | Income Tax Assessment Act 1997 subsection 40-30(1) | Income Tax Assessment Act 1997 section 40-40 | Income Tax Assessment Act 1997 section 40-85 | Income Tax Assessment Act 1997 section 40-95 | Income Tax Assessment Act 1997 section 40-100 | Income Tax Assessment Act 1997 subsection 40-85(1) | Income Tax Assessment Act 1997 paragraph 40-85(1)(b) | Income Tax Assessment Act 1997 subsection 328-110(1) | Income Tax Assessment Act 1997 subparagraph 328 110(1)(b)(i) | Income Tax Assessment Act 1997 paragraph 328-110(5)(b) | Income Tax Assessment Act 1997 subsection 328-175(9A) | Income Tax Assessment Act 1997 section 328-180 | Income Tax Assessment Act 1997 subsection 328-180(1) | Income Tax Assessment Act 1997 paragraph 328-180(1)(a) | Income Tax Assessment Act 1997 paragraph 328-180(1)(ab) | Income Tax Assessment Act 1997 paragraph 328-180(1)(b) | Income Tax Assessment Act 1997 subsection 328-180(2) | Income Tax Assessment Act 1997 section 328-205 | Income Tax Assessment Act 1997 subsection 328-205(1) | Income Tax Assessment Act 1997 subsection 328-205(2) | Income Tax Assessment Act 1997 subsection 328-215(4) | Income Tax Assessment Act 1997 section 995-1 | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax (Transitional Provisions) Act 1997 Subdivision 40-BB | Income Tax (Transitional Provisions) Act 1997 section 40-155 | Income Tax (Transitional Provisions) Act 1997 section 328-181 | Income Tax (Transitional Provisions) Act 1997 subsection 328-181(1)

Reasons for decision: Summary: The Company is eligible to claim as a deduction in the year ended 30 June 20XX the whole or a part of the cost of the asset under the TFE measures under section 328-180 of the ITAA 1997 using the simplified depreciation rules. The amount that can be deducted is impacted by the estimate of the taxable purpose proportion that the Company makes under section 328-205 of the ITAA 1997. Once the Company makes and applies this estimate to calculate the amount it can deduct, the same taxable purpose proportion is then used to calculate the assessable income of the Company under subsection 328-215(4) of the ITAA 1997 in the income year a balancing adjustment event occurs in respect of the asset. | Detailed Reasoning - Detailed reasoning: 6. The TFE measures provides an immediate write-off of the whole or a part of the cost of depreciating assets in accordance with the rules in: • Subdivision 40-BB of the IT(TP)A, that is applicable to business entities generally, and • section 328-181 of the IT(TP)A which modifies the operation of rules in Subdivision 328-D of the ITAA 1997, applicable to a SBE who has chosen the simplified depreciation rules. 7. The Company is a SBE and has chosen to use the simplified depreciation rules. If the conditions of TFE are met in respect of the asset, the Company will access TFE through the modifications made to the simplified depreciation rules. | Detailed Reasoning - Simplified depreciation rules: 8. Subsection 328-180(1) of the ITAA 1997 states: You deduct the *taxable purpose proportion of the *adjustable value of a *depreciating asset for the income year in which you start to use the asset, or have it *installed ready for use, for a *taxable purpose if: (a) you were a *small business entity for that year and the year in which you started to *hold it; and (ab) you chose to use this Subdivision for each of those years; and (b) the asset is a depreciating asset whose *cost as at the end of the income year in which you start to use it, or have it installed ready for use, for a taxable purpose is less than $1,000. Note: This threshold may be affected by section 328-180 (about temporary increased access to accelerated depreciation) or 328-181 (about temporary full expensing) of the Income Tax (Transitional Provisions) Act 1997. | Detailed Reasoning - Introductory statement to subsection 328 180(1): 9. In examining the introductory statement to subsection 328-180(1), it contains a number of defined terms under section 995-1 of the ITAA 1997, which terms are identified by an asterisk. These terms impact the deduction available under subsection 328-180(1) and the amount to claim under this subsection: • there must be depreciating asset as defined under section 40-30 of ITAA 1997 [1] ; • the entity has started to use the depreciating asset for a taxable purpose [2] , or has the depreciating asset installed ready for use [3] for a taxable purpose; • the entity needs to determine the adjustable value of the depreciating asset [4] ; • the entity must estimate a taxable purpose proportion [5] of that adjustable value; and • the entity must satisfy the conditions set down in paragraphs 328-180(1)(a) to (b). 10. The asset is a depreciating asset. 11. Subsection 328-180(1) applies in the income year when an entity starts to use the asset for a taxable purpose, or it has the asset installed ready for use for a taxable purpose. The Company purchased and has taken possession of the asset in the year ended 30 June 20XX. The Company used the asset before the year ended 30 June 20XX and if that use was for a taxable purpose, then subsection 328-180(1) will apply. 12. If the asset was installed ready for use during the year ended 30 June 20XX, but not used for a taxable purpose before 30 June 20XX, then its future use must be for a taxable purpose for subsection 328-180(1) to apply. 13. A taxable purpose is defined in subsection 40-25(7) of the ITAA as: • the purpose of producing assessable income; or • the purpose of exploration or prospecting; or • the purpose of mining site rehabilitation; or • environmental protection activities. 14. Of these four purposes, only the first purpose is relevant to the activities of the Company. 15. Based on the information provided, the Company will use the asset for a taxable purpose. 16. The adjustable value of the asset is determined under section 40-85 and subsection 40-85(1) states: The adjustable value of a *depreciating asset at a particular time is: (a) if you have not yet used it or had it *installed ready for use for any purpose - its *cost; or (b) for a time in the income year in which you first use it, or have it installed ready for use, for any purpose - its cost less its decline in value up to that time; or (c) for a time in a later income year - the sum of its *opening adjustable value for that year and any amount included in the second element of its cost for that year up to that time, less its decline in value for that year up to that time. Note: The adjustable value of a depreciating asset may be modified by section 250-285. 17. As the Company took delivery of the asset and first used it during the year ended 30 June 20XX the adjustable value of the asset will be the cost as determined by paragraph 40-85(1)(b). 18. To calculate the amount of the Company's cost, as determined under paragraph 40-85(1)(b), that the Company can deduct, this cost is multiplied by the taxable purpose proportion. 19. As the Company was an SBE in the year ended 30 June 2021, the taxable purpose proportion is determined under subsection 328-205(2), which states: You must also make this estimate for each * depreciating asset that you * hold and start to use, or have * installed ready for use, for a * taxable purpose during an income year for which you are a *small business entity and you choose to use this Subdivision. You must make the estimate for the income year in which you start to use it, or have it installed ready for use, for such a purpose. 20. How an entity estimates the taxable purpose proportion estimate referred to in subsection 328-205(2) is detailed in subsection 328-205(1), which applies in the first income year an entity is a SBE, and it states in part: ... make a reasonable estimate for that year of the proportion you will use, or have * installed ready for use, each * depreciating asset that you * held just before, and at the start of, that year for a * taxable purpose... Note 1: That proportion will be 100% for an asset that you expect to use, or have installed ready for use, solely for a taxable purpose... 21. In determining the taxable purpose proportion of the asset, the Company must consider how it will use the asset to produce its assessable income in the year ended 30 June 20XX. The Company must then make a reasonable estimate of how much of the total use of the asset in the year ended 30 June 20XX is to produce assessable income. As per Note 1 to subsection 328-205(2), if the Company was to estimate that the asset will be used solely for a taxable purpose in the year ended 30 June 20XX, then the amount that can be deducted is 100% of the adjustable value of the asset. 22. However, it should be noted that when a balancing adjustment event occurs in respect of the asset, subsection 328-215(4) of the ITAA 1997 requires that that the taxable purpose proportion be used to determine an amount of assessable income to be included in the income year the balancing adjustment event occurs. The amount of assessable income is determined by multiplying the taxable purpose proportion estimated under subsection 328-205(2) by the termination value of the asset. 23. If the requirements of paragraph 328-180(1)(a) to (b) are met, the amount that can be deducted by the Company is calculated by multiplying the taxable purpose proportion by the adjustable value of the asset. | Detailed Reasoning - Paragraph 328-180(1)(a): 24. In examining paragraph 328-180(1)(a) and determining whether an entity is an SBE in a year of tax, subsection 328-110(1) states: You are a small business entity for an income year (the current year) if: (a) you carry on a *business in the current year; and (b) one or both of the following applies: (i) you carried on a business in the income year (the previous year) before the current year and your *aggregated turnover for the previous year was less than $10 million; (ii) your aggregated turnover for the current year is likely to be less than $10 million. 25. As the Company carried on a business and had an aggregated turnover of less than $10 million in the year ended 30 June 20XX, subparagraph 328-110(1)(b)(i) has been satisfied for the year ended 30 June 20XX. 26. Paragraph 328-180(1)(a) also requires that the Company start to hold the asset in the year ended 30 June 20XX and Section 40-40 of the ITAA 1997 provides the meaning of hold in respect of a depreciating asset. Item 10 of the table in that subsection provides that 'the owner, or the legal owner if there is both a legal and equitable owner', holds 'any depreciating asset'. As the asset was purchased by the Company during the year ended 30 June 20XX it was first held in the year ended 30 June 20XX. 27. As the Company is an SBE for the year ended 30 June 20XX and, the Company first held the asset in the year ended 30 June 20XX, the conditions of paragraph 328-180(1)(a) have been met. | Detailed Reasoning - Paragraph 328-180(1)(ab): 28. Paragraph 328-180(1)(ab) requires that the SBE choose to apply the simplified depreciation rules in an income year. 29. The Company chose to apply this paragraph in the year ended 30 June 20XX and this ruling has been made on the assumption that the Company will choose to apply the simplified depreciation rules in the year ended 30 June 20XX. | Detailed Reasoning - Paragraph 328-180(1)(b): 30. In respect of paragraph 328-180(1)(b), this paragraph is modified by subsection 328-181(2) of the IT(TP)A under the heading 'Year asset first used etc. for a taxable purpose', which states: For the purposes of determining whether subsection 328-180(1) of the Income Tax Assessment Act 1997 allows you to deduct an amount in relation to a depreciating asset, disregard paragraph (b) of that subsection (which sets a limit of $1,000 on the cost of the asset) if, in the period beginning at the 2020 budget time and ending on 30 June 2023, you: (a) start to hold the asset; and (b) start to use it, or have it installed ready for use, for a taxable purpose. 31. Paragraphs 141 to 142 of LCR 2021/3 [6] provide a summary of the modification and state: 141. For small business entities that have chosen to use the simplified depreciation rules in Subdivision 328-D of the ITAA 1997, access to TFE is provided by section 328-181 of the IT(TP)A which removes thresholds for immediate deduction under sections 328-180 and 328-210 of the ITAA 1997. 142. Section 328-180 of the ITAA 1997 is the IAWO provision for small business entities using simplified depreciation which ordinarily operates with an asset cost threshold of $1,000. For assets acquired since 12 May 2015, the provision has operated with higher asset cost thresholds and, for the period during which IAWO applies for larger entities under section 40-82 of the ITAA 1997, the asset cost thresholds under the two provisions are aligned. 32. Providing the requirements of TFE are met, the $1,000 limit in paragraph 328-180(1)(b) is ignored and the Company will be able to claim a deduction for the cost of the asset under the simplified depreciation rules. 33. Part F of LCR 2021/3 discusses the TFE eligibility requirements for an SBE that use the simplified depreciation rules and this Part is examined in detail below. | Detailed Reasoning - Eligible entities: 34. Paragraph 143 of LCR 2021/3 states: An entity will be eligible for TFE under simplified depreciation rules if it is a 'small business entity' electing to use those rules. [7] An entity will be a small business entity for an income year if it carries on business in that year (see paragraph 17 of this Ruling) and its aggregated turnover is less than $10 million (see paragraphs 22 and 23 of this Ruling for how to apply the aggregated turnover test). | Detailed Reasoning - Carrying on a business: 35. Paragraphs 17 to 21 of LCR 2021/3 discuss when an entity is carrying on a business and in respect of an entity that is a company paragraphs 18 to 20 state: 18. For companies, the ATO has published guidance in Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? In line with that guidance, companies ordinarily will be considered to carry on business if they are established and maintained to make a profit for shareholders and invest assets in gainful activities that have both a purpose and prospect of profit. This will be so even if activities are relatively limited and consist of the passive receipt of returns on investments for distribution to shareholders. 19. Accordingly, company beneficiaries in regular receipt of trust distributions who reinvest those distributions for the benefit of shareholders will ordinarily carry on business. In rare cases, a company that is a mere object of a discretionary trust may conduct no activities of a commercial character and have no purpose or prospect of profit, in which case it may be concluded that no business is being carried on. 20. The absence of a purpose of profit-making for the benefit of shareholders will ordinarily count against a conclusion that a non-profit company is carrying on business. However, there may be circumstances in which such a company conducts substantial commercial activities for the purpose of profit-making to fund charitable or other objectives of the company. Depending on the nature and scale of the activities, this may amount to carrying on a business. 36. In examining paragraph 18 of LCR 2021/3 and the information provided in the ruling application, as the Company is a company, and is conducting activities aimed at generating income for its shareholders it is being maintained 'to make a profit for shareholders and invest assets in gainful activities that have both a purpose and prospect of profit'. Therefore, it is carrying on a business. | Detailed Reasoning - Aggregated turnover test: 37. Paragraphs 22 to 24 of LCR 2021/3 discuss the aggregated turnover requirements: 22. An entity that carries on business will be eligible for TFE if its aggregated turnover, worked out under Subdivision 328-C of the ITAA 1997, is under the $5 billion threshold. To satisfy this condition for an income year (current year), the aggregated turnover must be less than $5 billion for the previous year or likely to be less than the threshold for the current year. 23. In working out likely aggregated turnover for the current year, the determination is made at the commencement of the current year or at the date the entity first carried on business during the current year. If the condition would be satisfied on this basis only, it is taken not to be satisfied if the aggregated turnover for the two previous years exceeds the threshold. However, the condition may still be met for the current year if aggregated turnover, worked out as at the end of the current year, is under the threshold. 24. Further information on aggregated turnover for the purposes of TFE, and various other measures, is provided in other guidance material published by the ATO. 38. As an SBE the Company's aggregated turnover in the year ended 30 June 2021 was less than $10 million, so the requirement under section 40-155 of the IT(TP)A that the aggregated turnover be less than $5 billion is met. | Detailed Reasoning - Eligible entity conclusion: 39. For the year ended 30 June 20XX the Company passes the eligible entity test as it is carrying on a business and an SBE has an aggregated turnover that is less than $5 billion. | Detailed Reasoning - Eligible asset: 40. Paragraphs 144 to 145 of LCR 2021/3 states: 144. Most depreciating assets will be eligible. Some of the exclusions applicable to larger entities also apply to small business entities (see the excluded assets in paragraph 41 of this Ruling). There are also exclusions that apply specifically to small business entities under the simplified depreciation rules: • assets leased or expected to be leased predominantly on a depreciating asset lease [8] • horticultural plants [9] • primary production assets where a choice has been made to deduct amounts under Subdivisions 40-F or 40-G of the ITAA 1997 [10] • certain assets in a low-value pool or software development pool [11] • assets for which a notional decline in value deduction gives rise to an R&D tax offset [12] , and • second-hand assets used to produce income from residential property [13] . 145. Exclusion of these assets from the simplified depreciation rules does not mean that decline in value deductions cannot be obtained for these assets under other rules. A small business entity may still access TFE for such an asset under Subdivision 40-BB of the IT(TP)A if eligibility requirements are met. 146. If such an asset is not eligible for TFE under Subdivision 40-BB of the IT(TP)A (for example, it was first held before 2020 Budget Time), it will also be ineligible for IAWO under section 40-82 of the ITAA 1997 because those rules do not apply to small business entities. However, the asset may be eligible for BBI under Subdivision 40-BA of the IT(TP)A or may be depreciated under the usual Division 40 of the ITAA 1997 rules. If eligible second-element costs are incurred for the asset at or after 2020 Budget Time and by no later than 30 June 20XX [14] , the entity may apply TFE in respect of those costs under the Subdivision 40-BB rules in the way described in paragraph 85 of this Ruling. 147. The treatment of assets excluded from TFE under the simplified depreciation rules is illustrated in Example 12 of this Ruling using the example of a leased asset. 148. Motor vehicles are eligible for TFE under the simplified depreciation rules, although a car limit ($59,136 in the 2020-21 income year) may apply to determine the maximum cost amount that can be deducted. 41. Paragraph 144 above refers to paragraph 41 of LCR 2021/3 and paragraph 41 states: Assets to which the general capital allowance rules of Division 40 of the ITAA 1997 do not apply because of section 40-45 are also excluded for the purposes of TFE. Broadly described, these assets are: • certain work-related items for purposes of fringe benefits tax law where the relevant benefit provided by the employer is an expense payment benefit or a property benefit [15] • capital works for which amounts can be deducted under Division 43 of the ITAA 1997 (or would be deductible but for timing of expenditure or use of capital works) [16] • depreciating assets for which deductions were available under former provisions of the income tax law relating to Australian films [17] . 42. None of the asset exclusions that are outlined in either paragraph 41 or 144 apply to purchasing the asset or the way in which the Company states that asset will be used. Eligible asset - conclusion 43. As none of the exclusions apply, the asset is an eligible asset for the purposes of TFE. | Detailed Reasoning - Conclusion - paragraph 328-180(1)(b): 44. As none of the exclusions that apply to assets under TFE, or that apply under the simplified depreciation rules, apply to the asset, paragraph 328-180(1)(b) is modified by subsection 328-181(2) of the IT(TP)A to remove the reference to $1,000 that is contained in paragraph 328-180(1)(b). | Detailed Reasoning - Applying full expensing under the simplified depreciation rules: 45. In respect of the simplified depreciation rules, paragraphs 149 and 150 of LCR 2021/3 discuss the application of subsection 328-180(1) of the ITAA 1997 and state: 149. A small business entity choosing to use the simplified depreciation rules accesses TFE in the following ways: • For an asset first held at or after 2020 Budget Time and first used or installed for a taxable purpose by no later than 30 June 20XX, the entity deducts the taxable use proportion of the adjustable value of the asset for the income year in which it is first used or installed for a taxable purpose. • The entity can deduct the taxable purpose proportion of second-element costs (such as improvements) incurred at or after 2020 Budget Time and by no later than 30 June 20XX in respect of assets for which an amount was deductible in an earlier year under subsection 328-180(1) of the ITAA 1997. • The entity deducts the balance of its general small business pool for an income year ending between 2020 Budget Time and 30 June 20XX. 150. Small business entities can choose not to use the simplified depreciation rules for an income year and instead apply the general depreciation rules in Division 40 of the ITAA 1997 (see paragraphs 154 and 155 of this Ruling for the consequences of not using the simplified rules). However, if small business entities opt into the simplified depreciation rules, TFE applies to all eligible assets and small business entities cannot opt out of applying TFE for individual assets for an income year. They also cannot opt out of applying TFE to the balance of a general small business pool. 46. As the asset was purchased by the Company in the year ended 30 June 20XX, it is the first dot point in paragraph 149 that will apply in the year ended 30 June 20XX. 47. As explained earlier in these reasons for decision, the amount that the Company can deduct is based on the estimate of the taxable purpose proportion that the Company makes, multiplied by the adjustable value of the asset. | Detailed Reasoning - Conclusion: 48. As an SBE who has elected to use the simplified depreciation rules, the Company can apply TFE in respect of the asset it purchased in the year ended 30 June 20XX. 49. The amount The Company can claim is based on the estimate the Company makes of the asset for a taxable purpose, when determining the taxable purpose proportion under section 328-205 of the ITAA 1997. | Detailed Reasoning - Question 2: If the answer to question 1 is no, can the Company work out the decline in value of the asset under the TFE measure in Subdivision 40-BB of the IT(TP)A and claim a deduction for that decline in value under section 40-25 of the ITAA 1997 in the year ended 30 June 20XX? | Summary: This question was not addressed as the answer to question one was yes. | Detailed Reasoning - Question 3: If the answers to questions 1 and, if answered, question 2 are no, can the Company claim a deduction for the decline in value of the asset under Division 40 of the ITAA 1997 based on the effective life of the asset as determined under either section 40-95 or 40-100 of the ITAA 1997? | Summary: This question was not addressed as the answer to question one was yes. [1] Subsection 40-30(1) defines a depreciating asset in part as '...an asset that has a limited *effective life and can reasonably be expected to decline in value over the time it is used....' [2] taxable purpose is defined in subsection 40-25(7) of the ITAA 1997 [3] installed ready for use is defined in subsection 995-1(1) of the ITAA 1997 and means 'installed for use and held in reserve' [4] adjustable value of a depreciating asset is defined under section 40-85 of the ITAA 1997 [5] taxable purpose proportion is defined under section 328-205 of the ITAA 1997. [6] Law Companion Ruling LCR 2021/3 Temporary full expensing. [7] Subsection 328-175(1) of the ITAA 1997. [8] Subsection 328-175(6) of the ITAA 1997. [9] Subsection 328-175(5) of the ITAA 1997. [10] Subsections 328-175(3) and (4) of the ITAA 1997. [11] Subsection 328-175(7) of the ITAA 1997. [12] Subsection 328-175(9) of the ITAA 1997. [13] Subsection 328-175(9A) of the ITAA 1997. [14] The TFE provisions were amended to extend the end date to 30 June 2023 however LCR 2021/3 has not yet been updated to incorporate this change. any reference in quotes from LCR 2021/3 to the eligibility end date of 30 June 2022 should be read as 30 June 2023. [15] Subsection 40-45(1) of the ITAA 1997. [16] Subsection 40-45(2) of the ITAA 1997. [17] Subsection 40-45(5) of the ITAA 1997.

Is the Company eligible to claim a deduction in relation to the cost of the asset in the year ended 30 June 20XX under section 328-180 of the ITAA 1997 as modified by section 328-181 of the IT(TP)A which relates to the TFE measures?