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Updated Summary of Interaction Between Instant Asset Write-off, Temporary Full Expensing, and the R&D Tax Incentive

November 10th, 2020

The Government has recently introduced and augmented stimulus measures to encourage investment and allow eligible businesses to claim an immediate deduction for the cost of an asset in the year the asset is first installed ready for use.

This asset investment stimulus has taken the form of 2 programmes:

• Instant asset write-off provided for under section 328-180 of the INCOME TAX (TRANSITIONAL PROVISIONS) ACT 1997:
  • applies for assets a R&D entity first acquires/installs up until 31 December 2020;
  • applies to businesses with group turnover up to $500 Million and assets up to $150,000;
  • thresholds for access to the scheme are based on turnover and asset value, and are phased across the period of the programme;

• Temporary full expensing (TFE) provided for under subdivision 40-BB of the INCOME TAX ASSESSMENT ACT 1997:
  • applies for assets an R&D entity first acquires/installs between 7:30pm AEDT on 6 October 2020 (the 2020 Budget time) and 30 June 2022;
  • temporary full expensing supersedes the instant asset write-off scheme, and is available to a bigger pool of businesses, those with a group turnover up to $5 Billion;
  • it completely removes the $150,000 cost limit on the individual asset.

Expenditure included in the cost of a tangible depreciating asset is ineligible for a notional deduction under the R&D expenditure provisions. Notional deductions for the decline in value of R&D depreciating assets must be considered under the R&D decline in value provisions, and are available to a company under SECTION 355-310.

The ATO’s guidance on Tangible Depreciating R&D Assets has not yet been updated to detail the interaction between the R&D Tax Incentive and the transition between the Instant Asset Write-off and Temporary full expensing (TFE) programmes.

We have consulted with the ATO directly on this issue, who were helpful and have confirmed that:

• Where a company deducts the cost of an asset using the instant asset write-off provided for under section 328-180 of the INCOME TAX (TRANSITIONAL PROVISIONS) ACT 1997, it CANNOT claim the tax write-off amount as a notional R&D deduction for the purposes of Subsection 355-310;
• Where a company deducts the cost of an asset using the Temporary Full Expensing provided for under subdivision 40-BB of the INCOME TAX ASSESSMENT ACT 1997, it CAN claim the tax write-off amount as a notional R&D deduction for the purposes of Subsection 355-310. The amount of the notional deduction for R&D tax purposes must be apportioned where there is any non-R&D use of the asset;
• The above changes represent a significant enhancement to the R&D Tax Incentive for companies that may be purchasing tangible assets for use in R&D Activities over the coming years, and applying the Temporary full expensing (TFE) provisions.