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New temporary full expensing depreciation measure

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The new temporary full expensing depreciation measure was introduced to provide further economic support for businesses with an aggregated turnover of less than $5 billion, as a result of Covid-19.

Available for all sizes of business entity, the temporary full expensing measure enables an eligible taxpayer (e.g., sole trader, company) to deduct the full cost of eligible depreciating assets that are first held or used from 6 October 2020 to 30 June 2022. In other words, there is no limit to claim the full expenses of the asset’s purchases.

However, it will still depend on a case by case basis as to whether taking advantage of this new measure will be right for you.

For example, opting out of the temporary full expensing measure for one or more depreciating assets could be more beneficial for a sole trader. This will be particularly the case where the aftertax value of an up-front (or immediate) deduction for the cost of an asset in an income year (e.g., the 2021 income year) is not as beneficial to a sole trader as the after-tax value of claiming the same depreciation deduction over a number of years (e.g., over the asset’s effective life). For example, assume that a sole trader has an annual taxable income of $200,000 (which means that $20,000 of taxable income is being subject to tax at the top marginal rate). In this case, if the sole trader purchases a depreciable asset costing $100,000, writing off the asset in the year of purchase under the temporary expensing measure would mean that the sole trader is only getting the benefit of a deduction at the top marginal rate 45% on $20,000 of the asset’s cost. In contrast, if the asset is being depreciated over its effective life, a greater portion of the asset’s cost over time (i.e., more than $40,000) would be deducted against the sole trader’s income at the top marginal rate.

Please contact Caroline at TaxGo to discuss the implications of this new measure on your taxation strategy.


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