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    • #1275
      Wendy
      Participant

      Taking the following as an example, is it a correct interpretation that the taxpayer can deduct depreciation under Div 40 over the effective life of his asset without having to apply any instant asset write off?

      Individual is a sole trader (turnover well below the small business entity thresholds, say $90k pa) acquires a depreciating asset on 1 June 2020 cost $60k and immediately starts to use it for business purposes.

      Does not apply Div328 but prefers to apply the Div 40 capital allowances rules.

      The BBI rules can be opted out of on an asset by asset basis – assume he choses to opt out.

      S40.82 – the ‘instant asset write off’ if that is the correct terminology – applies only if the taxpayer satisfies BOTH of the following:

      a) the entity is not a small business entity AND
      b) the entity would be a small business entity if references to Subd 328-C apply (being changes in references to the SBE thresholds)

      Taxpayer does not satisfy a) above – because he IS a small business entity already. b) is therefore irrelevant as he needs to satisfy both for s40-82 to apply.

      Effect = if an entity is already a small business entity, the s40.82 instant asset write off doesn’t apply and he depreciates under Div 40 using effective lives as normal.

      Do others agree on this interpretation, which effectively carves out a different position for entities that are already SBE’s under the original rules.

      Interactions with the ATO on this have been ‘indeterminate’ so far, and I would be interested in others views.

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    • #1310
      RobynTax
      Moderator

      Hi Wendy
      Great post!

      Until 31 December 2020, small business entities (SBEs) had a $150,000 instant asset write-off (IAWO) under s 328-180 of both the ITAA 1997 and the Income Tax (Transitional Provisions) Act 1997, although the entity has until 30 June 2021 to first use or install the asset ready for use. The $150,000 threshold reverted to $1,000 on 1 January 2021, but this has no practical effect until 1 July 2022 due to the full expensing of depreciating assets (FEDA) measure (discussed below).

      Under s 40-82(4) of the ITAA 1997, an entity that is not an SBE and has an aggregated turnover of at least $10 million but less than $50 million could qualify for the $150,000 IAWO as a medium sized entity. Under s 40-82(4A), an entity that is not an SBE and has an aggregated turnover of at least $10 million but less than $500 million can qualify for the $150,000 IAWO as a large sized entity. The acquisition and first used dates of the assets for these entities differ from those which apply to SBEs.

      The reason that s 40-82 excludes an entity that is an SBE is because SBEs already had (until 31 December 2020) their own $150,000 IAWO under s 328-180.

      AVAILABILITY OF CHOICES

      If a taxpayer that is an SBE chooses to apply Subdiv 328-D, they cannot choose not to apply the SBE IAWO under s 328-180. If they are not an SBE, they cannot choose not to apply the IAWO in s 40-82.

      Entities may choose to opt out of the Backing Business Investment (BBI) measure (12 March 2020 to 30 June 2021) and the FEDA measure (6 October 2020 to 30 June 2022) on an asset-by asset basis.

      An entity that is an SBE, that does not choose to apply Subdiv 328-D, reverts to Div 40 for their depreciating assets. They are not eligible for the IAWO under s 328-180 as they have not chosen to apply the rules in Subdiv 328-D. They are not eligible for the IAWO under s 40-82 because they are an SBE. So, assuming they have opted out of BBI, my initial thoughts are that they would depreciate the asset over its effective life as normal.

      Regards

      Robyn Jacobson, CTA
      Senior Advocate
      The Tax Institute

      Disclaimer: The above response should not be treated as professional advice and readers should rely on your own enquiries in making any decisions concerning your own interests or those of your clients.

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    • #1321
      Wendy
      Participant

      Hi Robyn, Thank you for this. I have also now confirmed that it is the ATO’s view too. It’s an interesting piece of flexibility available to SME’s that are not medium sized entities. I appreciate your input!

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