Where previous accelerated depreciation under the Instant Asset Write-Off precluded claiming the asset under the R&D Tax Incentive, Temporary Full Expensing enables both accelerated depreciation and claiming.

Temporary Full Expensing and R&D

Recent changes to depreciation rules will affect R&D tax claims from FY21 onwards (or 2020 for companies filing against the calendar year). Businesses with turnover less than $50M can apply Temporary Full Expensing (TFE) to accelerate the depreciation of plant and equipment assets installed or first used after 6 October 2020 7:30pm.

Previously, small businesses with turnover less than $10M could choose between depreciating these assets under Division 40 as normal, or accelerate depreciation under the Instant Asset Write-Off (IAWO), however this would preclude the asset from being claimed under the R&D Tax Incentive.

As TFE is a subdivision of Division 40 (subdivision 40-BB), TFE enables the full, immediate deduction of eligible depreciating assets, while permitting this deduction to be claimed under the R&D Tax Incentive as proportionate to its use on R&D.

While this is overall advantageous for R&D claimants, be aware that if you are a small business entity applying simplified depreciation rules, TFE will require the balance of your small business pool to be fully deducted, and this would be precluded from an R&D claim.

Further considerations

  • Balancing Adjustment - If the asset is fully depreciated under TFE and later sold, a balancing adjustment must be made. This also impacts any associated R&D claim on the asset, in part or full, and requires a similar adjustment at that time.

  • Timing of Deduction - TFE is only available from the time asset is installed or ready for use. This may be different from when the cost of the asset is incurred or paid for. Remember that using an asset for R&D activities is a taxable use, and the asset can be deducted in the year.

  • Phase in - Due to TFE only applying to assets put into use from 6 October 2020, it is likely that you will have multiple assets depreciated via different rules on the balance sheet for a number of years. The R&D treatment follows the depreciation method used for each asset.

  • Opt out - You can choose to claim a deduction using other depreciation rules by lodging a form with the ATO by the lodgement of the tax return, and is irrevocable. Remember only Division 40 depreciation (both 40-82 and accelerated via 40BB) can be claimed as an R&D expense.

Further information

In addition to the ATO guidance, please see our detailed comparison of TFE with the previous IAWO provisions, and their intersection with claims under the R&D Tax Incentive.

The above information is noted as a guide only and does not constitute tax advice.

Due to the significant complexity in these areas, we advise you to speak to a tax professional to obtain guidance relevant to your situation.

Please get in touch with us here.