Our Insights

In October 2020, the government introduced Temporary Full Expensing, allowing an immediate write-off of the full purchase price of eligible capital expenditures such as plant and equipment.

This was extended to 30 June 2023, from 1 July 2023 it is now limited to purchases under $20,000 for small business entities (SBE) with a turnover of under $10 million.

Simplified Depreciation Rules and Small Business Entities (SBE’s):

For Small Business Entities using the simplified depreciation rules, any remaining balance in their small business pool may have been completely written off. This implies that, unless they opt out of these simplified rules, all eligible capital assets will be fully depreciated, holding no further taxable value.

Impact of Selling Completely Written-off Assets:

Assets written off under temporary full expensing have a nil written down value for tax purposes. When such assets are sold, the sales proceeds (exclusive of GST) are treated as a full profit, becoming taxable income in the year of sale. This situation can lead to unintended tax consequences, as outlined below.

Example Scenario – Managing Tax Consequences:

In 2020, you purchased a tractor for $500,000, which was fully written off in the small business pool write-off in 2021. Moving to the current 2024 financial year, you decide to upgrade to a newer version worth $800,000, and in a buoyant market, receive a trade-in of $350,000 for the original tractor.

Tax Consequences:

1. The new tractor, priced at $800,000, is included in your small business pool in 2023/24, allowing a 15% deduction in the first year, amounting to $120,000.
2. The original tractor holds no tax value, resulting in the full trade-in proceeds of $350,000 being taxable profit.
3. This transaction adds $230,000 ($350,000 proceeds minus $120,000 depreciation deduction) to your taxable income.

Significance and Action:

These changes can have a significant impact, especially if assets are sold without replacement, as 100% of the disposal proceeds will be taxable income with no offsetting deduction.

It is advisable to call us to discuss the value of deferred tax on future sales, providing a clearer picture of potential tax implications. Importantly, engage in tax planning discussions with us before undertaking any sales or changeovers to minimise the associated tax consequences.

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Thorntons is an accounting and advisory practice to mid-size, family-owned businesses in Western Australia. We offer a fully integrated portfolio of financial, tax, succession, and estate planning services and have the experience to guide you through the complexity so that you can enjoy stability, peace of mind and certainty.

To discuss your individual business needs and find out if we might be a fit for you, please contact Thorntons at tp@thorntons.biz or call (08) 9421 1722.