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New incentives for businesses

Driving investment and creating jobs through depreciation and taxation incentives

The past twelve months have presented challenges to business owners across the country. As the uncertain times continue, the government is endeavouring to battle a long-term economic downturn with lucrative depreciation and taxation incentives.

Driving investment and creating more jobs are two essential pieces of the puzzle to strengthen the Australian economy to pre-pandemic levels. In the last federal budget, the announcement of the full-expensing and loss carry back incentives showed that the government is ready to do what it can to achieve this.

Business incentives

Full expensing allows businesses to instantly claim the full value of plant and equipment assets purchased after 7.30pm on 6 October 2020 and first used or installed before 1 July 2022. All businesses with an aggregated turnover of up to $5 billion are eligible for the incentive, making it available to over 99 per cent of businesses. The government has essentially amplified the previous instant asset write-off rules by allowing full expensing. However, it’s important to note that businesses can opt out of full expensing on an asset-by-asset basis in some circumstances.

This means if the plant and equipment asset is eligible, it can be claimed as an instant expense. With no limit on the number of assets a business can claim in one year, full expensing has the potential to reduce tax liabilities by hundreds of thousands, if not millions, of dollars.

Businesses making a loss is an expected outcome for some industries. Usually, a business would need to return to profit before claiming this loss. But the new loss carry back measure ultimately overturns this arrangement.

Under loss carry back, a business can carry back tax losses from the 2019-20, 2020-21, or 2021-22 financial years to offset taxed profits in 2018-19 or subsequent financial years. Doing so allows the business to receive a healthier tax return now, rather than waiting until they return to profit.

For example, if a business made a tax loss in FY 2020-21, they could offset tax profits from previous financial years. This would result in an instant refund of tax paid. The repayment would require that the amount carried back isn’t more than the earlier taxed profits, and that the carry back doesn’t generate a franking account deficit.

A business doesn’t need to make a hard-hitting fiscal loss with property depreciation. Depreciation is a non-cash deduction, meaning the business doesn’t need to spend any money to claim it.

It’s possible for a business to make a profit, that could then turn into a loss when depreciation deductions are applied. A loss created by depreciation is treated like any other and can be used as loss carry back to offset profits in FY 2018-19 and subsequent years.

There’s no doubting that business owners have a lot to wrap their heads around to claim the most and maximise their cash flows. The following example demonstrates how both incentives can work together.

Ken owns a small farm and purchased $250,000 worth of plant and equipment assets in FY 2020-21 and claimed them under full expensing. All assets were classed as ‘non-primary producing’ and included tractors, a work ute, mowers and power tools.

In FY 2020-21 financial year, Ken’s farm made a loss of $120,000. This loss was due to the investment in plant and equipment and other depreciation deductions that came to $20,000 from a previously prepared tax depreciation schedule. If Ken didn’t purchase the plant and equipment or claim depreciation, he would have made a profit (after other expenses) of $150,000.

Ken’s farm business is classed as a base rate entity and is entitled to a lower tax rate of 26 per cent. When applying this to his $120,000 loss, the loss carry back tax outcome is $31,200.

In FY 2019-20 Ken’s farm taxable income was $200,000 and had no net exempt income and a franking account balance of $75,000. This entitles Ken to a refundable loss carry back tax offset of the full $31,200.

BMT Tax Depreciation’s comprehensive commercial schedules include every incentive on offer to ensure business owners claim the most deductions possible. BMT staff complete physical site inspections that maximise claims and ensure ongoing compliance is maintained.