Should I Write-Off Assets?

Inclusion of R&DTI expenditure for ‘Decline in Value’ is allowed if the asset is subject to depreciation treatment under Division 40 of the tax rules.

From October 2020 the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 introduced a new sub-division 40-BB (Temporary Full Expensing or ‘TFE’) that allows for assets first acquired between 6 October 2020 and 30 June 2022 to be fully expensed. This was extended to 30 June 2023 in the 2021 budget.

The small business concession for instant asset write off (IAWO), is a different tax rule (Division 328), which means that the write off is not a decline in value eligible as an R&DTI expenditure, even if the asset is used for eligible R&D activities.

There was also the potential to use the Backing Business Investment – accelerated depreciation (BBI) option for assets first put to use between 12 March 2020 and 30 June 2021. This is an uncapped scheme for larger businesses which was superseded by the TFE rules.

So for assets used for R&D that are put to first use within the TFE allowed period, ensure that the treatment is recorded as a 40-BB TFE on the tax return.

Confused? Here is the ATO guide to the different schemes confirming that TFE can (and should) be chosen as the preferred option. For FY22 and FY23 the IAWO and BBI are no longer available (assets must have been first used prior to 1 July 2021) so the likelihood of an inadvertent declaration is avoided.

The usual depreciation rules would see the same expenses offset against income over the period of the assets life, so if the use of the asset is primarily for R&D (more than 63% of its use at current offset rates – similar to the consideration whether to pool assets) then it may be more beneficial to depreciate it as a regular asset.

If the company wants more immediate tax losses in order to receive a refundable offset in cash then it may be better to apply the instant write off and forgo future R&D offsets against that asset usage. 

The full deduction under 40-BB does allow the asset decline in value to be included as an R&DTI expenditure with no current limit on asset value, but the R&D usage of the asset over its life needs to be known (or estimated)

Note that for cars, the threshold is $59,136 for the FY21 financial year, as a different rule applies.

If an asset is later sold, for a value that is different from the residual value in the asset register and R&DTI offsets have been claimed against the decline in value, then a balancing adjustment must be made to either recoup some R&DTI offset (if the sold value is higher than the residual value) or to provide some additional offset (if the sold value is less than the residual value). 

Balancing adjustments with R&DTI recoupment will be more common in situations where the TFE rule or IAWO has been applied and the residual value is therefore zero. So if an R&D asset is likely to be sold at a later date, then this should be considered in the decision to write it off or not.