Thinking Tax Edition 8

Roelof van der Merwe

Thinking Tax is an initiative from Crowe to provide you with a short overview of specific tax issues that may affect you or your business, with a focus on practical issues you may face on a day to day basis.

To claim the full expensing of depreciating assets you must be carrying on a business

For a business to claim the full expensing of depreciating assets (FEDA) bought, installed and used from 7 October 2020 to 30 June 2022, the asset must be used for a taxable purpose.

This requirement means an entity would not qualify for the FEDA unless it is reasonable to conclude the entity will use the asset principally in Australia for the principal purpose of carrying on a business.

Generally, an entity would be carrying on a business if the activity is planned, organised and carried on in a businesslike manner with the intention of making a profit (and not just as a hobby or a passive investment activity).

For example, an analysis of the following factors, amongst others, may indicate a business is carried on:

  • The activity has a significant commercial purpose or character.
  • There is active participation, repetition and regularity of business type activities.
  • The entity has a purpose of profit as well as a prospect of profit from the activity.

There is no clear line in the sand when an entity is carrying on a business and all factors mentioned above must be considered.

Practically, this ‘facts and circumstances test’ can lead to some complications when determining whether a business is carried on by entities that conduct passive activities, such as only renting out properties and deriving rental income. Is the letting of a property by itself an activity in the nature of investment or in the nature of carrying on a business? Does it matter if there are multiple properties being rented?

Likewise, it can be challenging to determine whether an entity that rents out movable assets (e.g. building cranes) to another entity, and thereby generates licence or hire fees, will be carrying on a business.

If the entity holding the asset is a company (i.e. the entity renting out the property or generating licence or hire fees), there is a rebuttable presumption in tax law that such a company would be carrying on a business. This is confirmed by the Commissioner in Taxation Ruling TR 2019/1.

The key qualification in that ruling is that this “presumption can be rebutted if it can be shown that, on the facts, the company had no aim or prospect of making a profit”.

It follows if the company holding the assets does make profits, it will likely be seen as carrying on a business.

Unfortunately, there is no rebuttable presumption that other entities (e.g. trusts, partnerships or sole traders) will be carrying on a business even if they have an aim or prospect of making a profit.

Please contact your Crowe representative if you are thinking of buying depreciable assets to use but you are unsure whether your activities would constitute carrying on a business in order to qualify for FEDA.

Roelof van der Merwe, National Tax Director (Melbourne)

Gary Thomas, Senior Partner, Tax Advisory (Melbourne)

Marcus Davis, Partner, Tax Advisory (Albury)