In response to combatting Australia’s COVID-19-induced recession, two significant income tax measures, instant asset write-off and tax loss carryback, were announced as part of Australia’s October 2020 federal budget. These temporary measures (expiring on June 30, 2022) are designed to inject cash into the Australian economy by lowering corporate tax collections with the aim of increasing employment and incentivizing businesses to spend money. There are eligibility criteria and anti-avoidance rules to navigate, so taxpayers looking to take advantage of these measures should seek guidance from Australian tax advisors.
Instant asset write-off
Australia’s capital allowance rules provide depreciation deductions for acquired assets over the asset’s determined effective life or at a statutory effective life cap for certain asset categories.
Australian taxpayers who acquire depreciable assets from Oct. 6, 2020 and install them by June 30, 2022 will be entitled to a 100% instant asset write-off for tax purposes. There is no cap on the cost of the asset. However, there are exceptions, which include:
- Capital works (buildings and structural improvements)
- Software allocated to a software pool
- Assets to be predominantly used outside Australia
Taxpayers who are members of a group with global turnover in excess of AUD$5 billion are not eligible for the instant asset write-off. However, taxpayers falling within these criteria will still be entitled to the instant asset write-off if their Australian taxable income is less than AUD$5 billion and they have invested more than AUD$100 million in tangible depreciating assets between July 1, 2016 and June 30, 2019.
Australian taxpayers who acquired depreciable assets with a cost of up to AUD$150,000 between March 12, 2020 and Oct. 6, 2020, and install the assets before Dec. 31, 2020, are also entitled to an instant asset write-off. However, this measure does not apply to taxpayers who are a part of a group with global turnover in excess of AUD$500 million.
Tax loss carryback rule
Australia’s tax year runs from July 1 through June 30 of the following year. However, Australian corporate taxpayers may apply for a substituted accounting period ending on a date other than June 30. Most Australian subsidiaries of a U.S. parent have likely applied for a December 31 substituted accounting period to align the Australian tax year-end to that of the U.S. parent. This is particularly true if the U.S. parent has subpart F or Global Intangible Low Tax Income (GILTI) inclusions.
For tax year 2021 (fiscal year ending [FYE] June 30, 2021 or Dec. 31, 2020), Australian corporate taxpayers can elect to apply their tax losses for the 2020 tax year (FYE June 30, 2020 or Dec. 31, 2019) and 2021 tax years against tax profits from the 2019 tax year (FYE June 30, 2019 or Dec. 31, 2018) or 2020 tax years.
For tax year 2022 (FYE June 30, 2022 or Dec. 31, 2021), Australian corporate taxpayers may elect to apply their tax losses for 2022 tax year against tax profits from tax year 2019, tax year 2020 or tax year 2021. Also for tax year 2022, Australian corporate taxpayers can elect to apply their tax loss for tax year 2020 against tax profits for tax year 2019.
There are a number of exceptions and limitations to the tax loss carryback rule:
- Taxpayers who are members of a group with global turnover in excess of AUD$5 billion in the loss year cannot claim the tax loss carryback.
- The tax loss carryback is limited to the taxable income of the relevant earlier income years (as explained above).
- Capital losses cannot be carried back.
- The tax loss carryback cannot result in the company’s franking account going into a deficit. This may occur if the company has paid franked dividends out of its profits.
United States tax considerations
Both the instant asset write-off and the tax loss carryback provisions potentially provide taxpayers with access to cash; however, if the U.S. multinational taxpayer generates GILTI in the respective tax years, the taxpayer may have a GILTI income inclusion without a corresponding foreign tax credit to offset the U.S. tax. If this is the case, then the use of these provisions could negatively impact the financial statement, thus requiring taxpayers to model out these scenarios to determine overall costs and benefits. Moreover, refunds of foreign taxes could trigger a U.S. tax redetermination, which could result in significant U.S. tax filing obligations (i.e., notifying the IRS about the change in foreign taxes paid relating to prior years).