‘Instant asset write-offs’ and interaction with accounting for research and development incentives

As part of its response to COVID-19, the Australian Government, in March 2020, announced an increase in thresholds for the instant asset write-off for new and second hand assets. Additional new schemes were subsequently introduced, and are summarised below:

Asset must be first used, or installed ready for use…

Eligible assets

Instant asset write-off threshold

Businesses eligible if aggregate turnover…

From 12 March 2020 to 30 June 2021

(must be purchased by 31 December 2020)

Business portion of a new and second hand asset

$150,000 per asset Note 1

Less than $500 million

6 October 2020 to 30 June 2023

(must be purchased on or after 6 October 2020 and before 30 June 2023)

Business portion of purchase price of new asset and improvements to older asset

100% of cost of asset (no upper dollar limit)

Less than $5 billion

6 October 2020 to 30 June 2023 (must be purchased on or after 6 October 2020 and before 30 June 2023)

Business portion of purchase price of second hand asset

100% of cost of asset (no upper dollar limit)

Less than $50 million

Note 1: For assets with a cost exceeding the $150,000 threshold, businesses can use the ‘backing business incentive’ accelerated depreciation measure which allows an upfront depreciation rate of 50%. The remainder of the written down value of the asset qualifies for Division 40 tax depreciation.

Example 1 – No refundable R&D incentive

On 1 April 2021, DEF Limited purchased a new asset for $100,000 and first used it on 1 April 2021. The asset is recognised as property, plant and equipment on the balance sheet.

The asset usually generates a Division 40 tax depreciation deduction of 20% straight-line per annum, and DEF Limited uses this same 20% straight-line method for determining accounting depreciation.

Tax rate is 30% and the year-end is 30 June.

Accounting depreciation for the year ended 30 June 2021

Accounting depreciation continues as usual and is recognised in the fixed asset register at $5,000, i.e. $100,000 X 20% X 3/12 months.

Tax depreciation for the year ended 30 June 2021

DEF Limited qualifies for the ‘instant asset write-off’ and therefore recognises tax depreciation of $ 100,000. The deferred tax liability at 30 June 2021 is therefore recognised as follows:

  Accounting Tax Difference Deferred tax liability @ 30%
  $ $ $ $
Cost – 1 April 2021 100,000 100,000 - -
Depreciation – 1 April to 30 June 2021 (5,000) (100,000) 95,000 28,500
Carrying amount – 30 June 2021 95,000 - 95,000 28,500

On 30 June 2021, DEF Limited processes the following journal entry to recognise the deferred tax liability:

Dr         Deferred tax expense (P/L)                   $28,500
Cr         Deferred tax liability                                                      $28,500

Example 2 – Refundable R&D incentive

DEF Limited generates turnover of less than $20 million and qualifies for the refundable research and development incentives.

On 1 April 2021, DEF Limited purchased a new asset for $100,000 and first used it on 1 April 2021. The asset is recognised as property, plant and equipment on the balance sheet. The asset is used for research and development purposes and its cost is included in the costs eligible for the research and development incentive.

The asset usually generates a Division 40 tax depreciation deduction of 20% straight-line per annum, and DEF Limited uses this same 20% straight-line method for determining accounting depreciation.

Tax rate is 30% and the year-end is 30 June.

Accounting depreciation for the year ended 30 June 2021

Accounting depreciation continues as usual and is recognised in the fixed asset register at $5,000, i.e. $100,000 X 20% X 3/12 months.

Tax depreciation for the year ended 30 June 2021

If the asset is not used for R&D purposes, or if DEF Limited decides not to apply for the refundable R&D incentive, DEF Limited would qualify for the ‘instant asset write-off’ and therefore recognises tax depreciation as $100,000, and a deferred tax liability as noted in Example 1 above.

Refundable R&D incentive

However, if DEF Limited applies for the refundable R&D incentive, it receives no ‘instant asset write off’ so to speak. Instead of receiving a tax deduction of $100,000 for the purchase of the new asset in its 30 June 2021 tax return (i.e. a tax benefit of $30,000 being 30% of the cost of the asset of $100,000), it instead claims a refundable R&D incentive of $43,500 (being 43.5% of the R&D costs), which it recognises at 30 June 2021 in one of the following ways:

Method 1 – Recognise government grant as deferred income (IAS 20, paragraph 24)

Dr    ATO receivable                                                                               $43,500
Cr    R&D incentive (government grant) – deferred income                                   $43,500
To recognise the accrual of the refundable R&D incentive at 30 June 2021

DEF Limited then recognises a portion of the government grant as income at 30 June 2021:

Dr    R&D incentive (government grant) – deferred income                       $2,175
Cr    Government grant income (R&D incentive)                                                   $2,175
To recognise government grant income on a systematic basis over periods in which the entity recognises as expenses the related costs (i.e. depreciation) for which the grant is intended to compensate (IAS 21, paragraph 12) - $5,0000 accounting depreciation /$100,000 cost of asset X $43,500

This results in a net debit to profit or loss of $2,825 ($5,000 depreciation less R&D income of $2,175).

Method 2 – Recognise government grant as a credit to PPE (IAS 20, paragraph 24)

Dr    ATO receivable                                                                               $43,500
Cr    PPE (R&D refundable incentive)                                                                   $43,500
To recognise the accrual of the refundable R&D incentive at 30 June 2021

PPE is then recognised at $56,500 (original cost of $100,000 less R&D incentive of $43,500). This results in an annual depreciation charge of 20% of $56,500 = $11,300, and $2,825 for the quarter (instead of $5,000 shown in Method 1 above). No R&D incentive income is recognised in profit or loss because it has reduced the carrying amount of PPE for depreciation purposes.

The net debit amount recognised in income (profit or loss) is the same $2,825, regardless of whether Method 1 or Method 2 is used as a means of presenting government grant income under IAS 20, paragraph 24.

It is important to note that under no circumstances can the full $43,500 R&D refundable grant be recognised at 30 June 2021 as grant income in profit or loss. This is because the R&D incentive relates to R&D costs that have been deferred under IAS 20, paragraph 24.

More information

Accounting News (October 2020) includes detailed examples on the accounting for refundable research and development incentives.

Need help?

Please contact BDO’s IFRS Advisory team if you require assistance accounting for research and development incentives, and our R&D team for information on R&D incentives.

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