Temporary Full Expensing guide for sole traders

Note: Temporary full expensing is no longer available for assets purchased after 30th June 2023. You may need to claim depreciation instead.

Let’s get straight to it; traditional depreciation of assets is a complicated process. There are tables and schedules involved, with every asset sorted by value and useful life. For sole traders operating on their own, it can be quite the headache.

To help simplify things, the Australian Government has introduced several easier initiatives for small business and sole traders over the past decade. The most recent of these is a tax incentive called Temporary Full Expensing (TFE), and it was introduced in the 2020 budget as part of a series of measures to ease the Covid economic burden.

Temporary Full Expensing does exactly what it says on the tin: for a limited amount of time (between 6 October 2020 and 30 June 2023), eligible businesses and sole traders can claim the full amount of their asset purchase expense in the year it was purchased, installed, or first used.

In this article, we cover why TFE was introduced, who’s eligible for TFE, the timeframe for TFE claims, and how TFE makes things FAR easier for sole traders (whoo!).

A quick explainer on depreciation

Before we explain exactly what makes TFE a great option for sole traders, let’s go over what depreciation looks like without it.

You’re probably already aware of the value of claiming business expenses to lower your taxable income. (And if you’re not, don’t worry – we gotchu. Check out our mammoth explainer on tax deductions.)

But when it comes to more valuable equipment/purchases/assets, the Australian Taxation Office (ATO) required you to depreciate these assets over a set period of time.

A depreciating asset is a bigger item/purchase that you’ll use over a number of years, and that will lose value (depreciate) over time. Instead of claiming the initial value of these assets, you claim the value it loses over the course of a financial year – aka, the depreciation.

You’re usually required to claim depreciation on fixed assets that cost more than $300, and it applies to lots of things that sole traders buy and use on the regular, like:

• machines and tools
• trucks, vans, cars and bikes
• equipment and furniture
• computers, keyboards and phones (both landline and mobiles).

Depreciating an asset means that you spread the tax benefit of the business expense over a series of years, instead of having it all in a single year.

BUT depreciating an asset means calculating the loss in value of each asset every year. Without going into detail, it does involve a lot of admin and paperwork. It also means that sole traders who buy expensive equipment won’t get the full tax relief until years later, meaning cash flow will initially be a little tighter.

Enter TFE.

Temporary Full Expensing for sole traders

Temporary Full Expensing is for assets that wouldn’t usually be claimed as a tax deduction because they’d have to be depreciated. TFE means that instead of claiming a portion of the cost of the asset as a business expense over a few years (depreciation), you can claim it in a single financial year, like a ‘normal’ business expense.

So far, so good. But you may be wondering what the fine print is, and how to find out if you’re eligible. To get on board the TFE train, you need to meet the following criteria:

• You can use TFE if you make under $5 billion in annual turnover.
• Also, if your annual turnover is under $50 million, you can fully expense all eligible second-hand assets.

If you meet the criteria you can claim:

• the business portion of new assets (or eligible second-hand assets) first held, used or installed ready for use between 6 October 2020 and 30 June 2023,
• cost of improvements to certain existing assets,
• there’s no general limit on the cost of eligible assets you can claim, but there are specific limits on certain assets, like passenger vehicles where a car limit may apply.

Using Temporary Full Expensing

It’s in the name; TFE is a temporary measure.

You can use it as a depreciation method for eligible assets for the 2020/21, 2021/22, and 2022/23 financial years.

Like we’ve already mentioned, there are pros and cons to using TFE as a depreciation method. You’ll be eligible for the full tax deduction in the financial year you first install/use an asset, but it’ll be a quick tax relief hit, rather than a slow burn benefit. It could help you invest in equipment in the here-and-now.

BUT it could also make your business look like it performed worse if you claim a significant expense in a single year – even though you’ll probably be using it for your business for several years after the fact.

In any case, remember; TFE won’t be around forever. If you’d like to make good use of it, now’s the time.

Simplify depreciation by using Hnry

If you’d rather not deal with depreciation or Temporary Full Expensing at all, you can sign up for Hnry and we’ll do it all for you. Yes, really!

Hnry is an award-winning tax and financial administration service that’s designed specifically with sole traders in mind. For just 1% of your self-employed income (capped at $1,500 a year), we will:

• Calculate, deduct, and pay ALL your taxes, including your GST, Medicare Levy and Student Loans, every time you get paid
• Use TFE on your assets
• Manage all your tax deductions
• Lodge your income tax and BAS returns whenever they’re due
• Chase up late-paying clients (politely!)
• … and more!

Hnry will make it so you never have to think about tax (including depreciation) again. Join Hnry today!

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