The 120% deduction for technology and skills boost has been approved by Parliament, providing benefits for small and medium businesses (SMEs). This article will outline how you can optimise your deductions under this scheme.
After almost a year since the announcement in the 2022-23 Federal Budget, the 120% tax deduction for SMEs on technology expenses, skills training for staff, or digital operations has become law. However, there are some timing complexities associated with this deduction. To qualify for the technology investment boost, the technology must have been purchased by 30th June 2023, or eligible assets must have been installed and ready for use by that date—merely seven days after the legislation was passed.
Who is eligible for the boosts?
Small business entities (individual sole traders, partnerships, companies, or trading trusts) with an aggregated annual turnover of less than $50 million can access the 120% skills and training and technology boosts. Aggregated turnover includes the turnover of your business as well as that of your affiliates and connected entities.
$20k technology investment boost
The Technology Investment Boost allows SMEs to claim additional deductions for expenses and depreciating assets related to digital operations or digitisation between 7:30 pm (AEST) on 29th March 2022 and 30th June 2023.
Expenses are considered incurred when you are in debt for them, such as having a tax invoice or a contractual obligation for the cost.
For depreciating assets like computer hardware, there is an additional requirement. The technology must have been purchased and installed, ready for use. For instance, if you ordered 10 computers, you need to have received and set them up for use by 30th June 2023. Ordering them on 29th June will not be sufficient to claim the boost if you haven’t received them.
Expenses that may qualify for the technology boost include:
- Digital enabling items like computer and telecommunications hardware, software, internet costs, systems, and services that facilitate the use of computer networks.
- Digital media and marketing, including audio and visual content accessible on digital devices and web page design.
- E-commerce expenses, such as goods or services supporting online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services, and advice on digital operations or digitisation.
- Cybersecurity systems, backup management, and monitoring services.
The technology must be primarily or substantially used for your business’s digital operations or digitising its operations. There must be a direct link between the technology and how your business earns its income, particularly in digital operations.
Repair and maintenance costs can be claimed if they meet the eligibility criteria.
If the expenditure has mixed use, the bonus deduction applies only to the portion used for business purposes.
There are some costs that the technology boost does not cover, such as staff employment costs, capital raising expenses, construction costs of business premises, and the costs of goods and services sold by the business. The boost does not apply to:
- Assets that were purchased and sold within the relevant period (on or prior to 30th June 2023).
- Capital works costs, including improvements to business premises.
- Financing costs like interest expenses.
- Salary or wage costs.
- Training or education costs, including training staff on software or technology (refer to the Skills and Training Boost section below).
- Trading stock or the cost of trading stock.
Let’s consider the example of GoCo Pty Ltd (GoCo), which purchased multiple laptops on 15th July 2022 to facilitate remote work for its employees. The total cost was $100,000, and the laptops were delivered on 19th July 2022 and immediately put to business use.
As the asset holder, GoCo is entitled to claim a deduction for the depreciation of this capital expense. GoCo can deduct the full cost of the laptops ($100,000) under the temporary full expensing provision in its 2022-23 income tax return. Additionally, GoCo can claim the maximum $20,000 bonus deduction in the same tax return.
The $20,000 bonus deduction is not given to the business as cash; instead, it is used to offset GoCo’s assessable income. If the company is operating at a loss, the bonus deduction will increase the tax loss. The cash value of the bonus deduction to the business depends on whether it generates a taxable profit or loss for the relevant year and the applicable tax rate.
The good news for eligible businesses is that your technology subscriptions and other business products may qualify for the boost.
To claim the boost, you need to include the extra 20% in your tax return on top of your regular claim. The way the expense or asset is claimed (immediately or over time) will determine how the bonus 20% is applied.
The Skills and Training Boost
The Skills and Training Boost provides a 120% tax deduction for external training courses provided to employees. Its objective is to assist SMEs in expanding their workforce by hiring less-skilled employees and upskilling them through external training, enhancing productivity and skills development.
Sole traders, partners in a partnership, independent contractors, and non-employees do not qualify for this boost. Similarly, associates such as spouses, partners, or trustees of a trust are not eligible.
Here are a few rules to keep in mind:
- Registration for the training course must have been done between 7:30 pm (AEST) on 29th March 2022 and 30th June 2024. Enrollments in courses or classes after 29th March 2022 are eligible, but not those before.
- The training must be deductible to your business under ordinary rules, meaning it should be related to how your business generates income.
- A registered training provider must charge your business directly or indirectly for the training.
- The training must be for your business’s employees and delivered in-person in Australia or online.
- The training provider cannot be your business or an associate of your business.
- Training expenditure may include incidental costs like books or equipment necessary for the course if the training provider charges your business for these expenses.
Let’s consider an example. Good Pets Pty Ltd is a small veterinary centre that recently hired an employee to perform various tasks. The employee has some prior experience in animal studies and aims to upskill as a veterinary nurse. The business pays $3,500 for the employee’s external training in veterinary nursing, which qualifies as a GST-free supply of education. The training is delivered by a registered training provider specialising in veterinary nursing education.
The bonus deduction is calculated as 20% of the amount of expenditure that the business could typically deduct. In this case, the full $3,500 is deductible as a business operating expense. Assuming all other eligibility criteria are met, the bonus deduction is 20% of $3,500, which equals $700.
In this example, the available bonus deduction is $700. This does not mean the business receives $700 in cash from the ATO; it means the business can reduce its taxable income by $700. If the company has a positive taxable income and is subject to a 25% tax rate, the net impact will be a reduction in the company’s tax liability by $175. However, this also means the company will generate fewer franking credits, potentially requiring additional top-up tax when distributing profits as dividends to shareholders.
Which organisations can provide training for the boost?
Not all courses provided by training companies qualify for the boost. Only courses charged by registered training providers are eligible. Typically, this includes vocational training for trades or courses contributing towards qualifications rather than professional development.
Qualifying training providers are registered with:
- Tertiary Education Quality and Standards Agency (search the register, including States and Territories)
- Australian Skills Quality Authority (ASQA)
- Victorian Registration and Qualifications Authority (search the register)
- Training Accreditation Council of Western Australia
While some training courses may not be delivered by registered training organisations, there are still many options available, such as short courses offered by universities or flexible courses designed for upskilling rather than degree qualifications. If you have recently conducted performance reviews and training is part of the employees’ development pathway, it might be worth exploring these options.
Schedule your tax time appointment with SG Advisory now
To ensure a smooth tax season in 2023, book your appointment with SG Advisory. If you require general advice or guidance, speak with one of our tax accountants or financial planners, and let us alleviate your tax-related anxieties.
Source: ATO Website