Bonus 20% deduction for small business investment in skills and technology

The Government recently released draft legislation on the proposed small business boosts to provide tax incentives for small businesses to train and upskill their employees and improve their digital and technology capacity.

These incentives were originally announced by the previous Coalition Government as part of the Federal Budget 2022–23 and have now been released by the current Labor Government.

These incentives include two distinct components:

• the small business skills and training boost (skills boost); and
• the small business digital technology investment boost (technology boost).

The bonus 20% deduction for eligible expenditure under the skills boost and/or the technology boost will be available where a small business (with aggregated turnover less than $50 million) can satisfy the relevant eligibility criteria.

What is the skills boost?

The proposed skills boost will give eligible small businesses a bonus 20% deduction for eligible expenditure on external training provided to their employees.

The following eligibility criteria require that expenditure incurred on external training:

• be delivered by registered providers to employees of the business;
• must be within the scope of the registered provider’s registration at the time the expenditure is incurred;
• provided either in person (with employees physically located in Australia) or online (where employees are not required to be physically located in Australia);
• not provided by the small business claiming the bonus deduction or any of their associates;
• not be on-the-job or in-house training;
• not be for training persons who are not employees of a small business (ie. sole traders, individual partners in a partnership and independent contractors); and
• be fully deductible under another provision of the tax law in the income year in which it is incurred.

The expenditure on external training can also include any associated costs such as books and equipment, but will not include fees charged by any entities not delivering the training sessions (ie. fees from an agent entity that helps connect businesses to training providers).

Registered providers of the external training sessions are required to be registered in Australia with at least one of four government authorities at the time the expenditure is incurred, including:

• Australian Skills Quality Authority (or ASQA);
• Tertiary Education Quality and Standards Agency (or TESQA);
• Victorian Registration and Qualifications Authority; and
• Training Accreditation Council of Western Australia.

We note that the draft legislation currently limits the external training to persons who are not employees of a small business and this has received criticism from the accounting industry as it excludes sole traders and partners in partnerships who historically have been responsible for their own training to maintain their skill sets. We expect this requirement will be reviewed and the ATO may provide some further guidance in this regard.

How is the bonus deduction for the skills boost claimed?

The skills boost is proposed to apply to eligible expenditure incurred from 29 March 2022 (when the Federal Budget 2022–23 was announced) until 30 June 2024.

A small business entity could claim the bonus deduction in their 2023 tax return for eligible expenditure incurred during both income years ending 30 June 2022 and 2023. The bonus deduction for expenditure incurred in the income year ending 30 June 2024 will be claimed in the 2024 tax return.

What is the technology boost?

The proposed technology boost will give eligible small businesses a bonus 20% deduction for eligible expenditure on supporting digital adoption, which may include (but not limited to) expenditure on expenses and depreciating assets that support digital operations or digitising operations:

• digital enabling items — computer and telecommunications hardware and equipment, software, systems and services that form and facilitate the use of computer networks;
• digital media and marketing — audio and visual content that can be created, accessed, stored or viewed on digital devices;
• e-commerce — supporting digitally ordered or platform enabled online transactions; and
• repairs and improvement costs for depreciating assets.

We note that during the consultation period, before the draft legislation was released, there was significant feedback from the accounting industry asking for detailed clarification on what expenditure will and will not be eligible for the bonus 20% deduction. We anticipate that ATO guidance will follow the finalisation of the legislation to clarify this important issue.

There are certain types of expenditure which are expressly excluded from the technology boost, including:

• Salary or wage costs;
• Capital works costs that are deductible under Division 43 of the ITAA 1997 (which includes deductions for capital expenditure incurred in the construction of buildings and other capital works used to produce assessable income);
• Financing costs, including interest and borrowing costs;
• Training or education costs;
• Expenditure incurred that forms part of the cost of trading stock;
• Expenses incurred in the development of in-house software allocated to a software development pool; and
• Depreciating assets if a balancing adjustment event occurs to the asset while the small business holds it, unless the balancing adjustment event is an involuntary disposal (which basically includes an assessable gain made when the proceeds from selling a depreciating asset exceed the written down value).

The bonus deduction under the technology boost will be capped to total expenditure up to $100,000, with the bonus deduction capped at $20,000 per year. Small businesses can continue to deduct expenditure over $100,000 under existing tax provisions.

The bonus deduction will be equal to 20% of the cost of an eligible depreciating asset that is used for a taxable purpose, regardless of whether the asset is fully expensed under the temporary full expensing regime or a deduction is claimed for the asset’s decline in value over its effective life under the uniform capital allowance regime.

If the expenditure includes mixed business and private use, the bonus deduction is available only to the extent of the proportion of the business expenditure. The business use (or taxable purpose) percentage applied in the first year the asset is used (or installed ready for use) will be applied here in all subsequent years for that asset.

How is the bonus deduction for the technology boost claimed?

The technology boost is proposed to apply to eligible expenditure incurred from 29 March 2022 (when the Federal Budget 2022–23 was announced) until 30 June 2023. We note the technology boost does not extend to the income year ending 30 June 2024, as it does for the skills boost.

A small business entity can claim the bonus deduction for the technology boost in their 2023 tax return (only), which includes eligible expenditure incurred during both income years ending 30 June 2022 and 2023.

Please do not hesitate to contact your Lowe Lippmann Relationship Partner if you wish to discuss any of these matters further.