Tax Incentives for Small Business Digital Adoption

Boosting small business investment in skills and technology

After months of uncertainty, the recent release of draft legislation on the proposed small business boosts confirms the new Government’s commitment to progressing these tax incentives announced by the previous government on 29 March 2022 as part of the Federal Budget 2022–23. The measures are intended to make it easier for small businesses to train and upskill their employees and improve their digital and technology capacity.

On 29 August 2022, the Government released for comment exposure draft legislation setting out the proposed small business skills and training boost (skills boost) and the small business technology investment boost (technology boost). It is expected that enabling bills will be introduced into Parliament this year but this is unlikely before the end of October 2022, given the timing of the Spring sitting days and the end of the public consultation period on 19 September 2022.

The proposed timing should allow a sufficient window for passage of the enabling bill and to incorporate new labels in the 2023 tax return forms for businesses to start claiming the boosts after June 2023.

A bonus 20% deduction for eligible expenditure on skills and training and investment in digital technology will be appealing to small businesses, but they will need to be across the eligibility criteria, a hallmark that accompanies all tax incentives.

What you need to know about the skills boost

The proposed skills boost will provide small businesses (aggregated annual turnover of less than $50 million) with a bonus 20% deduction for eligible expenditure on external training provided to their employees. New sections 328-445 and 328-450 are proposed to be inserted into the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A).

Eligible skills and training expenditure

Expenditure will be eligible for the bonus deduction if it is:

• incurred on external training delivered by registered providers to employees of the business; and
• fully deductible under another provision of the tax law, whether in, or wholly in, the income year in which the expenditure is incurred.

The requirement that the expenditure is deductible under the tax law means that if a business is GST-registered, the bonus deduction is generally calculated on the GST-exclusive amount of expenditure.

Training expenditure can include incidental costs such as books or necessary equipment but cannot include commission or fees charged by intermediaries.

Businesses will be limited in the scope of providers they can engage as the training provider is required to be registered in Australia with at least one of the following four government authorities at the time the expenditure is incurred:

• Australian Skills Quality Authority (ASQA) (within the meaning of the National Vocational Education and Training Regulator Act 2011);
• Tertiary Education Quality and Standards Agency (TEQSA) (within the meaning of the Tertiary Education Quality and Standards Agency Act 2011);
• Victorian Registration and Qualifications Authority (within the meaning of the Education and Training Reform Act 2006 (Vic)); or
• Training Accreditation Council of Western Australia (within the meaning of the Vocational Education and Training Act 1996 (WA)).

Businesses will be able to check whether training is within the scope of a registered provider’s registration here. The TESQA maintains a separate register of providers here.

Further conditions require that the training:

• must be within the scope of the registered provider’s registration at the time the expenditure is incurred
• can be provided either in person (the employees must be physically located in Australia) or online (employees are not required to be physically located in Australia when undertaking online training)
• cannot be provided by the business claiming the bonus deduction or any of their ‘associates’ (within the meaning of section 318 of the Income Tax Assessment Act 1936)
• cannot be on-the-job and in-house training
• cannot be for training persons other than employees.

The last requirement above means that the bonus deduction is not available for training non-employee business owners such as sole traders, individual partners in a partnership and independent contractors (who are not ‘employees’ of the business within the ordinary meaning of this term). This exclusion will be raised as a concern in our submission to the Government (which we are currently preparing with the assistance of our National Small and Medium Enterprise Technical Committee and will be available on our website when finalised).

This condition discriminates against sole traders and individual partners in a partnership — who do not employ staff and seek to upskill themselves — by precluding them from being able to claim the bonus deduction. If the policy intent is to enhance skills so those trained can contribute to the growth of the business, why should this be confined only to those businesses that employ staff?

When is the skills boost claimed?

The skills boost is proposed to apply to eligible expenditure incurred from the budget announcement until 30 June 2024.

Normal or late balancers will claim the bonus deduction in their 2023 tax return in respect of expenditure incurred between 7:30pm (AEDT) on 29 March 2022 and the end of their 2021–22 income year, as well as expenditure incurred in the 2022–23 income year. The bonus deduction for expenditure incurred in the 2023–24 income year will be claimed in the 2024 tax return.

Special rules will apply to taxpayers who are early balancers.

What you need to know about the technology boost

The proposed technology boost will provide small businesses (aggregated annual turnover of less than $50 million) with a bonus 20% deduction for eligible expenditure on supporting digital adoption. New sections 328-455 and 328-460 are proposed to be inserted into the IT(TP)A.

The discussion above for the skills boost that the bonus deduction is generally calculated on the GST-exclusive amount of expenditure applies equally to the technology boost.

Expenditure up to $100,000 will be eligible for the boost, with the bonus deduction capped at $20,000 per year.

Eligible technology expenditure

The budget announcement broadly described that eligible expenditure would:

‘… include portable payment devices, cyber security systems or subscriptions to cloud based services.’

The draft explanatory material explains that expenditure on expenses and depreciating assets that support digital operations or digitising operations may include, but is not limited to, business expenditure on:

• 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.

A lack of clarity around what constitutes eligible expenditure has emerged as the primary issue based on discussions with and feedback received from our members. Practical guidance from Treasury or, in due course, the ATO, will be paramount to confirm that the following examples of expenditure qualify:

• New hardware, including monitors, keyboards, webcams etc.
• Subscriptions for cloud based accounting software, productivity apps, programs and platforms, technical resources to replace hard copy publications and customer relationship management (CRM) software
• Digital images for marketing purposes
• Design or upgrade of new or existing website.

The following kinds of expenditure are specifically excluded from the boost:

• Salary or wage costs
• Capital works costs that are deductible under Division 43 of the Income Tax Assessment Act 1997 (ITAA 1997)
• Financing costs, including interest, payments in the nature of interest and expenses of borrowing
• Training or education costs
• Expenditure incurred that forms part of, or is included in, the cost of trading stock.

Expenditure on depreciating assets

Eligible expenditure on expenses and assets will:

• Exclude expenses incurred in the development of in-house software allocated to a software development pool
• Exclude depreciating assets if a balancing adjustment event occurs to the asset while the entity holds it during the relevant period, unless the balancing adjustment event is an involuntary disposal — this smart integrity rule will prevent the claiming of the bonus deduction by an entity that sells the asset within the relevant period
• Include repairs and improvement costs for depreciating assets provided the costs are incurred during the relevant period.

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 is for a mix of business and private use, the bonus deduction is available only to the extent of the proportion of the business expenditure. However, when claiming the bonus deduction for expenditure on a depreciating asset, it will be assumed the entity will continue to hold the asset throughout its effective life and will use the asset for a taxable purpose to the same extent that it does in the income year it first uses or installs the asset. This sensibly eliminates the need for subsequent adjustments to the boost should the taxable use of an asset change over time.

When is the technology boost claimed?

The boost is proposed to apply to eligible expenditure incurred from the budget announcement until 30 June 2023. Normal or late balancers will claim the bonus deduction in their 2023 tax return in respect of expenditure incurred between 7:30pm (AEDT) on 29 March 2022 and the end of their 2021–22 income year, as well as expenditure incurred in the 2022–23 income year.

Special rules will apply to taxpayers who are early balancers.