Treasury has released draft legislation that will introduce a “Skills and Training boost” and a “Technology Investment Boost” to help support small businesses.
The measures will allow small and medium businesses (SMEs) with an aggregated turnover of less than $50 million to deduct 20% in addition to existing available deductions in relation to their skills and training as well as digital operations.
Skills and Training Boost
The Skills and Training Boost is a measure to support SMEs to build a better trained and more productive workforce, helping to address skills shortages by upskilling existing staff or training new staff.
Businesses could be encouraged to take on less-skilled employees who may need external training to develop their skills and enhance their productivity.
The new tax incentive as per the draft legislation is available until 30 June 2024 and will be generally claimed in the income year in which the expenditure is incurred, but there are special rules for early and late balancers.
The bonus deduction is available to eligible small businesses that incur expenditure that meets the following criteria:
- Expenditure must be for training employees, either in-person in Australia, or online;
- Expenditure must be charged, directly or indirectly, by a registered training provider and be for training within the scope (if any) of the provider’s registration;
- The registered training provider must not be the small business or an associate of the small business;
- Expenditure must already be deductible under the taxation law;
- Expenditure must be incurred within a specified period on 29 March 2022 and 30 June 2024; and
- Expenditure must be for the provision of training, where the enrolment or arrangement for the provision of the training occurs at or after 7.30 pm on 29 March 2022.
Example as per exposure draft explanatory materials:
Cockablue Pets Pty Ltd is a small business entity that operates a veterinary centre. The business recently took on a new employee to assist with jobs across the centre. The employee has some prior experience in animal studies and is keen to upskill to become a veterinary nurse. The business pays $3,500 (GST exclusive) for the employee to undertake external training in veterinary nursing. The training is delivered by a registered training provider, whose scope of registration includes veterinary nursing.
The bonus deduction is calculated as 20 percent of 100 percent of the amount of expenditure that can be deducted under another provision of the taxation law. In this case, the full $3,500 is deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as a business operating expense. Assuming the other eligibility criteria for the bonus deduction are satisfied, the bonus deduction is calculated as 20 percent of $3,500, that is, $700.
To put this example in perspective, at a 25% corporate tax rate, the bonus deduction would provide a $175 tax savings to the SME. This does raise the question; would this really encourage SMEs to invest further in training?
Technology Investment boost
The Technology Investment Boost supports SMEs to take advantage of digital technologies, which the Government believes is key to a stronger, productive, and resilient economy. Digitisation can also assist SMEs to respond to customer demands, remaining competitive, and building resilience to changes in economic conditions.
SMEs will have access to a 20% bonus deduction for eligible expenditure incurred on business expenses and depreciating assets, to support their digital operations, up to a maximum bonus deduction of $20,000 per income year or specified time period.
The new tax incentive as per the draft legislation is available until 30 June 2023.
To be eligible for the bonus deduction:
- The expenditure must be eligible for a deduction under another provision of the taxation law;
- The expenditure must be incurred between 7:30 pm on 29 March 2022 and 30 June 2023; and
- If the expenditure is on a depreciating asset – the asset must be first used or installed ready for use by 30 June 2023.
To be eligible for the bonus deduction, expenditure must be incurred wholly or substantially for the purposes of an entity’s digital operations or digitising the entity’s operations.
That is, the eligible expenditure must have a direct link to the entity’s digital operations for its business.
Expenditure on 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; and
- E-commerce – supporting digitally ordered or platform-enabled online transactions.
Some types of expenditure are ineligible for the bonus deduction even where they would otherwise meet the requirements. These are:
- Salary and wage costs;
- Capital works costs can be deducted under Division 43 of the ITAA 1997;
- Financing costs;
- Training and education costs; and
- Expenditure that forms part of, or is included in, the cost of trading stock.
Example as per exposure draft explanatory materials:
Claiming the bonus deduction for a depreciating asset where Temporary Full Expensing applies:
A Co Pty Ltd (A Co) is a small business entity. On 15 July 2022, A Co purchased multiple laptops to allow its employees to work from home. The total cost was $100,000 (GST-exclusive). The laptops were delivered on 19 July 2022 and immediately issued to staff entirely for business use. As the holder of the assets, A Co is entitled to claim a deduction for the depreciation of a capital expense.
A Co can claim the full purchase price of the laptops ($100,000) as a deduction under temporary full expensing in its 2022-23 income tax return. It can also claim the maximum $20,000 bonus deduction in its 2022-23 income tax return.
Claiming the bonus deduction for a depreciating asset where the entity claims depreciation deductions over a number of years:
As above but in this example B Co has made the choice to opt-out of temporary full expensing and instead will claim depreciation deductions for the decline in value of the laptops over their effective life under the uniform capital allowance rules in Division 40 of the ITAA 1997.
In its 2022-23 income tax return, B Co can claim a depreciation deduction for the decline in value of the laptops between 19 July 2022 and 30 June 2023. It can also claim the bonus deduction calculated on the entire amount of eligible expenditure ($100,000). This results in a maximum $20,000 bonus deduction. Depreciation deductions that B Co may be able to claim in 2022-23 and later income years are not altered by the bonus deduction.
While at first glance these measures seem favorable for SMEs, they are very short-term “boosts” with limitations and exclusions that need to be considered before committing to the expenditure.
If the Government was serious about helping SMEs address skills shortages and assist them to adopt new technology, it is disappointing to see a short time and expenditure limits on the new tax incentives. Small businesses will also need to be mindful that only expenditure eligible for a deduction under another provision of the taxation law is eligible for the bonus deduction, this may then exclude expenditures such as entertainment associated with the training expenditure. It is also important to note that the bonus deduction is not available for the training of non-employee business owners such as sole traders, partners in a partnership, and independent contractors (who are not ‘employees’ of the business within the ordinary meaning).
Consultation is open on both draft legislation until 19 September 2022. The Treasurer states that legislation is expected to be introduced into Parliament this year.
The measure had been announced in the 2022 Budget of the former government (hence the backdating to 29 March 2022).
Please reach out to your local RSM office and speak to one of your trusted tax advisers for further guidance on the skills and training boost.