The Treasurer has released Exposure Draft Legislation that, if enacted, would implement both the skills and training and technology investment boost measures announced as part of the Morrison government’s March 2022 budget. Consultation on the proposals close 19 September.
What are the rules about?
The two measures are intended to assist small business to respectively, upskill their employees and take advantage of digital technologies. Both measures provide a “bonus” deduction equal to 20% of eligible expenditure. In the case of the technology investment boost, the bonus deduction is capped at $20,000 (i.e. eligible expenditure of up to $100,000) for each of the two income years covered by the measure (or $40,000 in total). No annual caps apply for the skills and training boost.
Who do the changes apply to?
The bonus deduction is available to an entity that carries on a business and had an aggregated turnover of less than $50 million for the previous year or whose aggregated turnover for the current year is, or is likely to be, less than $50 million.
When do the changes apply from?
Skills and training boost
The skills and training boost applies to expenditure incurred after 7:30pm on 29 March 2022 and on or before 30 June 2024.
For entities other than early balancers (see below), the bonus deduction for expenditure incurred between 29 March 2022 and 30 June 2023, is to be claimed in the 2022-23 income year and for expenditure incurred between 1 July 2023 and 30 June 2024 income year is to be claimed in the 2023-24 year.
The rules are modified for early balancers (those taxpayers that have been allowed to adopt an accounting period ending between 1 December and 31 May in lieu of the succeeding 30 June).
Technology investment boost
The technology investment boost applies to expenditure incurred after 7:30pm on 29 March 2022 and on or before 30 June 2023.
For entities other than early balancers (see below), the bonus deduction for expenditure incurred between 29 March 2022 and 30 June 2023, is to be claimed in the 2022-23 income year. To claim the maximum bonus deduction of $40,000 (i.e. 2 x $20,000 annual caps), such entities would need to incur at least $100,000 of eligible expenditure between 29 March 2022 and 30 June 2022 and then again from 1 July 2022 to 30 June 2023.
Again, the rules are modified for early balancers.
Delayed claims for expenditure incurred in the first income year
For both measures, the eligible expenditure incurred in the first income year only gives rise to bonus deductions in the following income year. For example, while expenditure incurred between 29 March 2022 and 30 June 2022 is ordinarily deductible in the 2021-22 income year, the 20% bonus deduction is “delayed” until the 2022-23 income year.
Therefore, taxpayers should track eligible expenditure incurred in the first income year to which each measure relates to assist in making claims in the subsequent year.
What expenditure is eligible for the bonus deduction?
The requirement common to both the skills and training boost and the technology investment boost is that the entity is otherwise entitled to deduct the full amount of the expenditure in the 2022-23 (or 2023-24 for early balancers) income year or a later year.
Expenditure eligible for the skills and training boost
Four additional requirements must be satisfied to be eligible for the bonus skills and training deduction.
First, the expenditure must be for training for one or more employees. For this purpose, the explanatory material accompanying the draft legislation states that “employee” takes its ordinary meaning. Accordingly, expenditure on training for a sole trader, partner in a partnership or a consultant (not otherwise being an employee of the relevant business) would not be eligible.
Second, the training must be provided by a provider registered with one of the following bodies: Australian Skills Quality Authority, Tertiary Education Quality and Standards Agency, Victorian Registration and Qualifications Authority or Training Accreditation Council of Western Australia. Further, the training provided must be within the scope (if any) of that provider’s registration.
Third, the training provider must not be the business entity or an associate of the business entity.
Finally, the expenditure must be for the provision of training conducted in Australia or online training which may include employees located overseas, where the enrolment or arrangement for the provision of the training occurs after 29 March 2022. There is no clear guidance on how this condition operates where individual subjects/units in a broader training course are the subject of separate enrolment requirements.
Expenditure eligible for the technology investment boost
There are three additional requirements for eligibility to the technology investment boost.
First, the expenditure must be incurred “wholly or substantially for the purposes of [the 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.
There is no clear guidance on what expenditure will and, more importantly, will not be eligible for the bonus deduction. However, the explanatory material accompanying the draft legislation provides the following, non-exhaustive, examples:
- 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.
Second, the expenditure must not be of a kind specifically excluded from eligibility. Excluded expenditure comprises salary and wages, expenditure on buildings and structural improvements deductible under the capital works regime, financing costs, training and education costs and expenditure that forms part of, or is included in, the cost of trading stock.
The third additional requirement relates to expenditure on depreciating assets. Expenditure on a depreciating asset is eligible for the bonus deduction only if a) the expenditure was incurred during the 2022-23 (or, in the case of an early balancer, the 2023-24) income year and b) the asset is first used, or installed ready for use, before 1 July 2023. The first used or installed rule does not apply to expenditure on the development of in-house software allocated to a software development pool.
Expenditure on a depreciating asset is ineligible for the bonus deduction if a balancing adjustment event (other than because of an involuntary disposal) occurs to the asset while the entity holds it during the relevant time period.
The explanatory material accompanying the draft legislation clarifies that expenditure “on” a depreciating asset includes both the original purchase price as well as expenditure on repairs and improvements.
The following example of how the technology investment boost operates is based on examples contained in the explanatory material.
B Co is an eligible business entity with a normal 30 June balance date. On 15 May 2022, it purchased multiple laptops at a total GST-exclusive cost of $120,000. The laptops were delivered on 1 June 2022 and immediately provided to staff for business use. B Co has chosen to opt out of temporary full expensing and instead will claim depreciation deductions over their effective life.
In its 2021-22 income tax return, B Co will be entitled to claim depreciation on the laptops calculated on the total cost of $120,000 subject to a day’s apportionment (30/365).
In its 2022-23 income tax return, B Co will be entitled to claim a depreciation deduction on the laptops calculated in the usual manner for the full year (assuming none have been disposed). It will also be entitled to claim a bonus deduction of $20,000 calculated on the capped amount ($100,000) of eligible expenditure ($120,000).
Should B Co incur further eligible technology expenditure in the 2022-23 income year, it will be entitled to claim a bonus deduction of 20% of eligible expenditure subject to the capped amount ($100,000) of eligible expenditure.
What are the next steps?
While the legislation is only in draft, clients should consider their position and begin to collate documents that would be required to substantiate a claim for the bonus deductions in respect of eligible expenditure incurred from 29 March 2022. Clients should contact their Pitcher Partners representative to review their existing arrangements and determine what action is required in light of the changes.