The 120% deduction for skills training and technology costs

Spend $100 and get a $120 tax deduction when SMEs invest in skills for their team or technology.

This was the proposal outlined in the 2022-23 Federal Budget that has now been adopted by the current Government and released as an exposure draft for consultation.

What's proposed

Two ‘Investment Boosts’ will be available to small businesses with an aggregated annual turnover of less than $50 million.

The Skills and Training Boost is intended to apply to expenditure from 7.30pm ACT time on Budget night, 29 March 2022 until 30 June 2024. The business, however, will not be able to start claiming the bonus deduction until the 2023 tax return. That is, for expenditure incurred between 29 March 2022 and 30 June 2022, the additional 20% boost deduction will not be claimable until the 2022-23 tax return, assuming the announced start dates are maintained if and when the legislation passes Parliament.

The Technology Investment Boost is intended to apply to expenditure from 7.30pm ACT time on Budget night, 29 March 2022 until 30 June 2023. As with the Skills and Training Boost, the additional 20% deduction for eligible expenditure incurred by 30 June 2022 will be claimed in the 2023 tax return.

The boost for eligible expenditure incurred on or after 1 July 2022 will be included in the income year in which the expenditure is incurred.

When it comes to expenditure on depreciating assets the bonus deduction is equal to 20% of the cost (within the meaning of Division 40 of the ITAA 1997) of the asset that is used for a taxable purpose. This means that regardless of the method of deduction that the entity takes (i.e., whether immediate or over time), the bonus deduction in respect of a depreciating asset is calculated based on the asset’s cost. 

The details have been released in the form of exposure draft legislation and Treasury is seeking comments on the draft rules by 19 September 2022.

Technology Investment Boost

A 120% tax deduction for expenditure incurred by small businesses on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems, or subscriptions to cloud-based services, capped at $100,000 per income year with a maximum deduction of $20,000.

To be eligible for the bonus deduction:

• The expenditure must be eligible for deduction (salary and wage costs are not deductible)
• The expenditure must have been incurred between 7.30pm (AEST), 29 March 2022 and 30 June 2023
• 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, the expenditure must be wholly or substantially for the entity’s digital operations or digitising its operations. For example:

• 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.

Repair and maintenance costs can be claimed as long as the expenses meet the eligibility criteria.

Where the expenditure has mixed use (i.e., partly private), the bonus deduction applies to the proportion of the expenditure that is for an assessable income producing purpose.

The bonus deduction is not intended to cover general operating costs relating to employing staff, raising capital, the construction of the business premises, and the cost of goods and services the business sells. The boost will not apply to:

• Assets that are sold while the boost is available
• Capital works costs under Division 43
• Financing costs such as interest expenses
• Salary or wage costs
• Training or education costs
• Trading stock or the cost of trading stock

Skills and Training Boost

A 120% tax deduction for expenditure incurred by small businesses on external training courses provided to employees. External training courses will need to be provided to employees in Australia or online, and delivered by entities registered in Australia.

To be eligible for the bonus deduction:

• The expenditure must be for training employees, either in-person in Australia, or online
• The 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
• The expenditure must be deductible
• Enrolment for the training must be on or after 7.30pm, 29 March 2022.

The training must necessarily incurred in carrying on a business for the purpose of gaining or producing income. That is, there needs to be a nexus between the training provided and how the business produces its income.

Only the amount charged by the training organisation is deductible. In some circumstances, this might include incidental costs such as manuals and books, but only if charged by the training organisation.

Some exclusions will apply, such as for in-house or on-the-job training and expenditure on external training courses for persons other than employees. The training boost is not available to:

• Sole traders, partners in a partnership, or independent contractors (who are not employees)
• Associates of the business such as a relative, spouse or partner of an entity or person, a trustee of a trust that benefits an entity or person and a company that is sufficiently influenced by an entity or person.