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The 120% technology and skills ‘boost’ deduction
The 120% skills and training, and technology costs deduction for small and medium business have passed Parliament. We’ll show you how to take maximise your deductions.
Almost a year after the 2022-23 Federal Budget announcement, the 120% tax deduction for expenditure by small and medium businesses (SME) on technology, or skills and training for their staff, is finally law. But there are a few complexities in the timing - to utilise the technology investment boost, you had to of purchased the technology and when it comes to acquiring eligible assets, installed it ready for use by 30 June 2023; that’s just seven days from the date the legislation passed Parliament.
Who can access the boosts?
The 120% skills and training, and technology boosts are available to small business entities (individual sole traders, partnership, company or trading trust) with an aggregated annual turnover of less than $50 million. Aggregated turnover is the turnover of your business and that of your affiliates and connected entities.
$20k technology investment boost
The Technology Investment Boost provides SMEs with a bonus deduction for expenses and depreciating assets for digital operations or digitising from 7:30pm (AEST) on 29 March 2022 until 30 June 2023.
You ‘incur’ an expense when you are in debt for it; this might be a tax invoice or it might be a contract where you are legally liable for the cost.
For depreciating assets, like computer hardware, there is an extra step. The technology needs to have been purchased and installed ready for use. For example, if you ordered 10 computers, you need to have received the computers and had them set up ready to use by at least 30 June 2023. Ordering them on 29 June won’t be enough to claim the boost if you did not receive them.
The types of expenses that might be eligible for the technology boost include:
- Digital enabling items - computer and telecommunications hardware and equipment, software, internet costs, 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, including web page design;
- E-commerce - goods or services supporting digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, subscriptions to cloud-based services, and advice on digital operations or digitising operations, such as advice about digital tools to support business continuity and growth; or
- Cyber security - cyber security systems, backup management and monitoring services.
The technology also must be “wholly or substantially for the purposes of an entity’s digital operations or digitising the entity’s operations”. That is, there must be a direct link to your business’s digital operations. For example, claiming the drone you bought at say Christmas 2022 won’t be deductible unless your business is, for example, a real estate agency that needed a drone to take aerial images of client homes to market on their website. The expense needs to relate to how the business earns its income, in particular its digital operations.
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 business use.
There are a few costs that the technology boost won’t cover such as costs relating to employing staff, raising capital, construction of business premises, and the cost of goods and services the business sells. The boost will not apply to:
- Assets that you purchased but then sold within the relevant period (e.g., on or prior to 30 June 2023).
- Capital works costs (for example, improvements to a building used as business premises).
- Financing costs such as interest expenses.
- Salary or wage costs.
- Training or education costs, that is, training staff on software or technology won’t qualify (see Skills and Training Boost).
- Trading stock or the cost of trading stock.
Let’s look at the example of A Co Pty Ltd (A Co) that purchased multiple laptops on 15 July 2022 to help its employees to work from home. The total cost was $100,000. 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 cost of the laptops ($100,000) as a deduction under the 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.
The $20,000 bonus deduction is not paid to the business in cash but is used to offset against A Co’s assessable income. If the company is in a loss position, then the bonus deduction would increase the tax loss. The cash value to the business of the bonus deduction will depend on whether it generates a taxable profit or loss during the relevant year and the rate of tax that applies.
The good news for many eligible businesses is that your technology subscriptions and other products you use in your business might qualify for the boost.
The boost is claimed in your tax return with the extra 20% sitting on top your normal claim. That is, however the way the expense or asset is claimed (immediately or over time), the bonus 20% applies in the same way.
The Skills and Training Boost
The Skills and Training Boost gives you a 120% tax deduction for external training courses provided to employees. The aim of this boost is to help SMEs grow their workforce, including taking on less-skilled employees and upskilling them using external training to develop their skills and enhance their productivity.
Sole traders, partners in a partnership, independent contractors and other non-employees do not qualify for the boost as they are not employees. Similarly, associates such as spouses or partners, or trustees of a trust, don’t qualify.
As always, there are a few rules:
- Registration for the training course had to be from 7:30pm (AEST) on 29 March 2022 until 30 June 2024. If an employee is part the way through an eligible training course, enrolments in courses or classes after 29 March 2022 are eligible, not before.
- The training needs to be deductible to your business under ordinary rules. That is, the training is related to how the business earns its income.
- A registered training provider needs to charge your business (either directly or indirectly) for the training (see What organisations can provide training for the boost).
- The training must be for employees of your business and delivered in-person in Australia or online.
- The training provider cannot be your business or an associate of your business.
Training expenditure can include costs incidental to the training, for example, the cost of books or equipment necessary for the training course but only if the training provider charges the business for these costs.
Let’s look at an example. Animals 4U Pty Ltd is a small 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 for the employee to undertake external training in veterinary nursing. The training meets the requirements of a GST-free supply of education. The training is delivered by a registered training provider, registered to deliver veterinary nursing education.
The bonus deduction is calculated as 20% of the amount of expenditure the business could typically deduct. In this case, the full $3,500 is deductible as a business operating expense. Assuming the other eligibility criteria for the boost are satisfied, the bonus deduction is calculated as 20% of $3,500. That is, $700.
In this example, the bonus deduction available is $700. That does not mean the business receives $700 back from the ATO in cash, it means that the business is able to reduce its taxable income by $700. If the company has a positive amount of taxable income for the year and is subject to a 25% tax rate, then the net impact is a reduction in the company’s tax liability of $175. This also means that the company will generate fewer franking credits, which could mean more top-up tax needs to be paid when the company pays out its profits as dividends to the shareholders.
What organisations can provide training for the boost?
Not all courses provided by training companies will qualify for the boost; only those charged by registered training providers within their registration. Typically, this is vocational training to learn a trade or courses that count towards a qualification rather than professional development.
Qualifying training providers will be registered by:
- Tertiary Education Quality and Standards Agency (search the register – includes States and Territories)
- Australian Skills Quality Authority (ASQA)
- Victorian Registration and Qualifications Authority (search the register)
- Training Accreditation Council of Western Australia
While some training you might want to have engaged might not be delivered by registered training organisations, there is still a lot out there, particularly the short-courses offered by universities, or the flexible courses designed for upskilling rather than as a degree qualification. If you have recently completed performance reviews for staff and training is part of their development pathway, it might be worth exploring.
Budget 2023-24
The 2023-24 Federal Budget will be released on Tuesday, 9 May 2023. Look out for our update the next day on the important issues to you, your superannuation and your business.
Little has been released to date on the impending Budget beyond the tax on super balances above $3m and the decision not to extend the temporary $1,500 low and middle income tax offset beyond 30 June 2023.
Cost of living is a focus but on this, the Government is walking a tightrope between easing pressure without increasing inflation.
In the election cycle, if there is going to be a tightening, the mid-term Budgets are the time to do it. The Government will undoubtedly look at concessions provided within the tax system and whether those concessions meet their stated objective and when it comes to spending, potentially redraw the allocations. Some of the areas to watch include:
- The legislated stage three tax cuts, that collapse the 32.5% and 37% tax brackets to a single rate of 30% for those with assessable income between $45,000 and $200,000 are not due to commence until 1 July 2024. The Government committed to keeping the tax cuts during the election and can bypass the issue until the 2024-25 Budget, but we’ll see.
- Provision for announced defence spending.
Active support to develop a viable clean energy industry and transition to clean energy (see the joint submission from the Business Council of Australia, Australian Council of Trade Unions, World Wide Fund for Nature-Australia and the Australian Conservation Foundation). - Productivity measures - Temporary full expensing - the productivity measure designed to encourage business investment that enables a business to fully expense the cost of depreciable assets in the first year of use – is set to expire on 30 June 2023. The Government will either extend, redevelop the small business instant asset write-off, or remove the concession altogether.
- Technology and training boosts - In the 2022-23 Federal Budget, the former Government announced that it would provide certain business taxpayers with ‘bonus’ tax deductions for investing in employee training or improving digital operations. The Skills and Training Boost allows small businesses (aggregated turnover less than $50 million) to claim a 120% deduction for eligible expenditure incurred on external training for employees between 29 March 2022 and 30 June 2024. The Technology Investment Boost provides a 120% deduction for eligible expenses that are incurred for the purposes of improving digital operations or digitising business operations. This can include the cost of depreciating assets. The boost is aimed at costs incurred between 29 March 2022 and 30 June 2023 and is limited to a maximum bonus deduction of $20,000. But, the legislation enabling both boosts has not passed Parliament. There is an opportunity in the Budget to extend the scope and nature of the concession.
Company money: A guide for owners for owners
When you start up a business, inevitably, it consumes not just a lot of time but a lot of cash and much of this is money you have already paid tax on. So, it only seems fair that when the business is up and running the business can pay you back. Right?
There a myriad of ways owners look for payback from a company they have invested their time and money into it from dividends, salary and wages, jobs for sometimes underqualified family members to cash advances and personal expenses like school fees and nights out picked up as a company expense. But, once the cash is in the company, it is company money.
We look at the flow of money in and out of a company and the problems that trip business owners up.
Repaying money loaned to the company
If you have lent money to your company, you can draw this money back out as a loan repayment. The loan repayment is not deductible to the company but any interest payments made to you will be as long as the borrowed money has been used in the company’s business activities (assuming interest has actually been charged on the loan).
Conversely, any repayments made by the company on the loan principal are not income for tax purposes but you will need to declare any interest earned in your income tax return. All loans, including the loan term and repayments, should be documented.
Dividends: Paying out profits
Dividends basically represent company profits being paid out to the shareholders of a company. If the company has franking credits from income tax it has paid, the dividends might be franked and the credits can often be used by the shareholder to reduce their personal tax liability.
When a dividend is paid by a private company it must provide a distribution statement to the shareholders within four months after the end of the financial year. This gives private companies up to four months after the end of the financial year to work out the extent to which dividends will be franked.
If any of the shares in the company are held by a discretionary trust then there are some additional issues that will need to be considered, including whether the trust has a positive amount of net income for the year, whether the trust has made a family trust election for tax purposes and who will become entitled to distributions made by the trust for that year.
Repaying share capital
Many private companies are set up with a relatively small amount of share capital. However, if a company has a larger share capital balance then there might be scope for the company to undertake a return of share capital to the shareholders. Whether this is possible will depend on the terms of the company constitution and there are some corporate law issues that need to be addressed.
From a tax perspective, a return of share capital will normally reduce the cost base of the shares for CGT purposes, which means that a larger capital gain could arise on future sale of the shares but there won’t necessarily be an immediate tax liability. Having said that, there are some integrity rules in the tax system that need to be considered. The risk of these rules being triggered tends to be higher if the company has retained profits that could be paid out as dividends.
Shareholder loans, payments and forgiven debts: Using company money
There are some rules in the tax law (known as Division 7A) that determine how money taken out of a company is treated. Division 7A is a particularly tricky piece of tax law designed to prevent business owners accessing funds in a way that circumvents income tax. While amounts taken from a company bank account by the owners are often debited to a shareholder’s loan account in the financial statements, Division 7A ensures that any payments, loans, or forgiven debts are treated as if they were dividends for tax purposes unless there is a loan agreement in place which meets certain strict requirements. These ‘deemed’ dividends cannot normally be franked.
If you have taken money out of the company bank account then the main ways of avoiding this deemed dividend from being triggered are to ensure that the loan is fully repaid or placed under a complying loan agreement before the earlier of the due date and actual lodgement date of the company’s tax return for that year. To be a complying loan agreement the agreement requires minimum annual repayments to be made over a set period of time and there is a minimum benchmark interest rate that applies – currently 4.77% for 2022-23.
For example, if your company is paying school fees for your kids, or you take money out of the company bank account to pay down your personal home loan, if you don’t pay back this amount or put a complying loan agreement in place then this amount is likely to be treated as a deemed unfranked dividend. That is, you need to declare this amount in your personal income tax return as if it was a dividend and without the benefit of any franking credits. This means that even though the company might have already paid tax on this amount, you will be taxed on it again without the ability to claim a credit for the tax already paid by the company (causing double taxation of the same company profits).
The rules are very strict when it comes to loan repayments. If a repayment is made but the same amount or more is loaned to the shareholder shortly afterwards then there are some special rules that can apply to basically ignore the repayment. There are some exceptions to these rules and the position needs to be managed carefully to avoid adverse tax implications.
Update: Tax on super balances above $3m
In a very quick turnaround from announcement to draft legislation, Treasury has released the exposure draft legislation for consultation to enact the Government’s intention to impose a 30% tax on future superannuation fund earnings where the member’s total superannuation balance is above $3m.
The draft legislation confirms the Government’s intention to:
- Impose the tax on member accounts with superannuation balances above $3 million from 1 July 2025 (not indexed); and
- Apply the additional 15% tax to ‘unrealised gains’. This will mean that a tax liability will arise if the value of the assets goes up
Currently, all fund income is taxed at either 15%, or 10% for capital assets that have been held by the fund for more than 12 months. Unrealised gains, that is gains that are made because of changes in value, gains on paper, are not currently taxed – only when the gain is realised on sale or disposal of the asset.
If enacted, the legislation would mean that those impacted, could be paying tax on gains in value but without the cash from a sale to support the tax payment.
What sharing platforms are sharing with the ATO
From 1 July 2023, a new reporting regime will require platforms that enable taxi services including ride sourcing, and short-term accommodation to report their transactions to the ATO each year. From 1 July 2024, the regime will expand to include all other platforms.
While the legislative instrument for the reporting regime is still in draft (see LI 2022/D27), it is expected that platform providers will report their transactions to the ATO every six months.
What information on sellers will the ATO know?
The platforms will submit data on the sellers for transactions on their platform including:
- ABN and business / trading name (where applicable)
- First, middle and surname/family name (for individuals)
- Date of birth (for individuals)
- Residential or business address
- Email address and telephone numbers
- Bank account details.
- And, for platforms facilitating short-term accommodation:
- Listed property name
- Listed property address
- Number of nights booked.
In addition, the platforms will provide aggregate quarterly data on the value of transactions, industry types, total gross income etc.
The reporting regime does not include platforms that simply match suppliers to sellers and are not engaged in the transaction such as quotes for hiring tradies where the job is not accepted through the website.
