After almost a year since its announcement in the 2022-23 Federal Budget, the 120% tax deduction for technology investments and skills and training expenditure by small and medium businesses (SMEs) has finally become law. People who follow our social media has been informed to record these types of expense into a separated account in order to easily capture the figures when the law is enacted and tax return is prepared. This boost is aimed at providing SMEs with added incentives to invest in technology and improve the skills of their workforce.

Who Qualifies for the Boosts?

The 120% technology investments and skills and training boosts are accessible to small business entities (individual sole traders, partnership, company or trading trust) with an aggregated annual turnover of less than $50 million. The aggregated turnover includes not only the business’s turnover but also that of its affiliates and connected entities.

$20k Technology Investments Boost

The Technology Investments Boost offers SMEs a bonus deduction for expenses and depreciating assets related to digital operations or digitizing activities from 7:30 pm (AEST) on 29 March 2022 until 30 June 2023.

To qualify for the deduction, an expense is considered “incurred” when the SME is legally liable for the cost, either through a tax invoice or a contractual agreement. For depreciating assets like computer hardware, the technology must have been purchased and installed ready for use by 30 June 2023. Simply ordering the assets on 29 June won’t suffice; they must have been received and set up for use.

Eligible expenses for the technology investments boost include:

• Digital enabling items: Computer and telecommunications hardware and equipment, software, internet costs, and systems and services that support the use of computer networks.

• Digital media and marketing: Audio and visual content accessible on digital devices, including web page design.

• E-commerce: Goods or services that facilitate digitally ordered or platform-enabled online transactions, portable payment devices, digital inventory management, cloud-based service subscriptions, and advice on digital operations.

• Cybersecurity: This includes cybersecurity systems, backup management, and monitoring services.

The technology must be “wholly or substantially for the purposes of an entity’s digital operations or digitizing the entity’s operations.” This means that there must be a direct link between the technology and the business’s digital operations, which generate income.

It’s essential to note that the technology investments boost does not cover costs related to employing staff, raising capital, constructing business premises, or the cost of goods and services the business sells. Additionally, assets that are purchased and sold within the relevant period, capital works costs, financing costs, salary or wage costs, and training or education costs are not eligible for the boost.

Claiming the Bonus Deduction

The bonus deduction is subject to an annual cap of $20,000, with eligible expenditures up to $100,000 qualifying for this deduction. However, over the entire period, the maximum total bonus deduction that a business can claim is limited to $40,000. The $20,000 bonus deduction is not given to the business in cash; rather, it is used to offset against the business’s assessable income. If the business is in a loss position, the bonus deduction will increase the tax loss. The value of the bonus deduction depends on whether the business generates a taxable profit or loss during the relevant year and the applicable tax rate.

If the expenditure has mixed use, meaning it is used for both business and private purposes, the bonus deduction will be applied only to the portion of the expenditure that is utilized for business purposes.

The bonus deduction can be applied to expenses related to a depreciating asset. To be eligible, the asset must have been first utilized or installed and ready for use for taxable purposes between 7:30 pm AEDT on 29th March 2022 and 30th June 2023. However, this rule does not extend to expenses incurred in developing in-house software allocated to a software development pool, in line with the current pooling regulations. Additionally, the costs associated with repairing and improving depreciating assets are also eligible for the bonus deduction, provided they are incurred within the specified time frame.

The bonus deduction is calculated as 20% of the expenditure on the qualifying depreciating asset, given that the expenditure occurs during the relevant period and the asset is used or installed and ready for use for taxable purposes by 30 June 2023. This calculation applies regardless of the depreciation method utilized by the business. If a business acquires a depreciating asset within the relevant period, the expenditure will be considered as the cost of the asset.

Conclusion

The 120% technology investments ‘boost’ deduction presents a valuable opportunity for eligible small and medium businesses to invest in technology. By carefully understanding the eligibility criteria and timing, SMEs can maximize their deductions and take full advantage of the boost to support their digital operations and business growth. It is recommended that businesses seek professional advice to ensure compliance and optimize their tax benefits under this scheme. We will continue discuss the skills and training boost in our next article.

Should you please have any question in regards to above, please feel free to contact our friendly team in Pitt Martin Tax at 0292213345 or info@pittmartingroup.com.au.

The material and contents provided in this publication are informative in nature only.  It is not intended to be advice and you should not act specifically on the basis of this information alone.  If expert assistance is required, professional advice should be obtained.

By Yvonne Shao @ Pitt Martin Tax