By Sean Neary - Direct, Neary Consulting

This week the Federal Government released draft legislation providing an additional 20% tax deduction for eligible expenditures incurred by small business seeking to digitize their operations. Intrigued, I printed the legislation to it read properly, with the details as follows.

Who can Claim?

Small businesses with an aggregated turnover of up to $50m are eligible. The turnover test must be satisfied for each of the two years in which the extra tax deduction is available. Note “aggregated turnover” means the taxpayer making the claim is grouped with “connected” entities, either directly by the same person or together with that person’s “affiliates”. These are the same grouping rules that apply for a range of small business concessions, albeit at a higher $50m turnover threshold.

Note the claimant must be carrying on a business, with the expenditure being an eligible tax deduction for that business.

What’s the benefit?

The benefit is an additional 20% tax deduction on digital-related expenditure incurred between 7:30 pm on 29 March 2022 and 30 June 2022. In practice that means there are two periods:
• 7:30 pm on 29 March 2022 to 30 June 2022 – with the maximum eligible expenditure of $100,000 resulting in a maximum bonus tax deduction of $20,000.
• 1 July 2022 to 30 June 2023 – with the same $100,000 maximum expenditure and the same $20,000 maximum bonus tax deduction.
We’ve Already Lodged 30 June 2022 – Is it too Late to Claim?

No. Unfortunately, the tardy implementation timeframe doesn’t match the lofty “digitization” headline. Regardless of when tax returns are lodged, the extra tax deduction for expenditure in both relevant periods can only be claimed in the 30 June 2023 income tax return.

Eligible Expenditure

The legislation is vague in terms of what constitutes eligible expenditure, with the only requirement being “you use the expenditure wholly or substantially for the purpose of your digital operations or digitizing your operations”. The Explanatory Memorandum indicates that it covers items such as the following:
• Digital enabling items – computer and telecommunications hardware, 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.
Our initial view is that eligible expenditure will include many costs that are routinely incurred by many businesses, including software subscriptions and IT consultants. It doesn’t appear that the expenditure needs to be incurred in digital improvements or otherwise revolutionizing your business (but knock yourself out if you have aspirations of doing so!).

Note eligible expenditure includes expenses and the cost of acquiring depreciating assets (regardless of the depreciation rate and method applied). Note any depreciating asset acquired must be installed ready for use by no later than 30 June 2023.

If the taxpayer is registered for GST, the boost applies to the GST exclusive cost.

Ineligible Expenditure

The following items aren’t eligible for the boost:
• Salary and wages;
• Capital works deductible under Division 43 (meaning building improvements);
• Financing costs;
• Depreciating assets if they are sold prior to 30 June 2023;
• The cost of items that are trading stock; and
• Training and education (although noting there is a separate Skills Boost programme that may cover these items).
How to Claim

As noted above, the claim for both periods will be made in the year return for the year ended 30 June 2023. Instructions as to how this will occur are to follow later.

Further Information

If you want further information, please contact Sean Neary via WhatsApp, Direct Messaging, or another digitally appropriate medium. If you’re old school and want information on how the boost can help your business move into the new millennium, maybe just call on (08) 6165 4900.