15/09/2022
Draft legislation: 20% deduction for digital take-up expenditure
Treasury has released draft legislation which will implement a measure announced in the 2022 Budget to provide small businesses (aggregated annual turnover less than $50 million) with a 120% deduction for expenditure incurred for the purposes of their digital operations.
The “bonus” component of the deduction is capped at $20,000 per income year.
The relevant expenditure must be incurred between 29 March 2022 and 30 June 2023 and must be eligible for a deduction under another provision of the taxation law. If the expenditure is on a depreciating asset, the asset must be first used or installed ready for use by 30 June 2023.
The following types of expenditure are ineligible: salary and wage costs; capital works costs deductible under Div 43 of ITAA 1997; financing costs; training and education costs; and expenditure that forms part of, or is included in, the cost of trading stock.
Generally, entities must claim the bonus deduction for expenditure incurred in their 2021-22 income year in their 2022-23 return. The bonus deduction for expenditure incurred in an entity's 2022-23 income year will also be claimed in its 2022-23 return (ie effectively a double up in one income year).
Eligible expenditure
To be eligible for the bonus deduction, expenditure must be incurred wholly or substantially for the purposes of an entity’s digital operations or digitising the entity's operations. Such expenditure may include, but is not limited to, business expenditure on:
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.
Depreciating assets
An entity can claim the bonus deduction for expenditure on a depreciating asset only if the asset is first used, or installed ready for use, before 1 July 2023. This rule does not apply to expenses incurred in the development of in-house software allocated to a software development pool, consistent with current pooling rules.
When calculating the bonus deduction for expenditure on a depreciating asset, it is assumed that:
the entity will continue to hold the asset throughout its effective life; and
the entity will use the asset for a taxable purpose to the same extent that it does in the income year it first uses or installs the asset.
An entity cannot claim the bonus deduction for expenditure on a depreciating asset if a balancing adjustment event occurs for the asset while the entity holds it during the relevant time period, unless the event is an involuntary disposal. Relevant repair and improvement costs are eligible expenditure.
The bonus deduction is equal to 20% of the cost of the depreciating asset. This means that regardless of the method of deduction that the entity applies (ie whether immediate or over time), the bonus deduction in respect of a depreciating asset is calculated based on the asset's cost.
