How two small businesses are using tax incentives to lift productivity

At a glance:

• Government incentives for digital skills and training for SMEs have now been legislated.
• While these incentives are welcomed, more support for small business productivity and to encourage innovation is needed.
• Australian firms have been regressing with respect to their innovative prowess both globally and in our region.
• New tax incentives may be the boost SMEs need to increase innovation but further policy work is needed to overcome key weaknesses around local firms generating novel and innovative solutions to problems.

Small businesses contribute more than half a trillion dollars to the Australian economy. With productivity growth at a 60-year low, measures to support innovation and productivity – such as technology tool adoption and training – are overdue.

Two new incentives came into effect recently: the Technology Investment Boost and the Skills and Training Boost, both of which have been backdated to cover expenditure from 29 March 2022.

“We are pleased that the Government has legislated these incentives for skills and training, which will enable businesses to embrace efficiency and growth opportunities,” says Tony Greco, IPA GM technical policy.

The Technology Investment Boost provides SMEs with an annual turnover less than $50 million with access to a bonus 20 per cent deduction for eligible expenditure incurred on business expenses and depreciating assets to support their digital operations from 7.30pm AEST on 29 March 2022 to 30 June 2023. The maximum bonus deduction is $20,000 with an annual $100,000 cap on eligible expenditure.

This incentive covers computers and software systems, and digital media and marketing content, e-commerce expenditure and repairs, and maintenance of equipment.

The Skills and Training Boost provides SMEs with an annual turnover less than $50 million with access to a bonus 20 per cent deduction for eligible expenditure on external training of employees by providers registered in Australia. The incentive is available from 7.30pm AEST on 29 March 2022 until 30 June 2024.

This incentive does not apply to sole traders, partners, independent contractors or in-house training.

Small businesses can check whether a training provider is registered on training.gov.au, as well as on the Tertiary Education Quality and Standards Agency’s National Register of Higher Education Providers.

“The IPA has been campaigning for both of these measures,” says Greco.

“We hope these initiatives will support small businesses that are planning to invest in technology to fuel productivity, as well as the skills to support technology adoption and innovation.”

While these incentives are welcomed, more support on an ongoing basis is needed.

“We would like to see these initiatives introduced permanently, particularly for those small businesses with a lower turnover threshold of $2 million,” Greco says.

Australian firms are regressing

Currently, ‘new-to-the-world’ innovation that fuels performance relates to only 1 to 2% of Australian firms, according to a 2023 report by the Productivity Commission. It advocates diffusion – the accumulation of existing knowledge across the economy — to lift the performance of millions of businesses.

However, it says poor overall investment in capital that embeds ‘new-to-the-world’ innovation such as equipment and machinery, R&D and software are all signs diffusion has weakened.

“Where Australia lags is in new ideas and products that allow SMEs to grow, develop and, eventually, unseat larger businesses,” says Associate Professor Edward Podolski, Department of Finance, Faculty of Business and Law, Deakin Business School.

Podolski points to a recent OECD report that highlighted the great number of small businesses in Australia, but told a different story when it came to medium-sized businesses.

The relatively small number of medium-sized businesses, Podolski argues, suggests that those smaller businesses, while contributing greatly to employment and the economy, are not able to challenge established players.

“[This] is needed and expected from our smaller firms if we are to have a vibrant and competitive economy,” Podolski says.

“A concerning trend is that Australian firms have been regressing with respect to their innovative prowess both globally and in our region. For example, we have fallen from 17th to 25th on the OECD Global Innovation Index in the past eight years. On the key metrics dealing with innovative outputs, Australia ranks 37th on knowledge and technology outputs, and 27th on creative outputs.”

Podolski hopes the new tax incentives will be the boost SMEs need to increase innovation and compete on a level playing field, but says further policy work is needed to overcome key weaknesses around local firms generating novel and innovative solutions to problems.

‘All bark’ no longer

Queensland-based Big Dog Builds, which specialises in American truck builds, is nipping at the heels of the big players with investment in growth, productivity and operational efficiency.

“When we commenced operations we knew there was potential for technology to form a key part of our operations, especially in workflow management software, for processes for quotes, to job cards, to getting work done,” says co-founder Dean Bliesner.

“We needed to increase productivity and upskill staff on project management by implementing technology that automates a lot of our processes.”

Business adviser Donna Eiby says Big Dog Builds will take advantage of the bonus deduction provided by the Technology Investment Boost for software, including a customer relationship management tool that automates information flow.

“From the moment someone contacts us on our website they receive a text and email thanking them, and setting expectations for a return call,” Eiby says. “So while we are busy building trucks that dreams are made of, we are able to stay in touch with our market.”

Previously, an overflow of enquiries had resulted in not only poor follow-up but the loss of opportunity and revenue.

Big Dog Builds has also implemented workflow management technology that takes a job from quote to tracking the vehicle, its parts, consumables and labour, all the way through the modification process.

“Six months ago, we didn’t have one automotive part documented; now we have 2,500 loaded into our workflow management tool and we have real-time information that allows us to manage our inventory,” Eiby says.

“At any time we can also see the stage a customer’s vehicle is at, we can assign members of the team to a task, and we can improve productivity and efficiency.”

Big Dog Builds has also taken advantage of Open AI – its in-house technology team has written code that strips the content from thousands of recorded customer calls, using ChatGPT to distil insights that are added to a knowledge database used by the sales and customer support team.

Incentive could bridge savviness gap

Director of NSW regional business Wild Honey Creative Jasmine Phillips, a design studio that specialises in creating brands, websites, and graphic and publishing design, hopes to use the Technology Investment Boost to offset ongoing costs of automating processes.

“We’ve found that the rapid increase of AI tools over the past six to eight months has created an even bigger gap between those businesses that are ‘tech savvy’ and those that are very quickly being left behind,” Phillips says.

While Phillips would also like to take advantage of the Skills and Training Boost to invest in skills around cybersecurity for her staff, she hopes that the list of registered training providers expands, both in terms of providers and the courses that are available.

“Not all small businesses will be able to commit to Certificate and Diploma level programs for their employees, and more training providers may either need to travel to regional areas or make their programs available online.”