Federal budget delivers development windfall for small-cap ASX shares

Smaller companies are being encouraged to enhance their digital capabilities.

Bernd Struben

Author bio Bernd Struben earned his BA in economics from the University of Michigan in 1991, with post-graduate studies in environmental economics at the University of Connecticut. Over the years he’s written about and analysed the tourism industry in the Caribbean; Europe’s commercial real estate markets; and, since moving to Australia in 2010, global and Aussie share markets. Bernd studies geopolitical and macroeconomic trends, alongside sector and company specific data, to gauge what he believes could be tomorrow's best investments. In his free time, you might find Bernd at the beach with his family or working on his next science fiction novel. Areas of expertise Australian and global share markets Macroeconomic and geopolitical trends Real estate Education Economics, University of Michigan Favorite investment quote "The four most dangerous words in investing are: 'This time it's different." — Sir John Templeton

Published March 30, 2022 11:55 am AEDT

ASX shares with annual turnovers of less than $50 million will receive a handy development windfall under the 2022 federal budget.

That windfall will come in the form of tax breaks involving digital investments.

The benefits aren't limited to ASX shares. Smaller private companies will also be eligible.

a young boy dressed in a business suit and wearing thick black glasses peers straight ahead while sitting at a heavy wooden desk with an old-fashioned calculator and adding machine while holding a pen over a large ledger book. — Image source: Getty Images

Small-cap ASX shares underperforming in 2022

The proposed tax breaks will come as good news for investors in most small-cap ASX shares, many of which have been struggling in the new year.

Longer-term, the smaller end of the listed market has performed very strongly.

For example, over the past five years, the S&P/ASX Small Ordinaries Index (ASX: XSO) has gained 41%. That's well ahead of the 28% gain posted by the S&P/ASX 200 Index (ASX: XJO) over that same period.

If you're not familiar, the Small Ords includes all the stocks in the S&P/ASX 300 Index, while excluding those in the S&P/ASX 100 Index.

However, in 2022 the Small Ords has struggled. The index of small-cap ASX shares is down 7% this calendar year, compared to a year-to-date loss of 1% on the ASX 200.

Which brings us back to the pending tax relief.

The 'Technology Investment Boost'

Mark Chapman is the director of tax communications at H&R Block Australia.

Commenting on the tax implications for smaller businesses, including small-cap ASX shares, he said, "There are two key measures for small business in this budget but no word as to whether the 'Temporary Full Expensing' tax break – which benefits almost all businesses with the instant write off of capital purchases – will be extended beyond 30 June 2023."

Chapman highlighted the potential significance of the government's 'Technology Investment Boost':

The main headline grabber is the 'Technology Investment Boost', which gives businesses with an annual turnover of less than $50 million the ability to deduct an extra 20% of the cost of expenses that support their digital uptake.

Businesses will be able to claim the additional deduction on up to $100,000 of expenditure a year.

And there's another benefit for small-cap ASX shares in the budget as well.

"In addition, there will be a similar tax break for small business that fund digital training and upskilling for staff," Chapman said. "The 'Skills and Training Boost' gives a small business that spends $100 on training employees a $120 tax deduction."

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