Small business energy incentive

Small businesses that incur expenditure relating to electrification and more efficient use of energy will be entitled to a bonus tax deduction

Businesses that are planning to invest in electrification and more efficient use of energy should consider conducting installations and upgrades to eligible assets in the 2023–24 income year to be able to avail the $20,000 bonus tax deduction.

Key points

• Businesses with an aggregated turnover of less than $50 million will be entitled to a 20% deduction for expenditure that supports electrification and more efficient use of energy
• This bonus deduction will be available for expenditure incurred from 1 July 2023 until 30 June 2024
• The additional deduction will be available for eligible expenditure of up to $100,000 and is therefore capped at $20,000 for each business
• The temporary measure will apply to eligible assets or upgrades first used or installed ready for use between 1 July 2023 and 30 June 2024

This measure is currently in the exposure draft stage and will require parliamentary approval to become law.

Eligible expenditure

The eligible expenditure includes a range of depreciating assets, as well as upgrades to existing assets which include upgrades to more efficient electrical goods. A depreciating asset is eligible for the bonus deduction if it uses electricity and there is a new reasonably comparable asset that uses a fossil fuel, it is more energy efficient than the asset it is replacing or is an energy storage, demand management or efficiency-improving asset.

Any expenditure incurred in excess of the $100,000 cap may still be eligible for other tax deductions under small business simplified depreciation rules.

Depreciating assets

The following depreciating assets may qualify for a bonus deduction:

• An asset that uses a fossil fuel and is available in the market and the business installs an asset that instead uses electricity
• An asset that uses electricity even if there is no comparable asset available on the market which uses a fossil fuel
• An asset that enables the storage of electricity, or the storage of energy that is generated from a renewable source
• An asset that allows energy to be consumed at a different time
• An asset that enables energy use to be monitored.

Improvements

The following improvements may qualify for a bonus deduction:

• an improvement that allows an asset to only use electricity, or to use energy generated from a renewable source which, prior to the improvement, could use energy from a fossil fuel
• an improvement that allows the asset to be more energy efficient provided the asset being improved uses electricity or energy generated from a renewable source
• an improvement that allows for energy use by an asset to be monitored, reduced at specific times, or confined to specific times, provided the asset being improved uses electricity or energy generated from a renewable source.

Exclusions

There are specific exclusions to be aware of when considering tax incentives. These exclusions encompass assets that can utilise fossil fuels, expenditures on such assets, and assets primarily used for electricity generation, such as solar panels. Capital works, motor vehicles (including hybrid and electric) and their associated expenditures are also excluded.

Additionally, assets allocated to a software development pool, financing costs like interest and borrowing expenses, fall under the exclusions. However, it's worth noting that electric and hybrid vehicles may still qualify for other tax incentives, such as the FBT exemption, subject to certain conditions.

Claiming the bonus deduction

For depreciating assets first used or installed during the 2023–24 income year, businesses must claim the bonus deduction in the 2023–24 income year. For improvements made to existing assets, entities must claim the bonus deduction in the income year in which the improvement cost is incurred.

Early and late balancers may claim the bonus deduction across more than one income year, provided the eligible asset was first used or installed, or the improvement cost was incurred, during the bonus period.

CONTACT BAUMGARTNERS