Electricity is the new black. Gas and other fossil fuels are out. A new, limited-time incentive encourages businesses to be more energy efficient. We show you how to get the most out of your deduction! The small business energy incentive is the most recent initiative to provide a bonus tax credit to stimulate small and medium-sized firms’ investment behaviour, this time towards more efficient energy consumption and electrification. Gas and fossil fuel is out, electricity is in the game.
Before Parliament, legislation will see SMEs with a total turnover of less than $50 million can claim a bonus 20% tax deduction on up to $100,000 of their expenses to enhance energy efficiency in the business. However, the tax deduction is for a limited time period. Assuming the legislation passes Parliament, you will have 30 June 2024 to make investments in new or upgrade current assets.
Your business is allowed to invest up to $100,000 in total, with a $20,000 maximum bonus tax deduction per business entity. The energy incentive is not given as a cash refund, it either minimises your taxable income or maximises the tax loss for the 2024 income year.
The energy incentive is applicable for both new assets and the costs of upgrading current assets. There is no particular assets list that can qualify. Instead, the rules offer a series of eligibility requirements that need to be met. First, the expense made in relation to the asset must be deductible under another section of the tax code.
If your company purchases a new depreciating asset, it must be used or installed for any reason, including a taxable purpose, between July 1, 2023 and June 30, 2024. If you are enhancing an existing asset, you must spend between July 1, 2023 and June 30, 2024.
If your company is purchasing a new depreciating asset, the following additional conditions must be met:
- The asset is required to use electricity, and
- There is a new comparable asset that makes use of a fossil fuel available in the market, or
- It is more energy efficient as compared to the asset it is replacing, or
- It is more energy efficient as compared to a new comparable asset if it is not a replacement, or
- It is an energy storage, monitoring or time-shifting asset, or an asset that boosts the energy efficiency of another asset.
If you are enhancing an existing asset the expenses are required to satisfy at least one of the conditions mentioned below:
- It allows the asset to solely make use of electricity or energy generated from a renewable source, instead of a fossil fuel
- It allows the asset to be more energy efficient, given that the asset only uses electricity, energy produced from a renewable source, or
- It allows the storage, usage monitoring or time-shifting of electricity, or energy produced from a renewable source.
What Doesn’t Qualify?
Some assets and enhancements don’t qualify for the bonus deduction, including where the asset or enhancement uses a fossil fuel. Thus, hybrids are out. Motor vehicles and solar panels are also not included. Additionally, the below assets are particularly from the rules:
- Assets, and expenses on assets that can make use of a fossil fuel
- Assets, expenses on assets that have only the purpose of producing electricity
- Capital works
- Motor vehicles and expenses on motor vehicles
- Assets and expenses on an asset where expenses on the asset are assigned to a software development pool, and
- Financing goals, including payments in the nature of interest, interest, and borrowing expenses.
What does Qualify?
The legislation has a few examples of what will qualify:
- Electrifying cooling and heating systems
- Upgrading to more efficient refrigerators and induction cooktops
- Installing heat pumps and batteries
- Installing an electric reverse-cycle air conditioner
- Use a more energy-efficient coffee machine if the manufacturer’s electricity consumption information satisfies this – keep the documentation!
- Thermal storage that can store cold or heat from a renewable source
- Solar thermal hot water system
The legislation to implement the energy incentive is prior to Parliament. Reliable Melbourne Accountants will keep you updated on its progress. It is likely to make the biggest investment to get the benefit of the bonus deduction, talk to us to ensure it qualifies.