Have you heard of the small business energy incentive? It’s the latest incentive which provides a bonus tax deduction for small and medium businesses, gearing us towards greater energy efficiency. Gone are the days of fossil fuels and gas, with this new deduction for small to medium businesses, electricity has never look so attractive .
The what
Parliament will soon pass legislation stating that SMEs with an aggregated turnover of less than $50 million will soon be able to claim a bonus 20% deduction on up to $100,000 of their costs – all in a bid to improve energy efficiency. However, there is a time limit for when these deductions can be claimed. You will only have until the 30 June 2024 to make any bonus tax deductions that will benefit your business.
How much?
A total of $100,000, with a maximum of $20,000 per business entity. It’s important to note that the purpose of the incentive is not to provide a cash refund, but rather, aims to reduce your taxable income or increase the tax loss for the 2024 income year.
What will qualify?
Wanting to know what you can claim? A set of eligibility criteria will be applied to determine what assets will qualify. These include the following:
1. The expenditure incurred in relation to the asset must qualify for a deduction under another provision of the tax law.
2. If your business is acquiring a new depreciating asset, it must be first used or installed for any taxable purpose, between the period 1 July 2023 and 30 June 2024.
3. If your business is improving an existing asset, the expenditure must have incurred in the period between 1 July 2023 and 30 June 2024.
4. If your business acquires a new depreciating asset, a number of additional conditions will also need to be satisfied:
a. The asset must be electricity; and
i. There is a new reasonably comparable asset that uses a fossil fuel available in the market; or
ii. It is more energy efficient than the asset it is replacing; or
iii. If it is not a replacement, it is more energy efficient than a new reasonably comparable asset available in the market; or
b. It is an energy shortage, monitoring or time shifting asset, or an asset that imp/roves the energy efficiency of another asset.
5. If your business is improving an asset which already exists, the expenditure will need to satisfy one of the following conditions:
a. It enables the asset to only use energy or electricity which is generated from a renewable source, as opposed to a fossil fuel;
c. It facilitates the storage, usage or time-shifting of energy generated from renewable sources or electricity.
But what won’t qualify?
You guessed it, if the improvements or assets use fossil fuels, these won’t be eligible for the bonus deduction. This also includes the exclusion of solar panels and motor vehicles.
These assets will also be excluded from the rules:
· Assets, and expenditure on assets, that can use a fossil fuel;
· Assets, and expenditure on assets, which have the primary or predominant purpose of generating electricity (i.e., solar photovoltaic panels);
· Motor vehicles (i.e. inclusive of hybrid and electric vehicles) and the expenditure on vehicles;
· Capital works (i.e., buildings or structural improvements);
· Assets and expenditure on an asset where expenditure on the asset is allocated to a software development pool; and
· Financing costs. This includes the expenses of borrowing, interest and payments in the nature of interest.
Examples of what will qualify
To help you out, here are a some examples of what will qualify with the new tax deduction:
· Heating and cooling systems which are electrified
· Upgrading fridges and induction cooktops to more energy efficient sources (i.e., replacing gas cook tops)
· The installation of heat pumps and batteries
· Upgrading or replacing coffee machines to more energy efficient alternatives
· Hot water systems which are powered by solar thermal energy (assuming this meets the other criteria)
· Installing electric reverse cycle air conditions as an alternative to gas heating
The legislation to implement this new energy incentive is currently before Parliament, however once passed, we will update you on its progress. Reach out to us if you would like to take advantage of the bonus deduction or are not sure what qualifies.