The small business energy incentive is the latest measure providing a bonus tax deduction to nudge the investment behaviour of small and medium enterprises (SME’s), this time towards more efficient energy use and electrification. Fossil fuels are out, gas is out, electricity is the name of the game.

Legislation before Parliament will see SMEs with an aggregated turnover of less than $50 million able to claim a bonus 20% tax deduction on up to $100,000 of their costs to improve energy efficiency in the business. But, the tax deduction is time limited. Assuming the legislation passes Parliament, you only have until 30 June 2024 to invest in new, or upgrade existing assets.

How much can my business invest?

Your business can invest up to $100,000 in total, with a maximum bonus tax deduction of $20,000 per business entity. The energy incentive is not provided as a cash refund, it reduces your taxable income for the 2024 income year.

How do I qualify?

The energy incentive applies to both new assets and expenditure on upgrading existing assets. There is no specific list of assets that can qualify. Instead, the rules provide a series of eligibility criteria that need to be satisfied.

First, the expenditure incurred in relation to the asset must qualify for a deduction under another provision of the tax law.

If your business is acquiring a new depreciating asset, it must be first used or installed for a taxable purpose between 1 July 2023 and 30 June 2024. If you are improving an existing asset, the expenditure must be incurred between 1 July 2023 and 30 June 2024.

If your business is acquiring a new depreciating asset the following additional conditions need to be satisfied:

• The asset must use electricity; and
• There is a new reasonably comparable asset that uses a fossil fuel available in the market; or
• It is more energy efficient than the asset it is replacing; or
• If it is not a replacement, it is more energy efficient than a new reasonably comparable asset available in the market; or
• It is an energy storage, time-shifting or monitoring asset, or an asset that improves the energy efficiency of another asset.

If you are improving an existing asset the expenditure needs to satisfy at least one of the following conditions:

• It enables the asset to only use electricity, or energy that is generated from a renewable source, instead of a fossil fuel;
• It enables the asset to be more energy efficient, provided that asset only uses electricity, or energy generated from a renewable source; or
• It facilitates the storage, time-shifting or usage monitoring of electricity, or energy generated from a renewable source.

What kind of asset doesn't qualify?

Certain kinds of assets and improvements are not eligible for the bonus deduction, including where the asset or improvement uses a fossil fuel. So, hybrids are out. Solar panels and motor vehicles are also excluded.

In addition, the following assets are specifically excluded from the rules:

• Assets, and expenditure on assets, that can use a fossil fuel;
• Assets, and expenditure on assets, which have the sole or predominant purpose of generating electricity (such as solar photovoltaic panels);
• Capital works (such as buildings and structural improvements);
• Motor vehicles (including hybrid and electric vehicles) and expenditure on motor vehicles;
• Assets and expenditure on an asset where expenditure on the asset is allocated to a software development pool; and
• Financing costs, including interest, payments in the nature of interest and expenses of borrowing.

What kind of asset does qualify?

The legislation contains a few examples of what would qualify:

• Electrifying heating and cooling systems
• Upgrading to more efficient fridges and induction cooktops (for example replacing gas cook tops)
• Installing batteries and heat pumps
• Installing an electric reverse cycle air conditioner instead of a gas heater
• Replacing a coffee machine with a more energy efficient coffee machine if the manufacturer’s electricity consumption information supports this – keep the documentation!
• Thermal storage that can store heat or cold from a renewable source
• Solar thermal hot water system (assuming it meets the other criteria)

Here are some examples of claims:

Example 1:

A business decides it wants to purchase a heater for a part of its premises.

It can purchase a new gas heater but it decides to purchase a new reverse-cycle electric air conditioner. This is eligible because the business has chosen an electricity driven device over a fossil fuel driven device.

The new air conditioner costs $3,000, with installation. This results in a bonus tax deduction of $600.

Example 2:

A business wants to purchase a new refrigerator for its business.

It visits a local whitegoods retailer and observes the various models available. It decides to purchase a refrigerator with a 5-star energy rating. There are other refrigerators available for sale in the store that have 3-star and 4-star energy ratings. Because the business has decided to purchase the more energy efficient model, the expenditure on the new refrigerator is eligible.

The new refrigerator costs $1,600. This results in a bonus tax deduction of $320.

Example 3:

A business uses solar panels to create renewable energy. It decides to purchase a battery to store the renewable energy which costs $15,000.

This is eligible and results in a bonus deduction of $3,000.

More information

The legislation to implement the energy incentive is currently before Parliament. We’ll keep you updated on its progress. If you intend to make a major outlay to take advantage of the bonus deduction, talk to your trusted Ruddicks advisor so we can make sure it qualifies.

You can read more about the small business energy incentive on the ATO’s website.

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The content of this newsletter is general in nature. It does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. Ruddicks accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. This information is current as at 17 November 2023, and was published around that time. Ruddicks particularly accepts no obligation or responsibility for updating this publication for events, including changes to the law, the Australian Taxation Office’s interpretation of the law, or Government announcements arising after that time.

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