How to benefit from the $20k small business energy incentive

Legislation enabling the small business energy incentive hit Parliament last week. The incentive is another broadly defined incentive to nudge behaviour, this time towards energy efficiency and “electrification.”  

The small business energy incentive is the latest measure providing bonus tax deductions in order to nudge the investment behaviour of small and medium businesses, this time towards more efficient energy use and electrification. Fossil fuels are out, gas is out, electricity is the name of the game.

Assuming the legislation passes Parliament in its current state, SMEs with an aggregated turnover of less than $50 million will be able to claim a bonus 20% tax deduction on up to $100,000 of their costs to improve energy efficiency in the business. To qualify, eligible assets or upgrades will need to be first used or installed ready for use, or the cost incurred for upgrading existing assets, between 1 July 2023 and 30 June 2024.

How much?

Up to $100,000 of total expenditure will be eligible for the incentive, with a maximum bonus tax deduction of $20,000 per business entity. The energy incentive is not provided as a cash refund, it either reduces the entity’s taxable income or increases the tax loss for the 2024 income year.

What qualifies?

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

If the entity 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 the entity is 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 does not 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.

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;
• 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.

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