In this transformative age of electricity, it has emerged as the dominant force, casting a shadow over traditional sources such as gas and fossil fuels. A new incentive program has been introduced, with the aim of inspiring businesses to adopt energy-efficient practices. Our expert guidance will lead you through the steps to maximize the benefits of this tax deduction.

The small business energy incentive program is a testament to the ongoing commitment to encourage small and medium-sized enterprises to embrace energy efficiency and electrification. The tides have shifted, and fossil fuels and gas have fallen out of favor, making way for electricity to claim the spotlight and drive the future of energy.

Pending legislation in Parliament targets businesses with an aggregated turnover of less than $50 million, granting them a bonus 20% tax deduction on up to $100,000 in expenses aimed at enhancing energy efficiency within their operations. 

However, it’s essential to note that this tax deduction has an expiration date. If the legislation passes Parliament, you’ll have until 30 June 2024, to invest in new assets or upgrade existing ones.

How much?

What’s in it for your business? You can allocate a maximum of $100,000 in total, with each business entity eligible for a bonus tax deduction of up to $20,000. It’s important to remember that this energy incentive won’t be dispensed as a cash refund; instead, it will either reduce your taxable income or augment the tax loss for the 2024 income year.

What qualifies for the energy incentive? The energy incentive applies to both new assets and the expenditure involved in upgrading existing assets. Rather than having a specific list of qualifying assets, it relies on a set of eligibility criteria that must be met.

For new depreciating assets, they must be first used or installed for any purpose, including a taxable purpose, between 1 July 2023, and 30 June 2024. If you’re making improvements to an existing asset, the expenditure must be incurred within the same time frame.

In the case of acquiring new depreciating assets, the following additional conditions must be met:

• The asset must utilize electricity.
• There should be a new reasonably comparable asset available in the market that uses a fossil fuel, or
• It must be more energy-efficient than the asset it’s replacing, or
• If it’s not a replacement, it should still be more energy-efficient than a new reasonably comparable asset on the market, or
• It must serve as an energy storage, time-shifting, or monitoring asset, or an asset that enhances the energy efficiency of another asset.

To be eligible for the bonus deduction when enhancing an existing asset, the expenditure must meet at least one of these criteria:

• It allows the asset to exclusively utilize electricity or energy from renewable sources, rather than fossil fuels.
• It enhances the energy efficiency of the asset, provided that the asset solely relies on electricity or renewable energy sources.
• It enables the storage, time-shifting, or monitoring of electricity or renewable energy usage.

What doesn’t qualify for the bonus deduction?

Several types of assets and improvements do not meet the criteria for the bonus deduction. This includes assets or improvements that rely on fossil fuels, such as hybrids. Solar panels and motor vehicles are also ineligible for this deduction.

Additionally, the following assets are explicitly excluded from these rules:

• Assets and related expenditures that involve the use of fossil fuels.
• Assets and associated costs primarily aimed at generating electricity, such as solar photovoltaic panels.
• Capital works, encompassing buildings and structural enhancements.
• Motor vehicles, including hybrid and electric vehicles, as well as expenses associated with them.
• Assets and expenses related to an asset allocated to a software development pool.
• Financing costs, covering interest, payments resembling interest, and borrowing expenses.

Examples of Qualifying Expenditures

The legislation provides specific instances of what could qualify for the energy incentive:

• Electrifying heating and cooling systems.
• Upgrading to more energy-efficient appliances, like switching from gas cooktops to induction cooktops.
• Installing batteries and heat pumps.
• Opting for an electric reverse cycle air conditioner instead of a gas heater.
• Replacing an energy-hungry coffee machine with a more energy-efficient model, provided the manufacturer’s electricity consumption data supports this – it’s important to maintain proper documentation.
• Utilizing thermal storage solutions capable of storing heat or cold from renewable sources.
• Employing a solar thermal hot water system, assuming it meets the additional criteria.

The legislation to enact this energy incentive is currently under consideration in Parliament. We’ll keep you informed of its progress. If you plan to make significant investments to take advantage of the bonus deduction, we recommend consulting with us beforehand to ensure that your expenditures qualify.