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Discover the 20% Tax Deduction for Small Businesses! Boost Efficiency and Save on Energy Costs

Writer's picture: Alvin FungAlvin Fung
Tax deduction
 

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On 30 April 2023, the Australian Government announced a new measure to support businesses with an annual turnover of less than $50 million. This measure, now enacted into law, provides an additional 20% tax deduction on spending that supports electrification and more efficient use of energy. 

 

Key Details of the Energy Incentive

The Small Business Energy Incentive is applicable to eligible expenditure on assets and improvements made between 1 July 2023, and 30 June 2024, referred to as the 'bonus period.' Businesses can claim this bonus tax deduction on up to $100,000 of total expenditure, with the maximum bonus deduction being $20,000. This deduction is separate and in addition to other deductions typically available under taxation law.


Eligibility Criteria

To qualify for the Small Business Energy Incentive, businesses must meet the following criteria:


  • The business must adhere to the standard aggregated annual turnover rules, now with an increased $50 million threshold.

  • The claimed expenditure must be deductible under other provisions in the taxation law.

  • For new assets, they must be both first used or installed ready for use for any purpose and used or installed ready for use for a taxable purpose, within the bonus period. If an asset is first used or installed for any purpose before 1 July 2023, it is not eligible for the bonus deduction, even if it is not used for a taxable purpose until the bonus period.

  • Expenditures on improvements to existing assets must be incurred during the bonus period.


Eligible Expenditure

The bonus deduction is available for expenditure on depreciating assets and improvements that enhance energy efficiency. Eligible depreciating assets include those that use electricity and meet one or more of the following criteria:


  • There is a new, reasonably comparable asset that uses a fossil fuel available in the market.

  • The asset is more energy-efficient than the asset it is replacing.

  • If it is not a replacement, it is more energy-efficient than a new, reasonably comparable asset available in the market.


"Available in the market" means that the comparable asset could have been readily purchased either locally or on the internet during the same time period.


Additionally, a depreciating asset may also be eligible if it is an energy storage, time-shifting, or monitoring asset, or if it improves the energy efficiency of another asset.


A depreciating asset can be a second-hand asset, but the comparable asset must be available in the market as new.


Examples of eligible expenditures are:

  • Electrifying equipment, such as replacing a gas heater with a reverse cycle air conditioner.

  • Upgrading to more energy-efficient appliances and equipment, like refrigeration systems.

  • Installing time-shifting devices that allow electrical appliances to operate during off-peak times.

  • Replacing diesel engines with electric motors.

  • Installing Virtual Power Plant enabled battery systems.


Where the expenditure is partly for private purposes, the bonus deduction is calculated based on the business-related portion of that expenditure. If your business is registered for GST and the expenditure is not GST-free, the bonus deduction is calculated on the amount of expenditure less the GST amount claimable as an input tax credit.


For improvements to existing assets, the incentive covers expenses that:

  • Enable the asset to use only electricity or renewable energy instead of fossil fuels.

  • Increase the asset’s energy efficiency.

  • Facilitate energy storage, time-shifting, or usage monitoring of electricity or renewable energy.


Exclusions and Limitations

Certain expenditures are excluded from the bonus deduction, including:

  • Assets and expenditure on assets that use fossil fuels (except incidental uses like oil-based lubricants).

  • Assets and expenditure on assets primarily for generating electricity (e.g., solar panels).

  • Capital works and motor vehicles (including hybrid and electric vehicles).

  • Expenditure allocated to software development pools.

  • Financing costs, including interest and borrowing expenses.


Additionally, businesses cannot claim the bonus deduction if a balancing adjustment event occurs to the asset during the bonus period unless it is due to an involuntary disposal.


Claiming the Deduction

Businesses generally claim the bonus deduction in the income year the expenses are incurred. For new assets, the deduction must be claimed in the income year they are first used or installed ready for use for a taxable purpose. For improvements, the deduction is claimed in the income year the expenditure is incurred. Entities with a substituted accounting period can claim the bonus deduction across multiple income years within the bonus period, ensuring the $20,000 cap is maintained.


 

This Small Business Energy Incentive provides a significant opportunity for businesses to invest in energy efficiency, reducing both their environmental footprint and operational costs. For more information on eligibility and claiming the deduction, businesses are encouraged to consult with our tax experts.

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