Small Business Energy Incentive : Bonus Deduction
How can you benefit a 20% bonus tax deduction?
The small business energy incentive offers a 20% bonus deduction on expenditures aimed at improving energy efficiency. Let’s dive into the details and see if you can benefit!
Understanding the Small Business Energy Incentive
The small business energy incentive was designed to help you save money while making your business more energy-efficient. If your business had an annual turnover of less than $50 million, and you purchased eligible assets and improvements between 1 July 2023 and 30 June 2024, you might be in luck!
Eligibility Criteria
To take advantage of the small business energy incentive, your business must have met this criteria in 2024:
- Annual Turnover: Less than $50 million.
- Deductible Expenditure: The costs must be deductible under regular tax provisions.
- Asset Use: The asset must be used or installed for a taxable purpose within the bonus period.
Important Note: If you used the asset before 1 July 2023, you can’t claim the bonus deduction, even if it wasn’t used for a taxable purpose until later. Improvements must also be made during the bonus period.
Explore other bonus deductions you might be eligible for with the small business skills and training boost.
Maximising Your Claims
The bonus deduction is available for spending on depreciating assets and improvements that boost energy efficiency. Here’s a breakdown of what can be claimed;
Eligible Depreciating Assets
The small business energy incentive applies to costs incurred for depreciating assets that are both first used or installed for any purpose and ready for a taxable purpose between 1 July 2023 and 30 June 2024. This means you must have purchased and utilised the asset within this period to qualify.
Eligible depreciating assets include:
- Electricity Use: The asset should use electricity.
- Energy Efficiency: The asset must be more energy-efficient than a comparable new fossil fuel asset or more efficient than the one it replaces.
- This includes a wide range of equipment such as electric motors, energy-efficient refrigeration systems, virtual power plant-enabled battery systems, and more. For instance, installing a reverse cycle air conditioner to replace a gas heater, upgrading to energy-efficient appliances, or fitting an electric motor instead of a diesel engine are all eligible expenses.
Example: Consider A Co Pty Ltd, a small business that purchases a new refrigeration system on 30 October 2023 for $1,100 (GST inclusive). They are entitled to a $100 GST credit. The new system uses less electricity than the old one, making it eligible for the energy incentive. Consequently, A Co can claim a $200 bonus deduction (20% of $1,000).
Assets can be second-hand, provided the comparable new asset is available in the market. Additionally, expenditure on electrifying equipment, upgrading appliances, installing time-shifting devices, or adding energy storage solutions like batteries are all covered under this incentive.
Important Note: Ensure that any asset or improvement claimed under this incentive genuinely enhances energy efficiency, and maintain detailed records to support your claims.
Improvements to Existing Assets
Not only does the small business energy incentive apply to new depreciating assets, but it also covers improvements to existing assets. To qualify, these improvements must have been made between 1 July 2023 and 30 June 2024. This timeframe ensures that the expenditure is eligible for the bonus deduction.
Enhancing Existing Assets
Improvements to existing assets can be eligible if they meet the following criteria:
- Electricity Use: The improvement should enable the asset to use only electricity or energy generated from renewable sources instead of fossil fuels.
- Energy Efficiency: The improvement should make the asset more energy-efficient, provided that the asset exclusively uses electricity or renewable energy.
- This includes installing variable speed drives to electric motors, upgrading components to enhance efficiency, or adding energy storage solutions that facilitate electricity usage monitoring.
Example: Imagine B Co Pty Ltd, a small business that purchases and installs ten variable speed drives for their electric motors on 15 July 2023 at a cost of $55,000 (GST inclusive). They claim a $5,000 GST credit. These drives significantly improve the motors’ efficiency. As a result, B Co can claim a $10,000 bonus deduction (20% of $50,000).
The bonus deduction encourages businesses to invest in energy-efficient improvements, offering significant tax benefits. Enhancements that allow assets to operate more efficiently, store energy, or shift usage to off-peak times are prime candidates for this incentive.
This benefit makes the incentive a valuable opportunity for any small business looking to modernise its equipment and reduce its carbon footprint.
Keeping Accurate Records
Keeping good records is crucial. Make you have :
- Documented Expenditures: Kept receipts and invoices.
- Compare Assets: Note how you determined the new asset’s efficiency.
- Electronic Records: Ensure they are accessible.
Depreciation and Instant Asset Write-Off
For businesses with an annual turnover under $10 million, it’s possible to benefit from both the instant asset write-off and the small business energy incentive within the 2023-24 financial year.
The bonus deduction amounts to 20% of the qualifying expenditure. This deduction applies irrespective of whether you opt for an immediate write-off or depreciate the asset over time.
This approach allows small businesses to maximize tax benefits by leveraging both the instant asset write-off and the energy incentive, encouraging investments in energy-efficient assets and upgrades.
Exclusions: What Doesn’t Qualify
While the small business energy incentive is generous, certain expenditures are excluded from the bonus deduction.
Here’s what you can’t claim:
- Fossil Fuel Assets: Any assets that primarily use fossil fuels, unless their fossil fuel use is merely incidental, such as oil-based lubricants.
- Electricity Generators: Assets whose main purpose is generating electricity, like solar panels, are not eligible.
- Capital Works: Expenditure on buildings and other structures does not qualify.
- Vehicles: This includes all motor vehicles, even hybrids and electric ones.
- Software Development Pools: Expenses related to software development cannot be claimed under this incentive.
- Financing Costs: Interest and borrowing expenses are also excluded.
Additionally, if your business is eligible for the research and development (R&D) tax incentive, you cannot claim both the R&D deduction and the small business energy incentive on the same expenditure. The R&D tax incentive provides a notional deduction for research and development activities, which supersedes other deductions under taxation law. However, you can still claim the bonus deduction based on what the R&D deduction would have been.
Understanding these exclusions is crucial for accurately claiming the bonus deduction and ensuring compliance with tax regulations. By focusing on eligible expenditures, businesses can make the most of the small business energy incentive and enhance their energy efficiency efforts.
Timing Your Claims: When and How to Apply
Understanding the timing of your claims is essential to ensure you benefit fully from the small business energy incentive. Here’s how it works:
Claiming for New Assets
You generally claim the bonus deduction in the income year when the expenditure is incurred. For new depreciating assets, this means you need to claim in the year the asset is first used or installed and ready for use for a taxable purpose, which must be within the bonus period from 1 July 2023 to 30 June 2024.
Improvements to Existing Assets
For improvements made to existing assets, the bonus deduction must be claimed in the year the expenditure on the improvement is incurred. Ensure these improvements also fall within the bonus period to qualify.
Special Cases for Different Accounting Periods
If your business operates on a substituted accounting period, you might be able to claim the bonus deduction across multiple income years. The key requirement is that the eligible asset was first used or installed, or the improvement costs were incurred, during the bonus period.
Maximum Deduction Limit
Remember, the maximum amount you can claim as a bonus deduction under the energy incentive is capped at $20,000. If you spread your claims across more than one income year, ensure that the total claimed does not exceed this cap. For instance, if you claim $10,000 in one year, the maximum you can claim in the subsequent year is $10,000.
Wrap-Up
The small business energy incentive is a golden opportunity to save on your energy bills and enhance your business’s efficiency. With a 20% bonus deduction on eligible expenditures, you can make impactful changes without breaking the bank. Don’t miss out on this chance to boost your savings and sustainability!
Think your business might be eligible?
Book a call with us today to learn more about how the small business energy incentive can benefit you. Let’s make a difference together!