Small business energy incentive

Small businesses can receive a 20% bonus deduction on expenditure to improve energy efficiency.

Published 30 June 2024

About the energy incentive

The small business energy incentive is designed to help businesses improve energy efficiency and save on energy bills.

Businesses with an aggregated annual turnover of less than $50 million will have access to a bonus 20% tax deduction for the cost of eligible assets and improvements that support more efficient use of energy.

The incentive applies to eligible expenditure on assets between 1 July 2023 and 30 June 2024 (the ‘bonus period’).

The incentive also applies to eligible expenditure on improvements to existing assets incurred during the bonus period.

Up to $100,000 of total expenditure will be eligible for the incentive, with the maximum bonus tax deduction being $20,000.

The bonus deduction is separate and additional to other deductions you would ordinarily claim under taxation law.

Eligibility

The following must be met to access the small business energy incentive:

Your business needs to meet the standard aggregated annual turnover rules (with an increased $50 million threshold).
The expenditure being claimed must be deductible to your business under other provisions in the taxation law.
For expenditure on eligible assets during the bonus period the asset must be both:
- first used or installed ready for use for any purpose, and
- used or installed ready for use for a taxable purpose.
For most entities, this means that if you first use or install an asset for any purpose before 1 July 2023, you cannot claim a bonus deduction for the cost of the asset. This is the case even if you do not use the asset for a taxable purpose until the bonus period.
For improvements to existing assets, the expenditure must be incurred during the bonus period.

Find out if you are eligible for other bonus deductions at Small business skills and training boost.

What you can claim

The bonus deduction is available for eligible expenditure on depreciating assets and improvements to assets that increase the energy efficiency of your business.

Depreciating asset

The bonus deduction applies to expenditure on a depreciating asset that is both first used or installed ready for use for any purpose, and installed ready for use for a taxable purpose, between 1 July 2023 and 30 June 2024.

A depreciating asset may be eligible for the bonus deduction if it uses electricity and when one or more of the following apply:

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 you could have readily purchased the comparable asset either locally or on the internet in the same time period.

A depreciating asset may also be eligible if it is an energy storage, time-shifting or monitoring asset, or an asset that 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.

Expenditure eligible for the bonus deduction may include, but is not limited to, expenditure on:

electrifying equipment (for example, installing a reverse cycle air conditioner in place of a gas heater)
upgrading to more energy efficient appliances and equipment (for example, energy efficient refrigeration systems)
installing time-shifting devices which allow electrical appliances to operate at off-peak times
replacing a diesel engine with an electric motor
installing a Virtual Power Plant enabled battery system.

Where the expenditure is partly for private purposes, the bonus deduction is worked out with reference to 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.

Example: Claiming the bonus deduction for an eligible depreciating asset

A Co Pty Ltd (A Co) is a small business entity. On 30 October 2023, A Co purchases and installs a refrigeration system at a cost of $1,100 (GST inclusive) to replace an old refrigeration system. A Co is registered for GST and entitled to a GST credit of $100.

Using the electricity consumption information provided by the manufacturer, A Co compares the electricity consumption information of the new refrigeration system to the old one. The rate of energy consumption for the new refrigeration system is lower compared to the old system.

The expenditure on the new refrigeration system is an eligible depreciating asset as it is more energy efficient than the asset it is replacing. A Co can therefore claim a bonus deduction of $200 (20% of $1,000).

Depreciation deductions that A Co can claim for the cost of purchasing the new refrigeration system are not altered by the bonus deduction.

Improvements

In addition to newly acquired depreciating assets, improvements to existing depreciating assets may also be eligible for the bonus deduction. Expenditure on eligible improvements needs to be incurred between 1 July 2023 and 30 June 2024 to be eligible.

An improvement to a depreciating asset is eligible if it:

enables the asset to only use electricity, or energy that is generated from a renewable source, instead of a fossil fuel
enables the asset to be more energy efficient, provided that asset only uses electricity, or energy generated from a renewable source
facilitates the storage, time-shifting or usage monitoring of electricity, or energy generated from a renewable source (for example, a battery that stores electricity).

Example: Claiming the bonus deduction for an improvement to an eligible depreciating asset

B Co Pty Ltd (B Co) is a small business entity. On 15 July 2023, B Co purchases and installs ten variable speed drives that it fits to existing electric motors that it owns and uses in its business for a cost of $55,000 (GST inclusive). B Co is registered for GST and entitled to a GST credit of $5,000. The variable speed drives enable each motor to run more efficiently.

The expenditure on each variable speed drive is an eligible improvement to a depreciating asset. B Co can therefore claim a bonus deduction of $10,000 (20% of $50,000 - expense less the GST credits).

Depreciation deductions that B Co can claim for the cost of the existing electric motors ($50,000) are not altered by the bonus deduction. B Co Pty Ltd (B Co) is a small business entity. On 15 July 2023, B Co purchases and installs ten variable speed drives that it fits to existing electric motors that it owns and uses in its business for a cost of $50,000. The variable speed drives enable each motor to run more efficiently.

The expenditure on each variable speed drive is an eligible improvement to a depreciating asset. B Co can therefore claim a bonus deduction of $10,000 (20 per cent of $50,000).

Depreciation deductions that B Co can claim for the cost of the existing electric motors ($50,000) are not altered by the bonus deduction.

Cap on the bonus deduction

The maximum amount of expenditure eligible for the energy incentive is $100,000. This means that the bonus deduction is capped at $20,000 per entity.

Energy efficiency

You can use any reasonable basis to determine if an asset is more energy efficient than another asset. For example, you can refer to the electricity consumption information provided by the manufacturer to compare assets.

You can also check out energy.gov.auExternal Link for advice on energy saving opportunities. Energy ratings are one of the tools you can use for comparing the energy efficiency of appliances. The Energy Rating CalculatorExternal Link includes a star rating to compare different models – the more stars a product has, the greater the energy efficiency rating.

We will generally accept any reasonable basis for this including an assumption that that a new asset will be more energy efficient than a very old asset (for example, one manufactured before energy efficiency ratings were in place).

Record keeping

In line with general record keeping requirements for taxpayers, you should keep records that confirm the expenditure claimed and explain how you compared different assets when upgrading or making improvements. Any electronic records must be in a form we can access.

Depreciation and the instant asset write-off

If your business has an aggregated annual turnover of less than $10 million, you may be eligible to claim both the instant asset write-off and the energy incentive in the 2023–24 income year.

The bonus deduction is equal to 20% of eligible expenditure. This means regardless of the method of deduction you use (that is whether immediate or over time), the deduction is calculated based on the expenditure incurred on the eligible asset or improvement.

What you can't claim

You can’t claim the bonus deduction for:

assets and expenditure on assets that can use a fossil fuel (except if that use is merely incidental such as where an asset uses an oil-based lubricant)
assets and expenditure on assets which have the sole or predominant purpose of generating electricity (such as solar panels)
capital works
motor vehicles (including hybrid and electric vehicles) and expenditure on motor vehicles
expenditure allocated to software development pools
financing costs, including interest and borrowing expenses.

You cannot claim the bonus deduction if a balancing adjustment event occurs to the asset during the bonus period, unless the event is an involuntary disposal (for example, the asset is lost or destroyed).

Research and development tax incentive

If your business is entitled to a research and development (R&D) notional deduction under the R&D tax incentive program, you are only entitled to the notional R&D deduction and not a deduction under other taxation law. Your bonus deduction is still claimed based on what that other deduction would have been.

You can claim both the bonus deduction and the R&D notional deduction. The bonus deduction will not affect the amount of the R&D notional deduction. The R&D notional deduction amount is the actual expenditure amount, not the expenditure amount and the bonus deduction amount.

When you can claim

You generally claim a deduction in the income year the expenses are incurred.

For depreciating assets first used or installed ready for use during the bonus period, you must claim the bonus deduction in the income year in which the asset is first used or installed ready for use, which must also be the income year the asset is used for a taxable purpose.

For improvements made to existing assets, you must claim the bonus deduction in the income year in which the expenditure on the improvement is incurred.

An entity with a substituted accounting period may claim the bonus deduction across more than one income year, provided the eligible asset was first used or installed ready for use, or the improvement cost was incurred, during the bonus period.

The maximum amount you can claim as a bonus deduction under the energy incentive is $20,000. If you can claim the bonus deduction across more than one income year, then the maximum amount of the bonus deduction you can claim in a subsequent income year is reduced by any amount claimed in the previous income year. This ensures that the $20,000 cap on bonus deductions applies equally to businesses with normal accounting periods and with substituted accounting periods.

How to claim the energy incentive

To correctly claim the bonus deduction in your tax return, see:

QC102640