Small businesses with an aggregated annual turnover of less than $50m could soon get a bonus 20% deduction for the cost of eligible depreciating asses that support electrification and more efficient use of energy.
While the SBEI proposal is still under consultation, once implemented the bonus deduction will apply to eligible assets first used or installed, and eligible improvement costs incurred, betwe en 1 July 2023 and 30 June 2024.
Eligible depreciating assets include any asset that: uses electricity and there is a new reasonably comparable asset that uses a fossil fuel available in the market – for example, a electric reverse cycle air-conditioner in place of a gas heater may considered to be a eligible depreciating asset.
However, the asset must be reasonably comparable to a new asset that uses fossil fuel available in the market at the time it is first used or installed ready for use. Assets will not qualify for the bonus deduction if the only reasonably comparable asset that uses a fossil fuel is a second-hand asset, uses electricity and is more energy efficient than the asset it is replacing or, if not a replacement, a new reasonably comparable asset available in the market – an asset that uses electricity may be eligible for the bonus deduction even if there is no comparable asset available on the market which uses a fossil fuel, in which case the energy efficiency of the asset will determine its eligibility.
Otherwise the energy rating label could be used the compare energy efficiency. is an energy storage, demand management or efficiency-improving asset – an asset may be eligible for the bonus deduction if it enables the storage of electricity, or the storage of energy that is generated from a renewable source (eg batteries). Assets can also qualify if they allow energy to be used at a different time (eg time-shifting devices) or are used in monitoring energy use (eg data-logging devices).
In order to claim the bonus deduction, the business must make the expenditure for a taxable purpose; therefore, costs will need to be apportioned if the asset has a mix of private and business use.
There are also assets specifically excluded from the bonus deduction even where they would otherwise meet the requirements, consisting of: assets, and expenditure on assets, that can use a fossil fuel, unless the use is merely incidental (eg solar hot water systems that use gas to heat water when there is no solar-heated water available is not eligible); assets which have the sole or predominant purpose of generating electricity (eg solar 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.
If both the small business and the asset meets eligibility requirements, the amount of bonus deduction is 20% of the total eligible cost, up to a maximum of $20,000 across the bonus period. The $20,000 cap is a limit on the total bonus deduction that may be claimed across multiple assets.
Income tax benefit of the SBEI
Unfortunately this incentive will not save small businesses much tax at all.
To illustrate, here are two scenarios for a small business operating through the most common two business structures:
Most sole traders (those with taxable income of between $45,000 and $120,000) have a marginal tax rate of 34.5% including the medicare levy.
Let’s say Jim Sole Trader buys an eligible asset worth $10,000 and he has a marginal tax rate of 34.5%.
The after tax benefit of the SBEI to Jim will be:
$10,000 x 34.5% x 20% = $690.
This equates to a 6.9% after tax discount off the purchase price.
Maybe a sweetener for Jim to buy if he was already considering such a purchase, but hardly enough to make him go out and spend $10,000 just to save $690.
Pty Ltd Company
The saving is even less if a Pty Ltd Company purchases the asset.
The after tax benefit of the SBEI for a Pty Ltd Company buying the same eligible asset of $10,000 will be:
$10,000 x 25% x 20% = $500.
This equates to a 5% after tax discount off the purchase price.
Hardly any incentive for a Pty Ltd to buy assets unless there was already a need to do so.
This is a typical Australian government tax “incentive”. A lot of hype but not much benefit.
Many retailers have sales at varying times with discounts ranging between 5% to 30%. It’s a fair bet small businesses could save as much or more than the SBEI just by shopping around.
This “incentive” is fine for your small business if you were intending to buy an eligible asset, but don’t spend $$ just to get this paltry discount.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.