Providing small and medium businesses with a bonus 20% deduction of eligible costs that support electrification or more efficient energy use

This measure was first announced on 9 May 2023 by Treasurer Jim Chalmers when he handed down the 2023/24 Federal Budget.

The Bill contains a bonus 20% deduction for eligible expenditure that supports electrification or more efficient energy use, incurred between 1 July 2023 and 30 June 2024, for small and medium businesses (with an aggregated annual turnover of less than $50 million).

Eligible depreciating assets (and improvements to depreciating assets) that support electrification or more efficient energy use will need to be first used or installed ready for use (or the improvement cost incurred) between 1 July 2023 and 30 June 2024.

Up to $100,000 of total expenditure will be eligible for the incentive, with the maximum bonus tax deduction being $20,000 per business. If the asset has a private use component, then a proportionate adjustment will need to be applied to claim the bonus 20% deduction.

What assets are eligible depreciating assets?

An asset will be an eligible depreciating asset for the bonus 20% deduction if:

• it uses electricity and:
• there is a new reasonably comparable asset that uses a fossil fuel available in the market; or
• is more energy efficient than the asset it is replacing; or
• if it is not a replacement, it is more energy efficient than a new reasonably comparable asset available in the market; or
• it is an energy storage, time-shifting or monitoring asset, or an asset that improves the energy efficiency of another asset.

The measure should help small and medium businesses (with an aggregated annual turnover of less than $50 million) make investments in asset used for a taxable purpose, such as: electrifying their heating and cooling systems; upgrading to more efficient fridges and induction cooktops; and/or installing batteries and heat pumps.

What assets are excluded depreciating assets?

Some types of assets and expenditure are ineligible for the bonus deduction even where they would otherwise meet the requirements, and they may include:

• assets, and expenditure on assets, that can use a fossil fuel (ie. natural gas, oil and coal);
• assets, and expenditure on assets, which have the sole or predominant purpose of generating electricity (such as solar photovoltaic 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.

How does the bonus 20% deduction work?

The amount of the bonus deduction is simply calculated as 20% of the total eligible cost (ie. GST exclusive amount), up to a maximum bonus deduction of $20,000 between 1 July 2023 and 30 June 2024. The bonus 20% deduction is a one-off bonus deduction that does not affect any other deductions in the taxation law.

Under the current taxation law, for depreciating assets, small and medium businesses (with an aggregated annual turnover of less than $50 million) that use the simplified depreciation rules generally either deduct the cost of a depreciating asset in one income year (ie. IAWO), or place the asset in the simplified depreciation pool and depreciated at fixed rates over time.

Small and medium businesses (with an aggregated annual turnover of less than $50 million) may be eligible to claim both the instant asset write-off and the bonus 20% deduction.

Entities must claim the bonus deduction in the income year in which the asset is first used or installed ready for use for a taxable purpose, which will need to be the income year ending 30 June 2024.

An entity cannot claim the bonus deduction if it sells the asset between 1 July 2023 and 30 June 2024.

Limiting the amount of non-arm’s length income (NALI) that arises relating to a general non-arm’s length expense (NALE) and to narrow the application of these rules

The Bill contains amendments relating to the NALE rules which apply to expenditure incurred by superannuation funds which will:

• have application only to self-managed superannuation funds (SMSFs) and small APRA-regulated funds;
• limit the income of SMSFs and small APRA-regulated funds that are taxable as NALI from a general expense breach to twice the difference between the amount actually charged and the arm’s length expense amount that would have been charged for a general expense;
• distinguish between specific and general expenses for the purposes of the rules, for both general and specific expenses of the fund; and
• exempt expenses that were incurred or might have been expected to be incurred before the 2018–19 income year.

Basically, NALI will arise where a complying superannuation fund has a transaction with a third party and incurs a loss, outgoing or expenditure of an amount in gaining or producing the income, and the amount incurred is less than its actual market value.

What is the difference between a general or specific expense?

A general expense is an expense that is not related to gaining or producing income from a particular asset of the fund.  These expenses usually relate to the operation or obligations of the fund as a whole such as accounting fees.

For a general expense breach the amount of income that is taxed as NALI is twice the difference between the amount of the expense that might have been expected to be incurred had the parties been dealing at arm’s length, and the amount the entity did incur.

Where the entity did not incur any expense, the amount of income that is taxed as NALI is twice the amount that might have been expected to be incurred had the parties been dealing at arm’s length.

A specific expense is any other expense (that is not a general expense). An expense incurred in relation to gaining or producing income as a beneficiary of a trust through holding or acquiring a fixed entitlement to the income of a trust will always be a specific expense.

For a specific expense breach the current treatment will continue to apply, and the amount of income that will be taxed as NALI will be the amount of income derived from the scheme in which the parties were not dealing at arm’s length and be taxed at the highest marginal tax rate of 45%. Examples include maintenance fees for a property and fees for investment advice for a specific pool of investments.