Small Business Energy Incentive: Too little, and soon too late

MSMEs are the backbone of our communities. The UN says they have a potential to transform economies, foster job creation, and promote equitable economic growth if given adequate support.

The final point of ‘adequate support’ is a key caveat.

MSME’s hold great potential to contribute across economies on a range of measures. As a collective, they have the ability to contribute to solving some of the world’s most complex challenges – if given adequate support.

So, is the support that is currently available to MSMEs sufficient to address one of our most pressing issues – climate change?

As part of the 2023 Federal Budget, the Government announced the Small Business Energy Incentive (SBEI). Announcing the incentive in the lead up to budget night, Treasurer Jim Chalmers, Minister for Climate Change and Energy Chris Bowen, Assistant Minister for Climate Change and Energy Senator Jenny McAllister and Minister for Small Business Julie Collins told the press that the incentive would “help up to 3.8 million small‑ and medium‑sized businesses save energy and save on their energy bills”.

The bonus tax deduction for businesses with annual turnover of less than $50 million that spend up to $100,000 on energy-saving assets and upgrades, the media release said, would provide an “additional 20 per cent deduction on spending that supports electrification and more efficient use of energy”.

Ultimately, the incentive aims to support small businesses in adopting energy-efficient practices and technologies, reducing their carbon footprint and operating costs.

But questions remain as to whether this is enough, especially considering the substantial impact the pandemic had on small businesses, which may be limiting their ability to invest in assets and upgrades.

“While the SBEI has been widely applauded for its positive impact, there is an argument to be made that the incentive's effectiveness could be enhanced by making it a permanent measure with a lower eligibility threshold. By expanding the program's lifespan for smaller businesses, the country could achieve broader environmental and economic benefits,” Institute of Public Accountants general manager technical policy Tony Greco says.

Limited time, limited impact

Under the SBEI, eligible businesses can receive financial incentives and support services to implement energy-saving technologies. The primary goal is to empower small businesses to become more environmentally sustainable while reducing their energy expenses.

The SBEI has already showcased its potential for positive change. It encourages small businesses to adopt more energy-efficient practices, leading to reduced energy consumption and a smaller carbon footprint. For example, cafes and restaurants can switch from gas cooktops to more energy-efficient induction, while office-based businesses can upgrade outdated and inefficient equipment, or install modern heating and cooling assets that are more energy-efficient than their older counterparts.

“Tax incentives are an important tool that influences behaviour,” says Greco. “The IPA supports measures to incentivise MSMEs to transition to electrification from fossil fuels, as well as energy-efficient assets or improvements that lead to more efficient energy use.”

But while the SBEI may offset to costs of upgrades and assets that can reduce energy costs, benefitting individual businesses and contributing to a reduction in environmental impact, it’s not likely to incentivise those businesses that don’t already plan to invest on the relatively short timeline before the incentive expires at the end of the financial year.

“Of late, we have seen measures that are good but temporary in nature: The Skills and Training Boost, Technology Investment Boost and, now, the SBEI. All these bonus deductions aimed at MSMEs have good, intended policy objectives and are worthy of extended tax concessional treatment,” says Greco.

The utility of these measures extends beyond their limited legislative timeframe, and temporary measures serve to increase pressure of accounting professionals and MSME leaders who must stay abreast of each new measure’s eligibility criteria to maximise the incentives before they expire.

Ongoing measures incentivise impact

Daniel Milkovich, founder and director at Australian-designed men’s underwear brand Obviously Apparel, says his company will use the SBEI to invest in energy-efficient machinery and equipment to reduce energy consumption and carbon footprint, while improving efficiency.

“Our choice to invest in energy-efficient assets aligns with our broader sustainability goals,” says Milkovich.

“By reducing our energy consumption, we not only contribute to a greener future but also improve our operational efficiency and cost-effectiveness in the long run.”

Milkovich expects reduced energy costs, improved production efficiency, and enhanced brand reputation as a sustainable and environmentally conscious company. But while these payoffs are useful and the business has a comprehensive financial plan to ensure a smooth transition, Milkovich says the initial investment cost of the upgrade is an obstacle.

“If the Small Business Energy Incentive were available with higher deduction limits or on an ongoing basis, Obviously Apparel would continue to invest in energy-efficient upgrades and explore additional sustainability initiatives,” he says.

“We are committed to continuously improving our environmental practices and setting higher standards for the industry.”

SBEI: The lowdown from Tony Greco

The good
Instant asset write-off compatible

Eligible MSMEs can claim bonus deductions even if the expenditure incurred qualifies for the instant asset write-off – this is confirmed at para 1.71. The bonus deduction is equal to 20% of the eligible first and second element costs worked out under the incentive. This means that regardless of the method of deduction the entity takes (i.e. whether immediate or over time), the bonus deduction in respect of a depreciating asset is calculated based on the asset’s cost.

The bad
Substantiation requirements

This initiative requires taxpayers to prove additional eligibility criteria over and above normal substantiation requirements such as:

• Uses electricity and there is a new, reasonably comparable asset that uses a fossil fuel available in the market
• Uses electricity and is more energy efficient than the asset it is replacing or, if it is not a replacement, a new reasonably comparable asset available in the market
• Is an energy storage, demand management or efficiency-improving asset

When are these details captured? Ideally, this happens at time of purchase or as part of the evaluation process, so more data needs to be recorded.

These additional eligibility requirements will impose compliance burdens on taxpayers claiming the bonus deduction, depending on what level of substantiation is required from the ATO to prove eligibility.

We expect the ATO to have more to say on this after the tax law amendment passes into law

Spending limit

Caps out at $20,000 so only up to $100,000 of eligible expenditure is covered.

Temporary

Expiring with the FY is not ideal for a transition that’s longer term to help achieve our greenhouse emission goal. MSMEs need all the help they can get to move to more energy-efficient alternatives which, it is hoped, will also reduce their operating costs and reduce carbon footprint

The ugly
Exclusions

There is a list of exclusions that are ineligible for the bonus deduction. One disappointing exclusion is assets that have the sole or predominant purpose of generating electricity (such as solar panels)

This seems at odds with the fact that the storage of renewable energy (i.e. batteries) is in.

Many state-based incentives for solar installations exclude MSMEs.