Are you interested in understanding more about the commercial benefits of solar?
Adding solar to your business premises can be an important element to future proofing your business. Serious savings can be made where electricity is a direct cost of income production such as those within manufacturing industries, providing potential competitive advantages over those businesses that haven’t reduced the cost of their inputs.
Where electricity costs are a line item in a business’s overheads, still on-going savings are available, which lend to running a leaner business in better shape for those more trying periods.
Let’s take a look at this quote for a 13.2 kilowatt system with 48 solar panels. This system can save around $4000 per year in electricity costs, can be fully tax deductable under the current Small Business Asset Write-Off Initiative and costs in total $21998.35 before subtracting Small-scale Technology Certificates (STC’s) still available from the government.
As can be seen in Figure 2 below, combining existing government incentives with tax savings available seriously reduces your first year out of pocket costs.
Below summarizes projected cash flows relating to the investment over 10 years.
Of course, whilst this is the ‘big picture’ view of such an investment, it’s also important to be across the detail, while aware of the potential pros and cons of such a deal.
This example assumes eligibility to the Small Business Instant Asset Write Off, where an eligible small business may deduct in full asset purchases that are under $20000 exclusive of GST. As noted below it note 6, this threshold has now been lifted to assets below $30000 exclusive of GST.
The above example assumes that your business is GST registered and so able to claim the GST paid within the solar system total price. Under current rules, if your business was not registered for GST, in this example your total cost would be $21998.35 and thus you would not be eligible to apply the Small Business Instant Asset Write-off (though now under changes this amount would be eligible for the write off) and would not be able to claim back the GST component on your next BAS. In this case, these benefits would be replaced by a 15% write-off of the total costs. (ie that would amount to a $3300 deduction, which would provide a 1st year tax reduction of $907.43 if you are a company using the small business tax rate currently at 27.5%)
When GST registered, GST is required to be charged for the sale of the STC’s which are treated as a separate sale back to the solar supplier. This GST payable on the STC’s will add to your 1a total for the relevant period while the total GST paid within the cost is to be included in your 1b input tax credits claimed.
In this example, the STC’s effectively become an assessable income which offsets the total cost of the solar system.
You don’t have to take the discount on the solar system and instead can hold on to your STC’s with a view to trading them down the track. The prices of STC’s vary as any commodity is traded on an open market, thus gains or losses can be made on them if one would like to take that chance.
There was a proposal for the Small Business Instant Write Off to be extended to assets below $25000. Following the recent budget and passing of legislation on 4 April 2019, this measure has been enacted for the period 29 January to 2 April 2019. From 2 April 2019, the threshold now becomes $30000 for eligible businesses with turnover below $50m and the provision is set to end now on 30 June 2020.
Savings described in the above example are based on a 28c per kWh energy chare (ex gst) which allows for a $5000 annual saving with an 80% usage rate thus leaving a $4000 net saving.
Tax treatments illustrated are specific to this example which represents a typical arrangement of Coffs Solar. Tax treatments of similar type transactions may vary depending upon the character of your specific arrangement as documented. Providing your draft paperwork to your accountant prior to your transaction will allow them to provide you with specific advice specific to your circumstances, quantify the proposal for you and allow for an informed appraisal of the investment.
The above example assumes that taxes are paid at the current corporate Small Business Tax Rate, being 27.5%. Thus, the annual net cash flows showing from year 2 to year 10 (Figure 3) amount to the $4000 in solar savings less the additional tax paid on additional resulting profits. This is calculated as $4000-( 27.5% *4000)=$2900.
The Year 1 ‘tax effect’ shown in Figure 2, nets the above annual tax effect against the upfront tax savings that are available given current Small Business Tax Write Off arrangements.
You can use the generous tax incentive to seriously lessen the cash flow impact of reducing energy consumption going forward, whilst still available.
This example provides a Return on Investment over a 10 year period is 44.1% (4.41 per annum).
Positive cash flows over the 10 year period as illustrated above, thus reducing overheads over the medium to long term.
It’s likely customers and business associates will see your business as one that’s progressive and doing its bit to lower carbon emissions which may be good for the value of your goodwill.
Will your business need the cash at some stage? Often, it’s best to finance such assets given any potential future cash flow squeeze that may arise. It’s generally easier and cheaper to finance when such a system is new, rather than re-financing at a later stage.
Ensure your supplier has a professional, respected service reputation and you are covered by multiple warranties for true long-term product protection.
Ensure you are adequately insured as you are adding an insurable asset to your business.
For most businesses, the question should not be ‘if’ but ‘when’ to invest in solar. This is an important question though and requires thorough consideration of your business entity status, your business cash flow requirements, competing investment opportunities and the structure of the specific contract you enter. Your accountant’s advice on all of this can be invaluable!
Written by Michael Nealand (BFA CPA Dfp). Michael is principal of Michael Nealand Accounting.