Australia: Tax breaks for green buildings

Last Updated: 2 February 2011
Article by Tom Cantwell

Fresh from the implementation of the Commercial Building Disclosure (CBD) laws in November 2010, the Commonwealth Government is pressing ahead with its drive to green Australia's building stock.

The CBD program requires owners of commercial office buildings of greater than 2000m2 to disclose the energy efficiency of the buildings during a sale and for major leases.  This compulsory regime has increased the focus within the property industry on the energy efficiency of the existing building stock and is a move away from the former voluntary rating processes.

However, the cost of retrofitting existing buildings to make them more energy efficient has remained the major stumbling block for industry and has delayed the widescale take up of energy efficient retrofits.  Assistant Treasurer Bill Shorten and Parliamentary Secretary for Climate Change & Energy Efficiency Mark Dreyfus have now jointly released the government's consultation paper on their proposed tax breaks for green buildings scheme, which aims to increase the payback from green retrofits and overcome this hurdle. 

Scheme overview

The scheme proposes a one-off bonus tax deduction of 50% of the cost of eligible improvements.  This tax deduction is in addition to the normal capital allowance deduction, enabling 150% of their total value to be deducted over their life and providing significant cash flow benefits to owners upgrading their properties. 

The scheme is open to existing commercial office buildings, shopping centres and hotels, provided they are currently covered by the National Australian Building Environment Rating System (NABERS) and have below average energy performance.  NABERS is managed by the NSW Department of Energy, Climate Change & Water on behalf of all Australian states and territories and is becoming the de facto energy efficiency standard, having also been adopted by the mandatory CBD program. 

Being limited to buildings with a NABERS rating of two stars or less, the scheme will deliver the most benefit by improving the worst performing buildings.  In order to qualify, the energy efficiency of the building must lift by at least two stars and achieve a minimum four-star rating.

The scheme is due to commence from 1 July 2011 and run until 30 June 2015, with $1 billion allocated for the life of the scheme.  With this budget likely to be rationed, one of the questions to be resolved is whether the deductions will be granted on a 'first come, first served' basis, or whether only the best-performing projects will be chosen.

A global approach

The consultation paper proposes that a global approach be applied to the costing of the energy efficient elements.  This is appropriate as most retrofits seeking to achieve significant energy efficiency improvements include many different elements, such as improving lighting, heating, ventilation air-conditioning systems, upgrading building management and control systems, and more rarely improvements to the façade or building fabric. 

Where many parts of the retrofit work together to deliver the energy efficiency improvement, it is not clear how the amount eligible for the tax break will be calculated.  For instance, the consultation paper contemplates that non-capital expenditure on a post-installation NABERS assessment, development or installation of improved software for building automation and costs associated with commissioning of the building may be examples of non-construction costs to which the tax break applies.  However, it is unclear how fees payable to consultants such as architects and engineers, ESD advisors or NABERS assessors for pre-submission evaluations would be handled.

Key requirements

The scheme does not apply 'as of right' or as a self-assessment regime.  To obtain the tax bonus, a building owner must complete three stages with significant approvals and reporting obligations:

  • Stage 1: The submission of the initial retrofit proposal, which has to be accepted and registered by the Department of Climate Change & Energy Efficiency (DCCEE).
  • Stage 2: The implementation of the retrofit.  The current proposal is that any contracts entered into prior to the retrofit being registered would not result in eligible expenditure, even if the works took place later.  This may lead to significant delays in the timing of works and be difficult to manage from a practical perspective.  Biannual reports must be submitted to DCCEE throughout this stage.
  • Stage 3: Upon completion of the works, a new four star-plus NABERS rating must be obtained. Various compliance materials must be compiled and submitted to DCCEE for approval and for DCCEE to issue a certificate confirming eligibility of the project for the tax bonus. As a NABERS rating requires 12 months of operational data after the building is commissioned and optimised, two years has been allowed for the issue of the NABERS rating, with the ability to request extensions if building performance has not achieved the required level.

It is only after DCCEE has issued a certificate that the bonus tax deduction could be claimed.  There would therefore be no certainty at the commencement of the project whether or not the tax break could ultimately be achieved, or the timing of the deduction.  This will make budgeting for the impact of the tax break difficult for building owners. 

A number of completed projects have struggled to perform at the level of energy efficiency predicted by the design modelling. It will be critical to ensure that all assumptions made in the modelling process are appropriate so that the building will achieve the required rating upon the retrofit being completed. 

As for the CBD program, the proposal is for much of the information in applications to be accessible through an online register.  This should prove a useful tool for the future planning of retrofits, with much greater transparency of costs and benefits. 

The scheme is undergoing consultation with the public and the property industry until 18 February 2011, prior to its details being finalised.  Information sessions are currently being held in Melbourne, Brisbane and Sydney, with an online webinar on Thursday 3 February 2011 between 2pm and 4pm.  Submissions can be made online to DCCEE.

We will provide further updates after completion of the consultation period and release of the final scheme.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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