Is your company making use of all the renewable energy incentives at its disposal?

As South Africa seeks to embrace renewable energy and reduce its carbon footprint, solar power has emerged as a promising and environmentally conscious solution. Beyond the environmental benefits, installing solar panels on residential and commercial properties can also provide financial advantages. In addition to long-term savings on electricity bills, there are several tax benefits available to individuals and businesses who opt for solar energy. In this article we explore the various tax incentives associated with renewable energy installations in South Africa, specifically for companies (or business trusts and sole proprietors), highlighting their potential to promote sustainability while offering economic benefits.

Section 12B Tax Allowance 2023 financial year

Section 12B of the South African Income Tax Act 58 of 1962 (the Act) as it currently stands, provides for an allowance that is claimable on assets used by a taxpayer, for its trade, in the generation of electricity from renewable energy. In its current format, the Act distinguishes between photovoltaic solar energy of more than 1 megawatt in which case the allowance is deducted over 3 years (50% in year one of use, 30% in year two and 20% in year three of use). For photovoltaic solar energy not exceeding 1 megawatt, and brought into use in years of assessment commencing on or after 1 January 2016, the allowance is 100% of the cost of the asset in year one.

Where the above-mentioned asset is disposed of by the taxpayer, the normal section 8(4)(a) recoupments will apply i.e. the cost previously deducted from taxable income will be included in the taxpayer’s gross income to the extent recovered on disposal.

Section 12BA Enhanced Tax Allowance proposal for the 2024 financial year

Under the expanded incentive announced during the 28 February 2023 Budget speech, it is proposed that businesses will be able to claim a 125% deduction in the first year for renewable energy projects installed between 1 March 2023 to 28 February 2025 with no thresholds on generation capacity. If for example, a company invests R1,000,000 into solar energy during the 2024 financial year, the company will effectively only pay R662,500 (R1,000,000 – 27% of (R1,000,000/100 x 125)) for the installation given the effective R337,500 ((R1,000,000 x 125%) x 27% tax rate) tax incentive.

This tax allowance is wider than the Section 6C rebate proposed for individuals in that it includes the cost of installation and erection and for example the cost of inverters as well. However similar to the proposed individuals’ Section 6C rebate, assets must be brought into use for the first time by the taxpayer and here too, distribution boxes and batteries will for example be excluded as these items store energy as opposed to generating energy. The asset however has to be owned by the company or acquired under an instalment credit agreement (a similar owner requirement is not needed for individuals).

It is proposed that where the above-mentioned asset is disposed of by the taxpayer before 1 March 2026, the taxpayer should include 25% of the cost of this asset in the taxpayer’s taxable income and should also include further recoupment in terms of section 8(4)(a) to the extent recovered on disposal.

The proposed tax relief incentives were published in the 2023 Draft Taxation Laws Amendment Bill and the deadline for written comments to the National Treasury’s tax policy depository has closed. The law has not yet been promulgated at the time of this article but is expected to be passed in due course.

Value-Added Tax (VAT) Refund

Vendors who invest in renewable energy such as solar panels in South Africa can also benefit from a Value-Added Tax (VAT) refund of 15% if the renewable energy installation has been acquired by the vendor for use in the course of his business of making taxable supplies. This is of course subject to a valid VAT invoice being issued by the supplier. This refund effectively further reduces the upfront costs of installing solar panels, making them more affordable and appealing for business owners.

Conclusion

As South Africa continues its renewable energy journey, solar power presents an attractive and sustainable option for businesses. The tax benefits associated with solar panel installations play a pivotal role in making this transition more feasible and financially viable. VAT refunds coupled with the further Section 12BA Tax allowance help tremendously to reduce the financial burden and enhance the return on investment for solar energy systems. By leveraging these tax benefits, South African businesses can contribute to a greener future while enjoying substantial cost savings and potential financial gains.

For a more in-depth look at some of the practical and technical aspects of proposed tax relief initiatives concerning renewable energy, you can read the article by Johnny Davis Tax Incentive for rooftop solar panels.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).

August 28, 2023
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