Considering that South Africa is amongst the top 20 countries in contribution to greenhouse gas emissions, the Government has introduced an environmental-related tax incentive to encourage cleaner low-carbon technologies that improve energy usage and addresses the concerns of climate change. Two of the tax incentives available to taxpayers are discussed in this article.
SECTION 12L OF THE ITA:
Section 12L of the Income Tax Act 58 of 1962 (“ITA”) provides as follows –
“For the purpose of determining the taxable income derived by any person from carrying on any trade in respect of any year of assessment ending before 1 January 2023, there must be allowed as a deduction from the income of that person an amount in respect of energy efficiency savings by that person in respect of that year of assessment determined in accordance with subsection (2), subject to subsection (3).”
In other words, a taxpayer can claim a deduction from its taxable income for all forms of energy savings resulting from the implementation of energy efficient measures in its activities performed in the carrying on of his trade, provided that all requirements of section 12L of the ITA are met.
The term “energy efficiency savings” is defined in the Regulations as follows –
“The difference between the actual amount of energy used in the carrying out of an activity or trade, in a specific period and the amount of energy that would have been used in the carrying out of the same activity or trade during the same period under the same conditions if the energy savings measure was not implemented.”
Any activity that results in an energy efficient saving may qualify for the deduction, including activities that use less energy to produce the same (or more) volumes of products or allows for more products being produced using the same amount of energy. The deduction of the energy efficiency savings is calculated at 95 cents per kilowatt hour multiplied by the number of kilowatt hours of energy efficiency savings.
It should be noted that a person may not claim a deduction in terms of section 12L where energy is generated from renewable sources other than energy generated from combined heat and power. In other words, any energy generated by way of biomass, geothermal, hydro power, ocean currents, solar energy, tidal waves or wind power will not qualify for the deduction, unless the electricity and heat is produced from fuel or an energy source which is a co-product, by-product, waste product or residual product of an underlying industrial process.
In order for a taxpayer to claim a deduction in terms of section 12L of the ITA, he must –
Register with the South African Energy Development Institute (“SANEDI”);
Appoint a measurement and verification professional to compile a report containing a computation of the energy efficiency savings for the relevant year of assessment (this report must contain a baseline report and a performance assessment report);
Submit the above report to SANEDI; and
Obtain an energy-efficiency performance certificate from SANEDI. The energy-efficiency performance certificate issued by SANEDI must comply with the requirements set out in section 12L(3) of the ITA.
Upon receipt of the energy-efficiency performance certificate from SANEDI, the taxpayer may claim the deduction from his taxable income. For example, if the energy-efficiency performance certificate reflects an annual energy efficiency saving of 100 000 KWh, the taxpayer may claim a deduction of R95 000 against his taxable income for the relevant year of assessment. If the annual energy efficiency savings are derived over two years of assessment, the deduction must be apportioned and claimed in the year of assessment in which it was derived. For example, if the energy savings commenced during October 2021, the taxpayer may only claim a deduction for the first four months in the 2022 year of assessment. The balance of the energy savings must be claimed as a deduction in the 2023 year of assessment.
Section 12B of the ITA:
Section 12B(1)(h) of the ITA provides that any machinery, implements, utensils and articles –
owned by the taxpayer or acquired by way of an instalment sale agreement; and
that is used in the taxpayer’s trade to generate electricity from renewable energy sources such as solar energy, wind power, hydro power or biomass;
may qualify for a capital allowance in the year of assessment in which it was brought into use for the first time.
In other words, the machinery, implements, utensils and articles must be brought into use for the purpose of the taxpayer’s trade to generate electricity from renewable energy sources such as solar energy, wind power, hydro power (limited to the production of electricity of no more than 30 megawatts) or biomass (comprising organic wastes, landfill gas or plant material).
The allowance under section 12B of the ITA only applies to machinery, implements, utensils and articles that was brought into use for the first time on or after 1 January 2016 and only apply to three categories of solar energy, namely –
Photovoltaic solar energy of more than one megawatt;
Photovoltaic solar energy that does not exceed one megawatt; and
Concentrated solar energy.
The capital allowance is calculated by multiplying the cost of the machinery, implements, utensils and articles (and/or any improvements to the aforesaid) by 50% in the first year, 30% in the second year and 20% in the third year of use. For example, if the taxpayer completed the installation of his solar panels at a cost of R250 000 and brought it into use during the 2020 year of assessment, he may qualify for a capital allowance of R125 000 in the 2020 year of assessment, R75 000 in the 2021 year of assessment and R50 000 in the 2022 year of assessment.
Where the machinery is used in the taxpayer’s trade to generate electricity from photovoltaic solar energy (not exceeding one megawatt), the taxpayer may claim the full allowance (i.e. 100% of the allowance) in the year in which it was brought into use for the first time. For example, if a taxpayer will qualify for a capital allowance of R250 000 (being the costs of installation of the solar panels) for the 2022 year of assessment, if the solar panels will generate electricity from Photovoltaic solar energy of no more than one megawatt and was brought it into use during the 2022 year of assessment.
In addition to the above, the taxpayer may also claim a deduction under section 12B of the ITA for any expenses actually incurred for the supporting structures, the foundations, the roads and fences (and any supporting structures for such fences) that were constructed for purposes of trade of a person generating solar energy.
We hope the above information may provide more clarity on your tax position. Kindly feel free to contact us should you wish to learn more about the tax incentives available to you.