Government is encouraging investment in renewable energy—but as always, there are caveats.
While this year’s Budget was largely devoid of surprises, Finance Minister Enoch Godongwana made one announcement that was widely anticipated following President Cyril Ramaphosa’s State of the Nation speech, and will hopefully help taxpayers alleviate some of the pain of dealing with loadshedding.
Renewable energy tax incentive for businesses:
According to the Budget Review, the tax incentive available for businesses to promote renewable energy will be temporarily expanded to encourage rapid private investment to alleviate the energy crisis.
This will be an extension to the current Section 12B capital allowances aimed at encouraging investment in renewable energy generation equipment. This included equipment in the generation of electricity from solar, wind, or hydro installations up to a maximum of 30 MW, as well as biomass generation projects.
Section 12B as it stands provides for an accelerated write-off period of three years, allowing 50% to be written off in Year 1, 30% in Year 2, and 20% in Year 3. For photovoltaic (PV) projects generating less than 1 MW, a deduction of 100% of the cost was available in Year 1.
The 2023 Budget has expanded the incentive available under Section 12B for a period of two years. For investments brought into use for the first time between 1 March 2023 and 28 February 2025, businesses will be able to claim a 125 per cent deduction in Year 1.
The thresholds on generation capacity have also been removed, which means that projects generating less than 1 MW or more than 30 MW will qualify for this expanded incentive.
It must be noted that while the allowance is only available for equipment brought into use for the first time by the taxpayer, this does not mean that the equipment concerned needs to be new (i.e. second-hand / refurbished equipment also qualifies). The purpose of the wording of Section 12B is to prevent abuse whereby a taxpayer attempts to claim the allowance twice on the same equipment.
The tax savings available to businesses making investments in renewable energy during the qualifying period are considerable. For example, a renewable energy project costing R1 million would qualify for a deduction of R1.25 million. At the current corporate tax rate of 27%, this results in a tax saving of R337 500.
Rooftop solar tax incentive:
Unlike most tax incentives where only businesses benefit, the Finance Minister also announced an incentive for individuals to invest in solar PV panels. However, in this instance the equipment purchased must be brand new and never used before, i.e. used/refurbished equipment will not qualify.
Individuals will be able to receive a tax rebate to the value of 25 per cent of the cost of new solar PV panels. To qualify, the solar panels must be purchased and installed at a private residence, and a certificate of compliance for the installation must be issued.
The wording ‘tax rebate’ contained in the Budget Review appears to indicate that the 25% incentive will be an actual tax credit, rather than a deduction as is the case for the business incentive. This means that, for example, an individual investing in solar PV panels costing R40 000, their 2023/24 tax liability will reduce by R10 000.
The rebate is only available for the actual solar PV panels, i.e. inverters, batteries, and any other ancillary equipment, and the installation costs, do not qualify. Furthermore, qualifying expenditure eligible for tax relief is capped at R60 000, translating to a maximum tax rebate of R15 000.
Unlike the business incentive, this incentive will however only be available for one year, i.e. the 2023/24 tax year (being the period from 1 March 2023 to 29 February 2024).
The Budget Review is silent on the position whereby a taxpayer uses a portion of their residential premises for business purposes.
It could therefore be argued that the residential portion could qualify for the individual tax rebate, while the business portion could qualify for the expanded Section 12B incentive. However, if this is the case, taxpayers can be certain that SARS will scrutinise such claims extremely closely, and appropriate apportionment (most likely based on square meterage) will be strictly applied.
It will therefore be interesting to see what comes out in the amendment Bills when they are published later this year.
WRITTEN BY Steven Jones
Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).