National Treasury has published a document that clarifies aspects of the temporarily enhanced renewable energy tax incentive for businesses.
The enhanced tax incentive will be effected by inserting section 12BA into the Income Tax Act as provided for in the 2023 Taxation Laws Amendment Bill (TLAB).
In October, National Treasury provided its responses to the submissions and comments received on the TLAB, at a meeting of the National Assembly’s Standing Committee on Finance (Scof). Treasury pointed out that its “FAQ” document is based on those responses, not the final legislation.
The incentive can be claimed by businesses that are registered for corporate income tax (CIT) and by sole proprietors and other taxpayers who conduct business activities.
Businesses can claim an upfront deduction of 125% of the cost incurred to acquire qualifying assets used in the generation of electricity against their taxable income. There is no limit on the electricity that can be generated.
The main qualifying criteria are:
- The business must own the asset.
- The asset must be used in the production of income.
- Only new and unused assets qualify.
- The assets must be brought into use for the first time on or after 1 March 2023 and before 1 March 2025.
- The assets must be used to generate electricity from any of the following renewable energy sources: photovoltaic solar energy; concentrated solar energy; wind power; hydropower; or biomass compromising organic wastes, landfill gas, or plant material.
Other terms and conditions
- Businesses can only deduct expenses incurred either in respect of section 12B or section 12BA, but not both, in respect of assets brought into use during the two-year period.
- A small business corporation can only benefit from section 12E or section 12BA, not both.
- Businesses that purchase qualifying assets using a combination of their own funds and funding received from government in the form of a grant can only benefit from the portion of expenditure incurred using the taxpayer’s own funds as an allowance under 12BA. For example, if the qualifying assets cost R1 000, and R500 was paid out of the business’s own funds, the section 12BA allowance will be: R500 x 1.25 = R625.
- There will be a recoupment if a business disposes of an asset where an enhanced renewable energy tax allowance was granted. If the disposal occurs from 1 March 2026 onwards, the standard recoupment provisions apply. If the recoupment occurs before 1 March 2026, there will be an additional recoupment limited to 25% of the cost of the asset being disposed.
Which assets qualify?
Some commentators said the absence of a definition of “eligible assets” creates confusion over which assets do and do not qualify for the incentive. The confusion is also because the solar rebate for individual taxpayers specifically excludes batteries and inverters.
Treasury said it would be difficult to create a definition that includes a list of assets because some cases may be viewed differently depending on which assets are being claimed for.
It said the incentive is not solely for assets that produce electricity. If storage and conversion assets form part of a system of assets that together produce electricity, it is likely they will qualify for the incentive.
But if a taxpayer is simply drawing power from the grid and storing it to reduce the impact of loadshedding, such storage assets will likely not qualify. The latter is not aligned to the policy objective of encouraging more generation capacity and should not be claimable under section 12BA. This is why it is important that the South African Revenue Service can apply a “facts and circumstances” approach to each case.
The supporting structures on which assets that are used in the generation of electricity are mounted qualify for the incentive.
“It is important that the foundation or supporting structure is designed specifically for that asset and constructed in such a manner that it is or should be regarded as being integrated with that asset; and the useful life of the foundation or supporting structure is or will be limited to the useful life of the asset mounted thereon or affixed thereto,” the FAQ document says.
Operating or finance lease arrangements qualify
Commentators questioned some of the constraints in the leasing space – for example, why operating leases are eligible, whereas finance leases are subject to stricter requirements. Some commentators said only finance leases should qualify for the incentive. The draft legislation requires that the lessee in a finance lease arrangement conduct a trade to be eligible for the incentive.
Treasury said that, from a strict policy eligibility perspective, businesses that lease out qualifying assets under operating lease arrangements do not require a subsidy because the demand for their investment is driven by the businesses and individuals who are leasing the assets.
However, because section 12BA’s design was based on section 12B, lessors in an operating lease context were included from the outset because they own the assets. Ownership is an important criterion that runs throughout the Income Tax Act because it is a prerequisite for capital allowances. It would be unfair to remove eligibility at this stage because the incentive has commenced, and investors require certainty. For this reason, Treasury will apply the same treatment to finance lease arrangements. The trade requirement for lessees will be removed.
Lessors that invest in qualifying assets that are leased to lessees under operating or finance lease arrangements will be able to benefit from the incentive.
Because the ownership of assets only transfers at the end of a finance lease arrangement and the incentive is only available for two years, the lessors of these types of arrangements will be eligible to claim the section 12BA incentive, Treasury said.
Calls for a longer timeframe rejected
Treasury rejected calls for the two-year period to be extended. Commentators said the period will result in the exclusion of several large projects that are in the pipeline, adding that many projects are delayed by the need to obtain regulatory approval.
In its response to Scof, Treasury’s reasons for not extending the period included:
- The purpose of the incentive is to change behaviour and encourage as many businesses as possible to invest in renewable energy generation capacity as soon as possible – that is, to accelerate investment within a “constrained fiscal envelope”.
- The intention of the incentive is not to assist with projects that were already planned and would have proceeded without government assistance. For example, the independent power producer projects will occur regardless because their business model is to generate electricity.
- Treasury recognises that companies investing in large-scale embedded electricity generation require regulatory approval for offsite grid connections, and approvals have been taking longer than they should. However, the Department of Trade Industry and Competition “a one-stop shop”, and the time taken for approvals “is being reduced”.
- The government wants to encourage businesses that do not have the means to invest in electricity generation. Many such businesses do not meet the generation threshold required to apply for regulatory approval or perform environmental impact assessments because they will be able to produce electricity on-site, so approvals are not a stumbling block for them.
- Treasury’s sense is that small and medium firms requiring systems of less than 1MW (less than 2 000 solar panels and falling into the small-scale embedded generation category) will be able to make use of the incentive within the two-year timeframe. This should be the case even if registration with the National Energy Regulator of South Africa and municipal or Eskom approval is required.
Businesses can use the incentive and the EBB Scheme
The tax incentive is complemented by the Energy Bounce-Back (EBB) Loan Guarantee Scheme, where EBB loans will be accessible through participating banks, development finance institutions, and non-bank SME finance providers. Read Treasury’s EBB FAQ document for more information.
How to claim
Businesses that are registered for CIT will be able to claim the incentive in their ITR14 return. Sole proprietors registered for personal income tax will claim when completing their ITR12 return. Trusts conducting business and registered for income tax will claim when completing their ITR12T.
