The Taxation Laws Amendment Bill 2012 (TLAB) proposes an amendment to s12B of the Income Tax Act, No 58 of 1962 (Act) to provide a capital allowance in relation to supporting structures for renewable energy projects.
Section 12B of the Act, as it is currently drafted, provides a capital allowance in respect of machinery, plant, implements, utensils or articles used, among others, in the production of renewable energy on a 50/30/20 basis. With regard to the significant amounts to be spent on infrastructure relating to renewable energy projects, it becomes critically important for taxpayers to accurately identify all assets falling under the accelerated capital allowance regime.
With effect from 1 January 2013, supporting structures associated with machinery and plant, that are dedicated to the production of renewable energy, will also be included under the accelerated capital allowance regime. The Explanatory Memorandum to the TLAB states that the supporting structures must be mounted or fixed to the machinery or plant and must be integrated with that machinery or plant. It is further a requirement that the useful life of the supporting structure be limited to the useful life of the underlying plant and machinery.
The Explanatory Memorandum states that, as a technical matter, only plant and machinery are deductible under s12B of the Act and not any supporting structures. The aforementioned statement does not necessarily hold true as one would be able to argue that, depending on the type of renewable energy involved (such as wind, solar etc) the supporting structures would in any event constitute plant or machinery. The difficulty under s12B of the Act is that there are no judicial decisions on what constitutes plant or machinery for purposes of that section, as opposed to the wealth of case law on s12C of the Act, dealing with plant and machinery used in the process of manufacture.
What one would find in practice, specifically with regard to the current IPP Programme, is that successful bidders would be required to return the land on which the renewable energy infrastructure was built back to its original state on expiry of the power purchase agreement. This would mean that any supporting structure would in any event have a useful life equal to the plant or machinery used to generate electricity from renewable resources. Although the specific inclusion of supporting structures under s12B of the Act is welcomed, it still places the onus on the taxpayer to prove to SARS that the relevant supporting structure is used in the production of renewable energy.
Given the amounts involved, it is recommended that taxpayers approach SARS for a Binding Private Ruling to obtain clarity as to the plant, machinery and supporting structures qualifying for the accelerated capital allowance regime under s12B of the Act.
Establishing what constitutes plant or machinery is but one part of the equation as the most difficult aspect under s12B of the Act, in my view, would be to establish which assets are used in the 'generation of electricity', which in its simplest form boils down to where the process of electricity generation starts and where that process ends. As no definition of 'electricity' exists in the Act, it may be useful for SARS to issue an interpretation note on s12B of the Act and possibly deal with the section as it applies to the use of different renewable energy technologies.
Written by Ruaan van Eeden, Director, Tax, Cliffe Dekker Hofmeyr