The continued rollout of loadshedding in South Africa has forced businesses to dig-deep into their pockets to keep their doors open amidst the country’s energy crisis. With productivity at an all-time low, the economy, at large, is desperate for a feasible solution. In an attempt to encourage greater private investment by businesses in renewable energy sources, government has turned to Sars for help.
Sars has taken on the responsibility of enhancing the current tax incentive for businesses, by increasing the deduction to 125%. This extends to wind, solar, hydro, and similar forms of renewable energy sources that can alleviate the country’s energy crisis.
Following the publication of the draft laws introducing this proposed tax incentive, a workshop was held by National Treasury, as well as various stakeholders, on 22 May 2023. During the workshop, National Treasury ventilated key issues, including those raised by businesses through the public comment process.
How does it work?
The draft laws currently state that the proposed tax incentive may only be claimed where assets used in the production of renewable energy are purchased in terms of an instalment credit agreement. However, National Treasury did clarify that this was a mere oversight by its drafters and will soon be corrected. It was also confirmed that qualifying assets for businesses investing in solar energy, as an example, will include not only solar panels themselves, but batteries, inverters, and the like.
The upshot is that the tax incentive will operate as a deduction, reducing the taxable income of businesses, and in turn, their tax liability.
Terms and conditions apply…
Apart from the technical nuances, businesses are also curious about the proposed tax incentive’s “fine print”. One detail that is clear from reading the draft laws, is that unlike the new tax incentive for individuals, which is capped at an amount of R15 000, there will be no monetary ceiling for businesses. This is best illustrated by way of an example; A business opting to install solar panels at an overall cost of R5-million can claim an upfront higher-than-cost deduction of R6.25-million.
Having said that, businesses should still be mindful of the most notable draft terms and conditions, which are as follows –
- The deduction can only be claimed for assets “brought into use for the first time” between 1 March 2023 and 28 February 2025;
- It can only be claimed within the 2-year time period, whereafter the tax incentive will reach its end; and
- Where a similar deduction was previously claimed under the existing section 12B of the Income Tax Act, they will unfortunately not qualify to claim this tax incentive as well.
Businesses who are considering the installation of renewable energy sources are therefore encouraged to move towards an implementation phase without delay, to ensure that they reap the benefits of this favourable tax incentive.
Written by Delano Abdoll, Team Leader: Cross Border Taxation at Tax Consulting SA; and Micaela Paschini, Tax Attorney at Tax Consulting SA