By Associate Professor David Warneke, Tax Partner
A meaningful renewable energy incentive was announced in Budget 2023 whereby businesses will, for a limited period of two years, be able to claim a once-off capital allowance of 125% of the cost of items that are used to generate electricity from renewable sources. The draft wording of this proposal has been recently released for public comment as part of the initial batch of tax amendments proposed under the Draft Taxation Laws Amendment Bill of 2023. In this article, I will explore the proposal in more detail.
Allowance currently available
Under current income tax law, an incentive allowance exists for these items under section 12B of the Income Tax Act. The current allowances extend to a broad range of items (being machinery, plant, implements, utensils or articles) either owned by the taxpayer or acquired by the taxpayer as purchaser under an instalment credit agreement (as defined in the VAT Act – most commonly an instalment sale agreement), that are brought into use for the first time by the taxpayer for purposes of its trade, to be used by the taxpayer in the generation of electricity from renewable sources (being wind power, photovoltaic solar energy, hydropower or biomass). These items currently qualify for a three-year write off for income tax purposes. The write-off allowed is 50% of the cost in the year the item is brought into use, 30% in the next year and 20% in the third year.
Where the item is used to generate photovoltaic solar energy not exceeding 1 megawatt, the write off is accelerated to 100%, which is awarded once off in the tax year in which the item is brought into use.
As an anti-avoidance measure, the cost of an item for the purposes of the allowance is deemed to be the lesser of the actual cost to the taxpayer or an arm’s length direct cash cost on the date of acquisition, including the direct cost of installation or erection.
Where an item that qualifies for the allowance is mounted on or affixed to a foundation or supporting structure, provided certain requirements are met, the foundation or supporting structure is deemed to be a part of the item and the cost thereof will also qualify for the allowance.
Where the item is let by the taxpayer (as the lessor), the lease must either be an ‘operating lease’ as defined in section 23A of the Income Tax Act (briefly, a short term letting business where members of the general public may hire the item directly from the lessor for periods of less than one month, in addition to other requirements) or, if not an ‘operating lease’, then the lessee must derive amounts that constitute ‘income’ for purposes of its trade (generally this means that the lessee must not be a tax-exempt entity or a non-resident that is not subject to SA taxation in respect of its trade) and the lease term must be at least 5 years or, if shorter, cover the expected useful life of the asset.
If the item is disposed of, to the extent that the proceeds exceed the ‘tax value’ (being cost less accumulated income tax allowances to date), the allowances granted may be recouped for income tax purposes.
Proposed enhanced allowance
The proposal is that in respect of new and unused items that are brought into use for the first time by a taxpayer on or after 1 March 2023 but prior to 1 March 2025, the 50/30/20 3-year allowance regime currently available will be replaced by a 125% of cost, once-off allowance. The allowance will be granted in the year of assessment when the item is brought into use. The Income Tax Act will give effect to the proposal through the insertion of a new section 12BA. An anti-overlap rule exists whereby, if an allowance on an item has been granted to the taxpayer under section 12B, an allowance will not be available under the new section 12BA.
The current broad range of items in section 12B (plant, machinery, implements, utensils and other articles), will be replicated in section 12BA. Like section 12B, section 12BA will require that the items be used in the generation of electricity from wind power, photovoltaic solar energy, concentrated solar energy, hydropower to produce electricity or biomass compromising organic wastes, landfill gas or plant material. Unlike the section 12B allowance, there is no distinction between items used to generate photovoltaic solar energy not exceeding 1 megawatt and those that exceed 1 megawatt. Since the requirement is that the items be used in the generation of electricity, it appears that items such as batteries to store the electricity once the electricity is generated, will not qualify for the allowance (and by the same reasoning also would not qualify for the section 12B allowance, but may qualify for a wear-and-tear allowance in terms of section 11(e) of the Income Tax Act if the requirements of that section are met).
An apparent error in the proposal is that only items that are acquired by the taxpayer under an instalment credit agreement will qualify for the enhanced allowance. However, this is almost certainly an oversight that will be corrected in subsequent refinements of the proposal and provided the item is owned by the taxpayer or acquired as a purchaser under an instalment credit agreement as defined in the VAT Act, the asset should potentially qualify for the allowance. Where the taxpayer has retained the ownership of the asset as seller in terms of the definition of instalment credit agreement in the VAT Act, the taxpayer will not qualify for the allowance (as is also the case under section 12B).
The proposed wording mirrors the wording in section 12B regarding the determination of cost, the write-off of foundations or other supporting structures and the requirements for when the item is let by the taxpayer, as discussed above. However, it should be noted that the foundation or other supporting structure on which the item is mounted or affixed must be brought into use on or after 1 March 2023 and before 1 March 2025 for the foundation or other supporting structure to also qualify for the allowance.
Where the taxpayer disposes of the item, the current recoupment provisions in the Income Tax Act may apply and in addition, if the disposal is prior to 1 March 2026, 25 percent of the cost of the item that is recovered or recouped, must also be included in the taxpayer’s taxable income (recouped).
Consequential amendments are also proposed to ensure that if an allowance is granted to a taxpayer in terms of section 12BA, no allowance will be granted to the taxpayer for that item under the small business corporation, 50/30/20 3-year deduction regime, in section 12E.
A much less meaningful incentive which is also included in the draft legislation is the solar energy tax credit. This is proposed to be included in the Income Tax Act in terms of a new section 6C. This will give effect to the announcement by the Minister at Budget 2023 that individuals who incur costs in the installation of solar photovoltaic panels at their private residences and bring these into use on or after 1 March 2023 and before 1 March 2024, would qualify for a tax credit of 25% of the cost of the panels, up to a maximum amount of R15 000 per individual. In addition to the miserly amount of this credit relative to the cost of installation of solar photovoltaic panels, the administration of the credit is fraught with difficulties. For further information on this proposal, see https://www.bdo.co.za/en-za/insights/2023/tax/unpacking-the-new-solar-energy-tax-credit. Be that as it may, where an allowance otherwise qualifies for both the section 12BA or 12B allowance as well as the solar energy tax credit, an anti-overlap rule is proposed to ensure that the taxpayer will not be able to claim the solar energy tax credit in respect of an item for which a section 12BA or 12B allowance was granted.
Although there are various errors and ambiguities in this first draft of section 12BA, the allowance is welcomed as a meaningful incentive to taxpayers that will hopefully lead to significant investment by the private sector in electrical generation capacity in South Africa.
