Income Tax Act, as amended
Tired of high electricity costs and the dreaded load shedding disaster affecting your business? It’s time to consider use of solar power solutions and the associated tax deductibility.
Section 12B(1) and (2) of the Income Tax Act provides for a 50%/30%/20% income tax deduction over three years for certain machinery or plant owned by the taxpayer and which was brought into use for the first time by the taxpayer, for the purpose of trade in the generation of electricity from, amongst others, photovoltaic solar energy (not exceeding 1 megawatt) or concentrated solar energy.
The tax deduction also applies to any improvements to the qualifying plant or machinery which is not repairs related.
The reason for the change is to accelerate and incentivise the development of smaller photo-voltaic solar energy projects, as it has a low impact on water and environmental consumption. This is also intended to help address the energy shortages facing South Africa in a more environmentally friendly way.
Currently, company tax in South-Africa is 28%. With this incentive, you can deduct the value of your new solar power system as a depreciation expense from your companies’ profits. This means that your companies income tax liability will be decreased by the same value as the value of the installed solar system. This reduction can also be carried over to the next financial year as a deferred tax asset.
The cost of any asset for purposes of section 12B also includes the direct cost of installation or the erection thereof.
In a recent binding private ruling from SARS (BPR 311) the applicant proposed to install solar power systems at each of the sites it rented to reduce electricity costs. As each system will only be supplemented and not replace the electricity provided by the main grid, it was proposed to generate less than 1 megawatt of electricity.
The taxpayer will purchase the photovoltaic solar panels, appoint and pay independent contractors to perform the installation planning, procure and purchase all other relevant equipment and install the systems at the relevant sites. These systems at each site comprised of the panels, AC inverters, DC combiner boxes, racking, cables and wiring.
In terms of the ruling, the taxpayer was entitled to claim the costs in respect of all the components of each system in terms of sections 12B(1) and (2). As each system will generate less than 1 megawatt of electricity, 100% of these costs were deductible in the year brought into use. No deduction was claimed in respect of the costs of distribution boxes as it did not form part of the photovoltaic solar energy system.
It was proposed that the taxpayer would incur certain related expenditure as part of the cost of the installation, including the installation planning costs, panel delivery costs and installation Safety Officer costs. SARS ruled that these costs all formed part of the direct costs of installation and erection of the systems and were therefore deductible in terms of section 12B(3).
In respect of photovoltaic solar energy of more than one megawatt, a taxpayer is allowed a deduction of the costs to the taxpayer of the asset producing the electricity on a 50/30/20 basis. In other words, one is allowed a 50% deduction of costs in the first year of use, 30% in the second year and the balance in the third year of use. Where the photovoltaic solar energy system produces less than one megawatt of power, then the taxpayer is allowed a 100% deduction in the first year of use.
Taxpayers installing solar energy systems should consider the tax deductions in terms of section 12B to ensure that all relevant costs are claimed for income tax purposes and ensure that you still have power during load shedding.
Author Craig Tonkin