Renewable Energy Incentives

Renewable Energy Incentives – 2023 draft Taxation Laws Amendment Bill for public comment

On 21 April 2023, the National Treasury and the South African Revenue Service (SARS) published, for public comment, the draft legislative amendments to give effect to the two renewable energy tax incentives, announced in the 2023 Budget. These proposals assist in partially addressing the country’s energy crisis and encourage private investment in expanding electricity generation.

This initial batch of the 2023 draft Taxation Laws Amendment Bill (TLAB) covers two specific tax amendments, and is urgent, due to the proposed early effective dates for implementation, and to enhance certainty for individuals and businesses that would like to immediately invest in renewable energy. Additional amendments and commentary relating to “ENHANCED DEDUCTION IN RESPECT OF CERTAIN MACHINERY, PLANT, IMPLEMENTS, UTENSILS, AND ARTICLES USED IN THE PRODUCTION OF RENEWABLE ENERGY” will be discussed in a second article.

This first set of amendments is intended to gather comments on the following two specific and urgent amendments and serves as notice to taxpayers for earlier effective dates of the proposed amendments.

  • Expansion of the renewable energy tax incentive

Under the enhanced renewable energy tax incentive, taxpayers who are conducting businesses will be able to claim a 125% tax deduction (in the first year) for qualifying capital expenditure in respect of all renewable energy projects, with no threshold on generation capacity. The enhanced incentive will be available for a period of two years and apply to investments in renewable energy projects brought into use for the first time on or after 1 March 2023 and before 1 March 2025.

  • Rooftop solar tax incentive

With respect to the rooftop solar tax incentive, individuals will be able to receive a tax rebate to the value of 25% of the cost of any new and unused solar PV panels, up to a maximum of R15 000. The rooftop solar tax incentive will be available for a period of one year and will apply to new and unused solar PV panels that are acquired by the individual and brought into use for the first time on or after 1 March 2023 and before 1 March 2024.

Public comments may include proposals by body corporates on how the rooftop solar incentive could be applied to members of the body corporate if a body corporate were to install solar PV panels for members’ benefit. Comments are due by 15 May 2023.

Applicable legal reference: New section 6C and section 25 of the Income Tax Act, No. 58 of 1962

The tax system does not generally allow for deductions in respect of personal consumption, for example, expenses incurred in respect of a motor vehicle used for private purposes or expenses incurred in respect of a salary paid to a domestic worker.

However, in certain circumstances, either for purposes of encouraging individuals to save for retirement or for philanthropic purposes or in instances where the expenditure is directly linked to employment income, the Act allows individuals who derive employment income and or passive income a credit or deduction in respect of the following expenses, namely:

  • Contributions to retirement funds
  • Medical scheme contributions and other medical expenses
  • Donations to approved Public Benefit Organisations
  • Home office expenses under certain qualifying criteria
  • Wear and tear in respect of certain assets
  • Amounts received for services rendered that are subsequently refunded
  • Bad and doubtful debts that are related to employment subject to certain conditions
  • Legal costs under certain qualifying circumstances

On the other hand, an individual who carries on a business is also eligible for all the deductions and allowances provided in the Act in respect of his or her business expenses.

In response to the severe energy crisis experienced by the country, the Government is proposing various policy measures to the renewable energy mix to improve energy efficiency and lower pressure on the grid. In order to encourage households to invest in clean electricity generation capacity which can supplement the electricity supply, in the 2023 Budget, the Government proposed a rooftop solar tax incentive for individuals who invest in solar photovoltaic (PV) panels.

It is proposed that individuals who pay personal income tax be granted a solar energy tax credit which will apply as follows:

A. Solar PV panels eligible for the solar energy tax credit

The solar energy tax credit will only apply to the following solar panels:

  • New and unused solar PV panels acquired by the individual and brought into use for the first time by the individual on or after 1 March 2023 and before 1 March 2024.
  • Solar PV panels with a minimum generation capacity of each being not less than 275W.
  • Solar PV panels that form part of a system that is connected to the distribution board of a residence that is mainly used by an individual for domestic purposes.
  • Solar PV panels installation for which an electrical certificate of compliance is issued to the individual in terms of Electrical Installation Regulations, 2009.

B. Time period for the solar energy tax credit

In order to encourage individuals to invest in clean electricity generation capacity as soon as possible, the solar energy tax credit will only be available:

  • for a period of 1 year and will apply to new and unused solar PV panels that are acquired by the individual and brought into use for the first time on or after 1 March 2023 and before 1 March 2024.

C. Amount of the solar energy tax credit allowed as a deduction

The amount of solar energy tax credit allowed as a deduction to an individual is as follows:

  • 25% of the cost of the solar PV panels described above, up to a maximum of R15 000

D. Meaning of residence for solar energy tax credit

As indicated above, the energy tax credit applies to new and unused solar PV panels that are installed at a residence that is mainly used by an individual for domestic purposes. This implies that the energy tax credit will apply to individuals who:

  • Own, rent, or occupy residences and acquire new and unused solar PV panels for installation at residences that are mainly used for domestic purposes.
  • Incur the cost to acquire the solar PV panels.

E. Limitation of solar energy tax credit in respect of assets granted an allowance in terms of section 12B or 12BA

In order to ensure that there is no duplication of tax incentives in respect of a solar PV panel:

  • the energy tax credit shall not be allowed for a solar PV panel in respect of which an allowance is granted in terms of section 12B or 12BA of the Act.

F. Recoupment of solar energy tax credit on the sale of solar PV panels

Where an individual sells a solar PV panel on or before 1 March 2025 that qualified for a solar energy tax credit:

  • the amount of the solar energy tax credit that was allowed as a deduction in respect of the solar PV panel will be regarded as an additional amount of normal tax payable by that individual in the year of assessment in which he or she sells
    the solar PV panel. There will be no recoupment of the amount of the solar energy tax credit that was allowed as a deduction if the individual disposes of or vacates the residence to which the solar PV panel is affixed.

The proposed amendments will be deemed to have come into operation on 1 March 2023 and apply in respect of years of assessment commencing on or after 1 March 2023.

A second article will discuss another incentive, namely: “ENHANCED DEDUCTION IN RESPECT OF CERTAIN MACHINERY, PLANT, IMPLEMENTS, UTENSILS AND ARTICLES USED IN THE PRODUCTION OF RENEWABLE ENERGY”.

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