DRAFT SARS GUIDE ON THE SOLAR ENERGY TAX CREDIT PROVIDED UNDER SECTION 6C – February 2024
Following on from our article “Renewable Energy Incentives” dated 23 November 2023, herewith follows an expanded commentary based on the Draft Guide issued by SARS in February 2024.
The draft guide provides general guidance on the newly introduced solar energy tax credit under section 6C of the Income Tax Act 58 of 1962.
It does not consider the technical and legal details that are often associated with tax, and should, therefore, not be used as a legal reference.
The guide is not an “official publication” as defined in section 1 of the Tax Administration Act 28 of 2011 and accordingly does not create a practice generally prevailing under section 5 of that Act. It is also not a binding general ruling under section 89 of Chapter 7 of the same Act. Should an advance tax ruling, a VAT class ruling, or a VAT ruling under section 41B of the Value-Added Tax Act 89 of 1991 be required, visit the SARS website for details of the application procedure.
This draft guide is based on the legislation as of the date of issue.
Glossary
In this guide, unless the context indicates otherwise:
- “Renewable energy” means energy produced from sources such as sunlight, wind, and water which are naturally replenished and do not run out;
• “Schedule” means a Schedule to the Act;
• “section” means a section of the Act;
• “solar PV panels” means solar photovoltaic panels;
• “TA Act” means the Tax Administration Act 28 of 2011;
• “The Act” means the Income Tax Act 58 of 1962; and
• “Tax credit” means the solar energy tax credit available under section 6C.
Background
The current energy crisis in the country coupled with the rising demand for electricity has resulted in various tax incentives and policy measures being introduced in an attempt to alleviate the pressure on the national grid as well as to improve energy efficiency in South
Africa.
Although the focus has generally been to promote cleaner technologies in businesses, emphasis has shifted to also encourage the use of renewable energy technology in residential properties while still providing further allowances to businesses.
To this effect, TWO SHORT TERM INCENTIVES have been introduced, namely a solar energy tax credit under section 6C for natural persons AND an enhanced deduction in respect of certain assets used in the production of renewable energy under section 12BA for taxpayers who conduct a trade.
Solar energy tax credit
To encourage households to invest in clean electricity generation capacity as soon as possible, a tax credit has been introduced under section 6C for a limited period. Section 6C is deemed to have come into operation on 1 March 2023 and applies in respect of years of assessment commencing on or after this date. Furthermore, this section is only available for one year, that is, from 1 March 2023 to 29 February 2024.
This tax credit applies to natural persons who are liable for personal income tax and who invest in qualifying solar PV panels.
Under this section, a natural person may be eligible for the tax credit on the cost that has been incurred in respect of the acquisition of qualifying solar PV panels. The cost of other components of a complete solar energy system such as inverters, batteries, and supporting structures do not qualify for the tax credit. The rationale behind allowing a deduction on the cost of only the solar PV panel is that it is the solar PV panels that promote or expand electricity generation capacity in the country. Inverters and batteries on their own create no additional supply of electricity and may even increase the demand from the electrical grid. While batteries and inverters can be used on their own to provide a private benefit to a particular household, it is the addition of solar PV panels that enhances generation supply, which provides a public benefit.
Since the intention is to encourage natural persons to invest in renewable energy, the carrying on of a trade is not a requirement to be eligible to claim this tax credit.
The requirements of section 6C
The tax credit under section 6C applies in respect of the cost incurred by the natural person:
- for the acquisition of any new and unused solar photovoltaic panels, the generation capacity of each being not less than 275W [section 6C(2)(a)(i)]; and
- if the solar photovoltaic panels referred to in subparagraph (i) are brought into use for the first time, by that person on or after 1 March 2023 and before 1 March 2024 [section 6C(2)(a)(ii)].
Persons eligible for the solar energy tax credit
Under section 6C(1), the tax credit is available to any natural person who complies with all the requirements of this section.
The term “natural person” is not defined in the Act. The grammatical meaning of the term, as defined in the Merriam-Webster Online Dictionary, is “a human being as distinguished from a person (as a corporation) created by operation of law”. This means that for purposes of section 6C, a credit will not be available to any juristic persons such as companies or entities of a similar nature. A body corporate or homeowner’s association that installs solar PV panels in sectional title schemes or residential complexes will thus not be eligible for the tax credit.
Trusts will also not qualify for the tax credit even if all their beneficiaries are natural persons.
Solar photovoltaic panel requirements
PV panels are a web of photovoltaic cells or panels that capture solar power and transform it into sustainable energy.
Essentially, when the sun shines onto a solar PV panel, energy from the sunlight is absorbed by the photovoltaic cells in the panel which creates electrical charges that, through an internal process, cause electricity to flow.
The solar PV panels usually form part of a bigger system and can include, for example, inverters, batteries, and mounting or supporting structures. However, the tax credit is only applicable to the cost of solar PV panels.
For a natural person to qualify for the tax credit relating to the solar PV panels, certain requirements under section 6C have to be met, namely that:
• the panels must be new and unused,
• the generation capacity of each panel must be not less than 275W; and
• the panels must be brought into use for the first time, by the natural person that acquired them, on or after 1 March 2023 and before 1 March 2024.
a) Solar photovoltaic panels must be “new and unused”
To qualify for the tax credit, the solar PV panels must be new and unused. Whether the panels are new or unused is a factual enquiry based on the facts of each case. For purposes of this section, the panels must be both new and unused. To be considered “new”, the solar PV panels must have been recently acquired and installed and mounted on or affixed to a residence mainly used for domestic purposes. If the panels had been acquired years before but had not been installed, they would be unused but not new. Unused means that the panels must not have been previously used for any purpose by any person.
b) Generation capacity of solar photovoltaic panels
In addition to the panels being new and unused, the generation capacity of each panel must not be less than 275W. This means that the generation capacity, that is, the amount of energy that a panel can produce, is not considered in the context of a set of panels as a whole. Instead, an evaluation must be conducted per panel. If a panel produces less than 275W of energy, a tax credit will not apply to the cost of this particular panel.
c) Solar photovoltaic panels must be “brought into use for the first time”
The tax credit is available only if the solar PV panels are brought into use for the first time by the same natural person who acquired it on or after 1 March 2023 and before 1 March 2024.
The determination of when a solar PV panel can be said to have been brought into use for the first time by a natural person is a factual one.
It can thus be said that a panel is “brought into use” when it has been installed and used by a person for its intended purpose, that is, the generation of renewable solar energy. Further, the solar PV panel must be used in such a way that it forms an integral part of the photovoltaic solar energy system. Once-off use is not sufficient as this will be considered inconsistent with the intended use of the panel. As such, a solar PV panel cannot be brought into use for an isolated instance merely to take advantage of the solar energy tax credit and then be uninstalled.
Importantly, the requirements of both sections 6C(2)(a)(i) and (ii) must be met – the solar PV panels must be new and unused, and the panels must be brought into use for the first time by that person on or after 1 March 2023 and before 1 March 2024. Should either of these requirements not be met, the individual will not be eligible for the solar energy tax credit.
Installation requirements of the solar photovoltaic panels
In addition to the requirements under section 6C(2)(a), specific mandatory requirements are contained in section 6C(3).
These are that:
• the solar PV panels must be installed and mounted on or affixed to a residence mainly used for domestic purposes by the natural person referred to in section 6C(2)(a);
• the installation is connected to the distribution board of such residence; and
• an electrical certificate of compliance contemplated in the Electrical Installation Regulations, 2009, is issued in respect of the installation referred to above.
Installed and mounted on or affixed to a residence
Section 6C(3)(a) requires that the solar PV panels must be installed and mounted on or affixed to a residence. Therefore, if a taxpayer acquires solar PV panels but does not install and mount them to a residence and does not bring it into use, no tax credit may be claimed.
The terms “install”, “mounted” and “affixed” are not defined in the Act and should, therefore, be interpreted according to their ordinary meaning as applied to the subject matter about which they are used.
The coordinating conjunction “and” is used between the words “installed” and “mounted on or affixed to” which means that the solar PV panels must be installed and mounted on or affixed to the residence mainly used for domestic purposes. The legislation does not prescribe the exact place where the PV panels must be mounted or affixed to the residence. Due to various technical reasons, it may not be possible or feasible to mount or affix the PV panels to the residential building itself, but rather, for example, to an outbuilding or independent support structure. In considering whether the requirement of “mounted on or affixed to” the residence has been met, regard has to be had to the purpose of section 6C, namely that the rebate should benefit natural persons at their private residences, rather than a literal interpretation of the words.15 The facts of each case must be considered.
Many solar PV panel systems will be of a permanent nature since they are wired into the electrical system of the premises and become integrated into the permanent structure. As such, the panels must be mounted on or affixed to the residence in such a way that there is a certain degree of permanency which would ensure the effective and sustained use of the solar PV panels. This will be a factual question.
Whether an asset has been affixed or attached to the land to become immovable, three factors are relevant, namely:
• the nature of the asset;
• the manner of its annexation; and
• the intention of the person affixing the asset.
The first two factors are determined objectively while the third test is subjective. The assessment of these criteria is dependent on the facts of each case. The requirement under section 6C that the solar PV panels must be installed and mounted to a residence does not mean that the panels must be attached in such a way that the principles of accession must be met. The terms “installed” and “mounted” suggest that generally acceptable industry norms and standards for the installation of solar PV panels must be met. This is a factual determination.
Section 6C does not require the natural person wanting to claim the tax credit to be the owner of the residence where the solar PV panels are installed and mounted. This means that a lessee or any natural person who occupies a residence for domestic purposes and who has acquired and incurred the costs of the solar PV panels may be eligible for the tax credit. If a lessee of a residence who incurred the costs of solar PV panels moves out of the residence that such panels are installed and mounted on or affixed to, the owner of the house or the new lessee will not be able to qualify for the credit on the cost of the same panels since the owner or new lessee has not acquired the solar PV panels, have not incurred the cost nor was it new and brought into use for the first time.
If the residence is registered in the name of a juristic person or trust, the registered owner will not be eligible for the tax credit. A body corporate or homeowner’s association that installs solar PV panels on the common property in sectional title schemes or residential complexes will also not be eligible for the tax credit.
A natural person occupying such residence may, however, qualify for the tax credit if that natural person has incurred the cost of the solar PV panels and is subject to meeting the other requirements under section 6C.
If the owner of solar PV panels uninstalls the panels from a residence and reinstalls them at another residence, this person will not be eligible to claim the tax credit again since the requirements of new and unused will not be met.
Residence mainly used for domestic purposes
Under section 6C(3)(a), the residence that the panels are installed and mounted on or affixed to must be used mainly for domestic residential purposes by the natural person that acquired the solar PV panels. The determination of whether a residence is mainly used for domestic residential purposes is a question of fact.
For a natural person to qualify for the tax credit, the residence on which the solar PV panels are installed and mounted or affixed must be used more than 50% during the year of assessment for domestic purposes. If the residence is used for dual purposes, for example, as a domestic residence and a portion for purposes of trade, a determination will have to be made about whether the more than 50% requirement has been met. In practice, if more than 50% of a residence, measured by floor space or volume, is used during the year of assessment for residential purposes, the “mainly” requirement will be met. If, for example, the taxpayer uses 60% of the residence for residential purposes, the full tax credit under section 6C may be claimed, that is, no apportionment is necessary. On the other hand, if a taxpayer uses 50% or less of the residence for domestic purposes, no tax credit may be claimed.
Connection to the distribution board
Under section 6C(3)(b), the natural person must ensure that the solar energy system is connected to the distribution board of the residence. A distribution board is where the electrical supply is distributed from within the building. The main supply cable comes into the board and is then distributed to the breakers and from there to all the circuits, for example, the lights and plugs, amongst other things.
Electrical certificate of compliance
Section 6C(3)(c) makes it a mandatory requirement that the natural person must acquire an electrical certificate of compliance contemplated under the Electrical Installation Regulations, 2009, and issued in respect of the installation of solar PV panels.
An electrical certificate of compliance is a legal document that verifies an electrical installation is compliant with all the legal requirements as stipulated in the Electrical Installations Occupational Health and Safety Act of South Africa on the date of inspection.
This document is usually issued to the owner of the residence. If solar PV panels are installed and mounted on or affixed to a leased property, it would be sufficient for the person wanting to claim the tax credit to provide, as supporting documentation, the certificate as well as the rental contract indicating the names of the parties to the lease agreement.
In the absence of this certificate, a tax credit will not be available to the natural person. The taxpayer does not need to submit this certificate to SARS but should retain it for audit purposes for five years according to the record-keeping requirements under section 29 of the TA Act.
Allowable amount of tax credit
The tax credit is claimed when the natural person’s normal tax payable is determined. The normal tax payable can be from any source of income, including salary income.
Normal tax is defined in section 1(1) and means “income tax referred to in section 5 (1)”.
Section 5(1)(d) states that income tax (or normal tax) must be paid annually in respect of the taxable income received by or accrued to or in favour of any person (other than a company) during the year of assessment ending during 12 months ending on the last day of February each year.
The amount of the tax credit allowed as a deduction to an individual under section 6C(2)(b) is 25% of the cost incurred on the solar PV panels, up to a maximum of R15 000. The tax credit is deducted from the natural person’s tax liability.
The tax credit is limited to the actual cost of the solar PV panels and excludes other costs such as supporting structures, installation costs, or financing costs.
Prohibition of double deductions
Under section 6C(4), a deduction is prohibited on the cost of any asset in respect of which a deduction has been allowed to the taxpayer under section 12B or 12BA. In addition, under section 23B, should a deduction be allowed under section 6C(1), no deduction will be allowed on the same amount under any other section of the Act. This ensures that there is no duplication of tax incentives in respect of the cost of a solar PV panel.
Multiple persons incurring the cost of solar photovoltaic panels
It may occur that more than one natural person as co-owner incurs the cost of the solar PV panels. In these cases, provided that all the requirements of the section are met, each person will be able to claim the tax credit at the rate of 25% on THEIR PORTION of the cost. In other words, each party will thus not be eligible for a credit amounting to 25% of the full cost of the panels.
Provisional tax
Under paragraph 17 of the Fourth Schedule, all provisional taxpayers must make provisional tax payments to the Commissioner in respect of their liability for normal tax for every year of assessment. A “provisional taxpayer”, as defined in paragraph 1 of the Fourth Schedule, includes natural and juristic persons. Provisional taxpayers will be able to claim the section 6C tax credit against the provisional final tax liability subject to the maximum of R15 000.
Disposal of solar photovoltaic panels and capital gains tax
A taxpayer that subsequently disposes of solar PV panels on which the tax credit was claimed, has no recoupment of the tax credit. The purchaser of these solar PV panels will, however, not be eligible to claim the tax credit under section 6C since that purchaser will not meet the requirements.
The disposal of the solar PV panels may be subject to capital gains tax.
If the solar PV panels are fixed to the residence in such a way that the common law principle of accession is met, the installation of the solar PV panels may be regarded as an improvement to the residence upon which the panels are affixed to or mounted. As such, upon the sale of the residence, the Eighth Schedule must be taken into account in respect of any capital gains or losses upon the disposal of such asset.
Under paragraph 20(1)(e) of the Eighth Schedule, the cost of improving or enhancing an asset may be added to its base cost. The base cost of an asset acquired on or after 1 October 2001 is the amount the taxpayer incurred for the acquisition of the asset plus other expenditures incurred directly related to buying, selling, or improving it. The base cost does not include any amount otherwise allowed as a deduction for income tax purposes. As such, any deduction allowed under section 6C will be excluded from the base cost. The facts of each case must be evaluated when determining any capital gains tax implications.
Income tax returns
A return must be a full and true return and be signed by the taxpayer or by the taxpayer’s duly authorised representative. The person signing the return will be regarded as being cognisant of the statements made in the return.
A natural person claiming the tax credit under section 6C may have to confirm the following information in the tax return:
• the number of new and unused solar PV panels installed;
• that the panels are connected to the residence’s electrical distribution board;
• that the minimum generation capacity is 275W for each solar PV panel; and
• that a legitimate electrical certificate of compliance has been issued.
Recordkeeping
Taxpayers are required to keep records for five years from the date of submitting a return under the TA Act.
A return includes any form, declaration, document, or other manner of submitting information to SARS that incorporates a self-assessment or is the basis on which an assessment is to be made by SARS.
Although records are generally required to be kept and retained for five years, there are circumstances in which they are required to be retained for longer periods.
The required retention periods for records, books of account, or documents are as follows:
• Five years from the date of the submission of a return.
• If no return is submitted for a tax period but is required to be submitted, records, books of account, or documents must be kept and retained indefinitely until the obligation to submit a return has been complied with, and then for five years from the date of submission of the return.
• If an objection or appeal against an assessment or decision is lodged, the records, books of account, or documents relevant to the objection or appeal must be kept and retained until the disputed assessment or decision becomes final or the applicable five-year period has elapsed, whichever is later.
• A person notified of, or who is aware of an audit or investigation by SARS must retain the records, books of account, or documents relevant to that audit or investigation until it is concluded or the applicable five-year period has elapsed, whichever is later.
A natural person wanting to claim the tax credit under section 6C will have to retain, amongst others, the following records:
• An electrical certificate of compliance contemplated in the Electrical Installation Regulations, 2009 issued in respect of the specific installation. Such a certificate must, amongst other things, contain a certificate number, the registration number, and contact details of the electrical contractor that completed the installation and certification.
- An invoice for the purchase of the solar PV panels. The invoice should reflect, among others, the number of panels purchased, the cost per solar PV panel, and the wattage of each panel.
- Proof of the date of installation of the panels and the date when they were brought into use.
- Proof that the installation is in respect of a residence mainly used for domestic purposes by the natural person who acquired the solar PV panels.
The above records as well as other relevant information may be requested by SARS for purposes of the administration of section 6C.
Section 6C of the Income Tax Act
6C. Solar energy tax credit. — (1) In determining the normal tax payable by any natural person, there must, subject to subsection 4, be deducted an amount to be known as the solar energy tax credit, equal to the amount of the rebate determined under subsection (2).
(2)(a) The solar energy tax credit applies in respect of cost actually incurred by the natural person —
(i) for the acquisition of any new and unused solar photovoltaic panels, the generation capacity of each being not less than 275W; and
(ii) if the solar photovoltaic panels referred to in subparagraph (i) are brought into use for the first time, by that person on or after 1 March 2023 and before 1 March 2024.
(b) The amount of the solar energy tax credit allowed to the natural person referred to in paragraph (a) must —
(i) be 25 percent of the actual cost of the solar photovoltaic panels described in paragraph (a); and
(ii) in aggregate be limited to an amount not exceeding R15 000.
(3) Solar energy tax credit will be allowed under subsection (1) only if —
(a) the solar panels are installed and mounted on or affixed to a residence mainly used for domestic purposes by the natural person referred to in subsection (2)(a);
(b) the installation is connected to the distribution board of such residence; and
(c) an electrical certificate of compliance contemplated in the Electrical Installation Regulations, 2009, is issued in respect of the installation referred to in paragraph (a).
(4) No deduction shall be allowed under this section in respect of any asset in respect of which a deduction has been allowed to the taxpayer under section 12B or 12BA.