“The lack of reliable electricity supply is the biggest economic constraint… I am pleased to announce two tax measures to encourage businesses and individuals to invest in renewable energy and increase electricity generation.”(Finance Minister Enoch Godongwana – Budget 2023)
In the 2023 Budget, the lack of a reliable electricity supply was highlighted as the country’s biggest economic constraint. South Africans have been subjected to loadshedding every day of 2023, often at stage four, five or six. Recent research by the Bureau for Economic Research revealed more load-shedding in the first two months of 2023 than in all of the previous four years. It is a situation expected to deteriorate even further as demand rises with the winter months approaching.
To encourage businesses and individuals to invest in renewable energy and to increase electricity generation, government announced two tax measures in the 2023 Budget in February. The first will provide R5 billion in tax relief to companies through an expansion of the renewable energy incentive, and the second will provide R4 billion in tax relief for households that install solar panels. Both entail a number of conditions and requirements, as well as tight timelines, which are summarised below.
To encourage rapid private investment to alleviate the energy crisis, this is a temporary expansion of the existing tax incentive Section 12B of the Income Tax Act, which provides for capital expenditure deductions for assets used in the production of renewable energy.
It originally allowed businesses to deduct 50% of the costs in the first year, 30% in the second and 20% in the third for qualifying investments in wind, concentrated solar, hydropower below 30 megawatts (MW), biomass and photovoltaic (PV) projects above 1 MW, and provided an accelerated capital allowance of 100% in the first year for solar PV energy projects of less than 1MW.
This incentive has now been temporarily expanded as outlined below.
Highlights of the expanded incentive
Example: business renewable energy tax incentive
For businesses with a positive taxable income, the deduction will reduce tax liability. For example, a renewable energy investment of R1 million would qualify for a deduction of R1.25 million against taxable income.
Using the current corporate tax rate (27%), this deduction could reduce the corporate income tax liability of a company by R337,500 in the first year.
This is a new tax incentive available for a very limited period to encourage individuals to install rooftop solar panels to increase electricity generation and reduce pressure on the grid. Individuals can claim the rebate against their personal income tax liability.
An individual who purchases 10 solar panels at a cost of R40,000 will be able to claim 25% of this R40,000 cost – or R10,000 as a rebate. This means that the individual’s personal income tax liability that is payable for the 2023/24 tax year can be reduced by R10,000.
Another individual who buys 20 panels at a cost of R4,000 per panel, will have invested a total of R80,000. The calculation of 25% of R80,000 amounts to R20,000, but only R15,000 can be claimed against income tax liability for the 2023/24 tax year, as the deduction is limited to R15,000 per individual. If the tax payable is less than R15 000, the rebate is reduced to the amount of tax payable. The balance of the rebate is thus forfeited.
Given the many conditions and requirements, as well as the tight timelines, professional tax advice is recommended before installing solar power or renewable energy alternatives, to ensure the full benefit of these time-limited tax incentives can be realised.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.