The final energy incentive legislation

​​​On 22 December 2023 the Taxation Laws Amendment Act 17 of 2023 was promulgated. It contained the final versions of the renewable energy incentive legislation which I wrote about when it was still in its draft form in the July 2023 issue of ASA. Happily, the final legislation has ironed out many of the gremlins that were in the draft legislation. This article is an update of my previous article.

The solar energy tax credit (s 6C)

Section 6C grants individuals a tax credit (rebate) against their normal tax payable equal to 25% of the cost actually incurred by them in acquiring any new and unused solar photovoltaic panels having a generation capacity of not less than 275W. The panels must be brought into use by the person who acquired them on or after 1 March 2023 and before 1 March 2024. interestingly, a person acquiring panels in February 2023 would qualify for the tax credit as long as the panels were brought into use during the 2024 year of assessment. The panels must be new and unused at the time of acquisition. The exact meaning of 'new' in this context probably means not second-hand. Another meaning could be 'not old'. if a person bought panels from a supplier that had been holding them in stock for five years, they may be regarded as not 'new', although I think such an interpretation would defeat the purpose of the legislation. As long as the panels produce at least 275W, why should it matter how long they have been in stock?

The panels are the type that convert sunlight to electricity (photovoltaic), and not the solar thermal collector type that heat water. The position with hybrid panels that both heat water and produce electricity is unclear but presumably as long as they produce at least 275W of electricity, they should qualify.[1]​

The credit is limited to ZAR 15 000 in aggregate (ZAR 60 000 × 25%), that is, you would need to spend more than ZAR 60 000 before the ZAR 15 000 limit applied. The limit is per person, so if more than one person living in the residence contributed to the cost of the panels, each would be subject to a ZAR 15 000 limit. The words 'in aggregate' relate to the total cost of all panels acquired during the year of assessment by each person.

The tax credit will be allowed only if

• the solar panels are installed and mounted on or affixed to a residence mainly [2] used for domestic purposes by the natural person who incurred the cost of acquiring them and brought them into use;
• the installation is connected to the distribution board of the residence; and
• an electrical certificate of compliance issued under the Electrical Installation Regulations, 2009, is issued to the natural person in respect of the installation.

A person would therefore be unable to obtain a credit for financing the cost of an installation at the home of a relative where they do not reside, since they would not be using the panels for their own domestic purposes.

When more than one person in the residence contributes to the cost of the panels, the amount spent by each such person will qualify that person for the credit.

There is no longer any provision in s 6C which results in a reversal of the tax credit if the person disposes of the panels before 1 March 2025. In practice, however, it is highly unlikely anyone would go through the cost of installing panels only to remove them within the same year of assessment. The abandonment of this clause in the draft bill also solves the concern that a person who is not the owner of the residence would be disposing of the panels through the principle of accessio as soon as they are attached to the residence (the panels may well accede to the residence and become the property of the owner of the residence).

Section 6C makes no provision for the tax credit to apply when the home owner hires a solar system and incurs a monthly rental. A portion of such rental expense may, however, qualify under s 11(a) read with s 23(b) and 23(m)(iv) to the extent it is incurred for the purposes of trade.

No tax credit will be allowed to the extent that a deduction has been granted on a panel under s 12B or 12BA (s 6C(4)).

Section 6C is deemed to come into operation on 1 March 2023 and applies to years of assessment commencing on or after that date.

There is nothing to prevent The cost of panels from being added to the base cost of a residence. Paragraph 20(3)(a) of the Eighth Schedule does not prevent the inclusion in base cost as it deals only with amounts allowed in determining taxable income before the inclusion of any taxable capital gain. Section 23B is likewise inapplicable as it deals only with double deductions in the determination of taxable income.

On 26 January 2024, SARS issued a draft guide on s 6C for comment but at the time of writing it had not been released in final form.  

Enhanced deduction for assets used in the production of renewable energy (s 12BA)

Like s 6C, s 12BA is a temporary measure which provides an enhanced incentive compared to the existing allowance under s 12B(1)(h) for assets used in the production of renewable energy.

It applies to any new and unused machinery, plant, implement, utensil, or article (asset) owned by the taxpayer or acquired by the taxpayer as purchaser under an agreement contemplated in para (a) of the definition of 'instalment credit agreement' in s 1 of the Value Added Tax Act and which was or is brought into use for the first time by that taxpayer for the purpose of that taxpayer's trade on or after 1 March 2023 and before 1 March 2025.

The asset must have been acquired to be used by that taxpayer or the lessee of that taxpayer in the generation of electricity from

• wind power;
• photovoltaic solar energy;
• concentrated solar energy;
• hydropower; or
• biomass comprising organic wastes, landfill gas or plant material.

The restrictions on lessors being able to take advantage of s 12BA that were in the draft legislation have been removed. National Treasury notes that under a finance lease the lessee will take ownership of the assets only at the end of the lease, thus enabling a lessor to potentially qualify for the allowance. Unfortunately, s 23A has been amended to ring-fence the s 12BA allowance against the rental income. This has caused many en commandite partnerships to structure their agreements as power purchase agreements (PPAs). Under such PPAs the partnership does not let the equipment but rather charges a fee for the electricity produced by it.[3] ​Some of these partnerships make use of borrowings to boost the s 12BA allowance. Under s 24H(3) the s 12BA allowance is limited to the taxpayer's contribution plus any amount for which the taxpayer may be held liable to any creditor of the partnership and any income received by or accrued to the taxpayer from the trade or business. Given that the allowance is 125% of the cost of the asset, the taxpayer will have to be liable for an additional R25 over and above a contribution of R100, which makes little sense because the R25 does not involve any outlay. National Treasury declined to exclude the additional 25% portion of the allowance from s 24H(3). Before 2002, s 24H(3) excluded the now repealed s 11bis marketing allowance which also involved a deduction that exceeded cost.

Questions have been asked whether the cost of inverters and batteries qualify on the basis that they do not actually generate electricity. In an FAQ document released by National Treasury on 20 November 2023, it was confirmed that storage and conversion assets would qualify for the incentive as long as they were part of a system that produced electricity. Installations that simply used inverters and batteries to store power from the grid and release it during load shedding would not qualify.

Unlike s 12B, s 12BA has no electricity generation limits.

Taxpayers embarking on massive energy projects may find it difficult to bring such projects into use before 1 March 2025, as they can take several years to complete. These taxpayers will have to avail themselves of s 12B.

Supporting foundations or structures will qualify for the allowance if the asset or improvement qualifies for the allowance and they are mounted on or affixed to any concrete or other foundation or supporting structure and

• the foundation or supporting structure is designed for such asset or improvement and constructed in such manner that it is or should be regarded as being integrated with the asset or improvement;
• the useful life of the foundation or supporting structure is or will be limited to the useful life of the asset or improvement mounted on or affixed to it.

In the above circumstances, the foundation or supporting structure is deemed to be part of the asset or improvement mounted on or affixed to it. The purpose of this deeming provision is no doubt to ensure that the foundation does not become part of the immovable property to which it is affixed, thus losing its character as a separate asset qualifying for the allowance under s 12BA. .

Under s 12BA(2) the deduction is 125% of the cost of acquiring the asset. Thus, if the asset cost ZAR 1 million, the taxpayer would be entitled to a deduction of ZAR 1 250 000. For an individual on the maximum marginal rate of 45%, this amounts to a total tax saving of R562 500. For a company on the 27% flat rate, the saving will be ZAR 337 500.

Under s 12BA(3), for the purposes of s 12BA, the cost to a taxpayer of any asset acquired by that taxpayer is deemed to be the lesser of the actual cost to the taxpayer or the cost which a person would, if that person had acquired the asset under a cash transaction concluded at arm's length on the date which the transaction for the acquisition of the asset was in fact concluded, have incurred in respect of the direct cost of acquisition of the asset, including the direct cost of its installation or erection. The purpose of this rule is to prevent interest incurred from forming part of the cost of the asset. Interest would usually be claimed under s 24J on a yield-to-maturity basis.

The deduction does not apply to any asset the ownership of which is retained by the taxpayer as a seller under an agreement contemplated in para (a) of the definition of 'instalment credit agreement' in s 1 of the Value-Added Tax Act (s 12BA(4)(a)). This rule prevents the seller from claiming the deduction, since it is the acquirer who would claim it (see s 12BA(1)).

It also does not apply to any asset brought into use on or after 28 February 2025 (s 12BA(4)(b)).

A person is not entitled to a deduction under s 12B if that person has claimed a deduction for the relevant asset under s 6C or s 12BA (s 12B(4)(h)). Taxpayers can choose under which provision they wish to claim a deduction (s 12B or s 12BA). Given that s 12BA offers the superior deduction, it is unlikely anyone would choose s 12B over s 12BA unless there was a concern that the asset could not be brought into use before 1 March 2025.

Recoupment of the s 12BA allowance

A special recoupment rule, contained in s 8(4)(nA), applies when a s 12BA asset is disposed of before 1 March 2026. It provides that in such circumstances the taxpayer must include in income 25% of the cost of that asset, which has been recouped during the current year of assessment, in addition to the inclusion of amounts under s 8(4)(a), but limited to the total amount allowed to be deducted in respect of that asset. It seems unlikely that anyone would go to the trouble of installing solar equipment in, say, 2023, only to dispose of it two years later. The most likely scenario in which this could occur seems to be when the building itself is disposed of together with the equipment attached to it.

The table below illustrates various scenarios illustrating the interaction between s 8(4)(a) and 8(4)(nA) when an asset is disposed of before 1 March 2026. The table assumes that the person paid R100 for the s 12BA asset and obtained an allowance of R125.

On or after 1 March 2026 the position is as follows:

Can the s 12BA allowance be claimed on a portion of a residence used for trade?

Employees other than persons deriving more than 50% of their remuneration from commission are prevented from claiming the allowance under s 23(m).

A sole trader or commission agent may be able to claim the s 12BA allowance on the cost of installation of energy generation equipment at domestic premises that is attributable to the part of the premises used for the purposes of trade, provided they comply with s 23(b). That provision requires that 'such part is specifically equipped for purposes of the taxpayer's trade and regularly and exclusively used for such purposes'. Commission agents must not perform their duties mainly in an employer-supplied office in order to qualify for the allowance. SARS indicates in Interpretation Note 28 (Issue 3) dated 4 March 2022 in para 4.6.1 that it accepts that the correct method for apportioning expenses is one based on floor area. However, an apportionment based on power consumption attributable to the part used for trade divided by the total power consumption would seem to be more appropriate.

A sole trader or commission agent who claims a tax credit for solar panels under s 6C would be unable to claim the cost of inverters and batteries under s 12BA, since the batteries and inverters would no longer be part of a group of assets used in the generation of electricity. To qualify, the person must claim s 12BA on the panels together with the inverters and batteries.

It is understood that SARS is working on a s 12BA guide but at the time of writing it had not been released for comment.

Conclusion

In the 2024 Budget presented on 21 February 2024, no extensions were announced to s 6C or s 12BA. It remains to be seen what impact these incentives will have on load-shedding.