In an effort to bolster South Africa’s energy sector, the government recently increased the tax incentives available for renewable energy systems. In this blog, we explore the tax benefits available for South African commercial and residential clients who invest in solar PV systems. Please note that while we strive to provide accurate information, this blog does not constitute tax advice – you should always consult a tax professional for personalised guidance.
Tax Incentives for Commercial Clients:
For commercial clients, section 12B of the Income Tax Act allows an accelerated depreciation (i.e. wear and tear) allowance, in terms of which the cost of a solar PV system used in your business can be claimed as a tax deduction. The section 12B allowance has been available for a number of years, but recently an increase in the allowance was announced.
For systems brought into use (i.e. commissioned) for the first time before or on 28 February 2023, the allowance provided a deduction of 100% of the cost of the system, if the system was under 1 MW in size. For systems over 1MW in size, the deduction was spread over three years, (50% of the cost deductible in year 1, 30% in year 2 and 20% in year 3).
In the Finance Minister’s recent budget speech, it was announced that, with effect from 1 March 2023, the allowance will be increased to 125% of the cost of the solar PV system, which will be claimable in year 1 regardless of the size of the system.
The incentive translates to a potential reduction in your tax bill equal to 33.75% (27% company tax rate x 125%) of the system’s cost – provided, of course, that you have sufficient income against which to use the deduction. If you don’t have sufficient income to use the full deduction, the balance will be carried over to your next tax year (although the limitation in section 20 of the Income Tax Act then applies, and states that the balance carried over can only be claimed in year 2 up to the greater of 80% of your income after deductions in that year, or R1 million – any further balance then gets carried over to year 3, etc.)
The best way to understand these rules is to use an example:
- If a business were to purchase a R2m system, then it can claim R2.5m (125% x R2m) as a tax deduction in the year in which it brings the system into use for the first time.
- If the business only has R1m of income in that year (after all other deductions), then the section 12B deduction is effectively limited to R1m. Thereafter:
- the balance of the deduction of R1.5m gets carried over to year 2; and
- the cash flow benefit to the business in the first year is 27% x R1m, or R270,000.
- In year 2, if the business again only has income of R1m, then it will be able to use a further R1m of the deduction in that year (the greater of 80% of income and R1m), and the remaining balance of R500,000 will be carried over to year 3.
- On the other hand, if the business had income of R2.5m or more (after all other deductions) in year 1, then the section 12B deduction will be the full R2.5m. In this case the cash benefit in year 1 is R675,000 (27% x R2.5m) – effectively reducing the cost of the system from R2m to R1.325m!
Notably, the announcement increasing the section 12B incentive states that it will apply until 28 February 2025. The future beyond that date is uncertain, but it is expected that the allowance would then revert to the position pre-1 March 2023.
For commercial clients considering solar PV systems with battery storage, the eligibility of the cost of batteries as a section 12B deduction is not entirely clear. However, if the batteries are sized to ensure continued solar PV generation during load shedding, it is likely that the claim can be made – for the simple reason that, without the batteries, the PV system would not be able to operate. Hopefully SARS will provide clarity regarding the inclusion of batteries in the section 12B allowance soon.
Tax Incentives for Residential Clients:
In the budget speech, it was also announced that individuals would be eligible for a tax rebate of 25% of the cost of solar panels purchased for their private residences. For instance, if R50,000 worth of solar panels are purchased, a tax rebate of R12,500 can be claimed. The incentive is capped at R15,000 per person for home solar systems, and relates only to panels – not any of the other equipment required for a PV system.
It is important to note that this incentive is yet to be made into law and the amendments to the Income Tax Act are still pending. However, such incentives announced in the budget speech typically materialise into law. Nevertheless, it is advisable to stay informed about any further details or modifications.
Taking advantage of solar PV tax incentives can provide significant cost savings and environmental benefits for both commercial and residential clients. Broadreach Energy is committed to helping businesses make a seamless transition to sustainable energy solutions. Our expertise in designing, building, and maintaining customised solar PV systems ensures optimal savings and energy security while maximising available tax incentives.
Contact us today to explore how Broadreach Energy can help you navigate the complexities of solar PV tax incentives and unlock the potential of renewable energy for your business.
Wondering about the future of solar energy in South Africa? Check out our blog on solar trends to keep an eye on.
South African Revenue Service (SARS): www.sars.gov.za
Income Tax Act of South Africa: www.sars.gov.za/AllDocs/LegalDoclib/Income-Tax-Act
Section 12B of the Income Tax Act
Section 20 of the Income Tax Act
2023 National Budget Speech (Government of South Africa)
National Treasury of South Africa: www.treasury.gov.za
Disclaimer: The information provided in this blog does not constitute tax advice. It is recommended to consult with a tax professional