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Understanding section 12B: renewable energy tax allowances

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South Africa has an abundance of natural resources, and with the right fiscal incentives for the production of renewable energy, we could become a key producer of renewable energy for the continent.

The National Treasury has revisited the section 12B allowance as part of its initiatives to encourage investment in cleaner energy, but what does it actually mean? Here, Genergy unpacks the Act.

How the allowance works
Section 12B of the Income Tax Act (No. 58 of 1962), provides for a capital allowance for any qualifying moveable asset owned by the taxpayer that is used to produce renewable energy for their trade.

It is important to note that the allowance is only available if the asset is brought into use for the first time by the taxpayer. This prevents taxpayers from claiming the section 12B allowance twice on the same asset.

Under the 12B allowance you can claim for:

· Assets used to produce bio-diesel or bio-ethanol
· Assets used by the taxpayer for the purpose of his trade in the generation of electricity from:
o wind power
o solar energy
§ photovoltaic (PV) solar energy of more than 1 megawatt, provided one obtains a generator licence from NERSA
§ photovoltaic solar energy not exceeding 1 megawatt
§ concentrated solar energy
· Hydro power of not more than 30 megawatts
· Biomass which includes organic wastes which comprise of gas or plant materials

Section 12B provides for an accelerated capital allowance (as opposed to the five year write-off period of section 12C) on the cost of the asset and can be claimed in full, even if the asset is used for only part of the year of assessment. Section 12B(3) deems the cost of the asset to be the lesser of:

· the actual cost to the taxpayer, or
· the cost under a cash transaction concluded at arm’s length on the date on which the transaction for its acquisition was in fact concluded;
· plus, the direct cost of its installation or erection.

The cost of the asset includes improvements and foundations. If the lessee of government-owned property undertakes obligatory improvements on a leased property in terms of a Public Private Partnership or for obligations incurred on or after 1 January 2013, the Independent Power Producer Procurement Programme of section 12N (administered by the Department of Energy) will apply. If the lessee uses the property for purposes of earning income, section 12N allows for the depreciation on the improvements to be calculated as if the lessee owned the underlying property directly.

From 1 January 2013, the section 12B allowance was also available on foundations or supporting structures that are deemed to be part of the qualifying asset, if[1]:

· the asset is mounted or fixed to any concrete or other supporting structure or foundation;
· the supporting structure or foundation is designed for the asset in such a way that it is an integral part of the asset; and
· the foundation or supporting structure is brought into use on or after 1 January 2013.

How much can a tax payer deduct in terms of the following?
For all photovoltaic assets that do not exceed one megawatt, a 100% deduction of the cost of the asset will be allowed if the asset was brought into use on or after January 2016. Included in this is embedded solar PV renewable energy for self-consumption with up to one megawatt of generation capacity.

All other qualifying assets will qualify for an allowance over a three year period: 50%, 30% and 20% respectively. This allowance is not apportioned in the first year of the write off but fully claimable in the relevant year of assessment.

Practical considerations

When interpreting section 12B, it can be difficult to understand what the qualifying assets are. Does ‘generation’ simply entail the creation of the electricity (for example, in solar panels of a solar farm) or does it also include the processing or harnessing of such electricity in a form that can be sold?[2]

The intention of the legislature is to incentivise the industry by expanding the section 12B allowance in 2006 to include assets used in the production of renewable energy, and it was likely intended that the allowance should be extended to assets that harness electricity. After all, if the energy that is created is not harnessed correctly, it is a worthless investment.

So, one would interpret that the word ‘generation’ in the context of section 12B is intended to include the process of producing electricity to be used or sold. Therefore assets integral to the generation of electricity and the taxpayer can demonstrate that any related assets are integral to the generation of electricity, they might qualify for the allowance.

Author: Kimberley Clare Nanson
Website: http://www.genergy.co.za

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