South African companies and households, with no option but to seek alternatives to Eskom’s expensive, erratic and deteriorating supply, will be relieved to know that – from a tax perspective – the timing could not be better to invest in solar and renewable energy.
Two time-limited tax measures were announced in the 2023 Budget in February to encourage investment in renewable energy. The first is an expanded tax incentive for businesses that will reduce taxable income by 125% of the cost of qualifying investments in renewables, and the second is a tax rebate to individuals for 25% of the cost of solar PV panels. Both are subject to conditions, requirements and tight timelines (summarised in this article), making professional advice essential.
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.
The expanded tax incentive for businesses
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
- Under the expanded incentive, businesses will be able to claim a 125% deduction.
- Moreover, that deduction can now all be claimed in the first year.
- Businesses will be able to reduce their taxable income by 125% of the cost of renewable energy assets used for electricity generation.
- The adjusted incentive will only be available for investments brought into use for the first time between 1 March 2023 and 28 February 2025.
- The deduction applies to all renewable energy projects.
- There will be no thresholds on the generation capacity size of the projects that qualify.
- The expanded incentive is only available for two years from 1 March 2023 to 28 February 2025 to stimulate investment in the short term.
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.
Tax rebate for individuals
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.
Highlights of the individual tax rebate
- This incentive will be available for one year between 1 March 2023 and 29 February 2024.
- Individuals who install rooftop solar panels will be able to claim a rebate of 25% of the cost of the panels, up to a maximum of R15 000 per individual.
- The rebate can be used to reduce tax liability in the 2023/24 tax year. PAYE taxpayers can claim the rebate on assessment during the 2023/24 filing season, while provisional taxpayers can claim the rebate against provisional and final payments.
- There is no ownership limitation, so installations by either landlords or renters are eligible, but only the party that pays for the solar panels can claim the rebate.
- The rebate applies only to new and unused solar PV panels with a minimum capacity of 275W per panel (design output), installed as part of a new system, or as an extension of an existing system, which must be connected to the mains distribution of the residence (i.e. no off-grid installations qualify).
- The rebate is only available for solar PV panels (excluding portable panels), and not for other components of a system such as batteries, inverters or fittings. Installation costs do not qualify.
- The solar panels must be purchased and installed at a private residence used mainly for domestic purposes (i.e. dual-use residences such as a guest house or Airbnb used more than 50% for trade, will be excluded).
- A certificate of compliance for the installation must be issued between 1 March 2023 and 29 February 2024 and the certificate must confirm the date the solar panels purchased were brought into use for the first time.
- To claim, taxpayers will need a VAT invoice that indicates the cost of the solar PV panels separately from other items, along with proof of payment.
- There will be no recoupment if the residence is sold after claiming the rebate, but there will be a claw-back if the panels themselves are sold within one year.
- SARS has issued draft third-party regulations for comment that will require solar installers to report to SARS the complying installations they have completed together with the details of the purchaser.
- Like other rebates, it may only be claimed against tax payable and only to reduce the tax payment to nil. If the tax payable is less than the rebate, the balance is forfeited.
Example: tax rebate to individuals
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.