Making The Most Of Tax Incentives Encouraging The Use Of Renewable Energy
31 July 2011
Posted by: Author: Ruaan van Eeden and Mari Wichmann
Making The Most of Tax Incentives Encouraging The Use of Renewable Energy
Various tax and cash incentives are currently available to potential investors which, if used to their full potential,could aid in the ultimate success of investment projects
With government’s drive to make electricity from renewable sources part of South Africa's energy mix, it is worthwhile to peruse the proverbial "shopping list” of the most significant incentives which may be available to investors in that sector.Investment projects focusing on creating renewable energy could be eligible for the following tax and cash incentives.
Section 12B of the Income Tax Act (the Act) provides an accelerated capital allowance over at three year period, on a 50/30/20 basis, for assets used in the generation of electricity from sunlight, wind, hydro or biomass.Issues to be aware of under Section 12B include the determination of which assets actually qualify for the accelerated allowance, as not everything on an investment project of this nature is necessarily used in the generation of electricity.
Section 12D of the Act provides a deduction of 5% per annum for the cost of lines or cables used for the transmission of electricity.Investors must however be aware of cost sharing arrangements with Eskom, and determine whether the more beneficial Section 12B may in fact apply to cables or transmission lines in renewable energy projects.
The renewable energy market,although mature in places such as Europe and North America, is still in its infancy from a South African perspective, so don't forget about Section 11D of the Act which provides for a deduction of 100% or 150% of the actual cost expended for certain research and development ventures.
In addition to the tax incentives discussed above, a cash grant may also be available to renewable energy projects which supply power back into the Eskom grid.In the past, the generation of renewable energy and the supply into the Eskom grid was not necessarily supported by the Department of Trade and Industry(DTI). However, in early 2010 a project converting gas from household waste into electricity was approved under the Critical Infrastructure Programme (CIP),and was awarded a cash incentive of R17.3 million.
Manufacturing is another driver under Government's long term growth plan, with investors being able to tap into the following tax and cash incentives.The good old Section 12C of the Act provides a five year accelerated capital allowance for the cost of machinery and plant used directly in a process of manufacture.Not something new, but critical for taxpayers operating in this sphere.The much publicised Section 12I of the Act provides a 35% or 55% tax deduction in the first year of operation, in addition to the allowance under section 12C of the Act.
This applies to a qualifying investment in machinery and equipment for industrial projects manufacturing items which are classifiable under the Standard Industrial Classification Schedule 3,and which have innovative, energy efficient , and job creation components.Onerous in terms of qualification criteria, but enormously beneficial in lowering the tax base of an investor.For projects with an investment value below R200 million, the Manufacturing Investment Programme (MIP), administered by the DTI, may be a viable option.
The MIP offers a cash based incentive of between 15% to 30%of qualifying assets.It is worth also taking note of the proposed changes to Section 12Iin the 2011 Taxation Laws Amendment Bill published on 2 June 2011.Where the project falls within an industrial development zone, the deductions are increased from 55% to 100% in respect of greenfield projects, and from 35%to 75% in respect of brownfield projects.
In addition to the MIP, investors could also qualify for a foreign investment grant (FIG), capped at R10 million, which provides an incentive in respect of the cost of moving qualifying machinery and equipment from abroad to South Africa.The CIP could also apply to manufacturing operations.With the exception of the deduction under Section 12I of the Act and the MIP incentive, which are mutually exclusive, most of the incentives above can be used in conjunction with each other to obtain the maximum assistance on offer.
Source: By Ruaan van Eeden and Mari Wichmann (Tax breaks)