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Fiscal incentives for the modern-day Flintstones: a note on energy efficiency

17 November 2015   (0 Comments)
Posted by: Author: Lee-Ann Steenkamp
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Author: Lee-Ann Steenkamp (University of Stellenbosch Business School)

An outline of the new energy efficiency tax incentive, namely section 12L of the Income Tax Act No. 58 of 1962, as amended.

In the popular 1960s TV series, the Flintstones were a Stone Age family whose technology consisted of pre-industrial materials and animals. Who can forget their energy-efficient cars which were made out of stone, wood and animal skins and powered by Fred Flintstone's own feet? But, "the Stone Age did not end because we ran out of stones; we transitioned to better solutions. The same opportunity lies before us with energy efficiency and clean energy.”1

As the debate around carbon emissions, climate change and global warming continues to rage, the topic of energy efficiency has understandably come under the spotlight. An area that has been receiving much attention lately is the introduction of incentives to encourage South African companies to become more energy efficient.

SARS acknowledges that the conversion by taxpayers of old technologies to newer, more energy-efficient ones often involves a substantial amount of capital expenditure and that the perceived long pay-back period discourages business from making upfront investments relating to energy efficiency (EE) savings.2 Accordingly, SARS deemed it appropriate to 'encourage greater levels of energy efficiency savings' by the introduction of a new EE tax incentive. This article will outline the workings of that incentive, namely of section 12L of the Income Tax Act No. 58 of 1962, as amended (the 'Act').

Legislative history

Section 12L was originally introduced into the Act in 2009. However, it only came into effect on the date determined by the Minister of Finance by notice in the Government Gazette, being November 1 2013. The corresponding Regulations on the Allowance for Energy Efficiency Savings (the Regulations) were published on December 9 2013.3 The Regulations detail the procedures required to claim allowances, the calculation of the baseline and limitations of the allowance. The Regulations must be made by the Minister of Energy in consultation with the Minister of Finance and the Minister of Trade and Industry.

During the May 2013 budget vote speech, the Department of Energy indicated that EE was one of the areas in which the country was not performing as well as anticipated.4 On
December 4 2013 the Director-General of the Department of Energy announced the launch of the Private Sector Energy Efficiency (PSEE) programme and explained the linkage between section 12L and the PSEE programme. He furthermore noted that:5

 

'... as government, we view the opportunity presented by the energy efficiency tax incentives as the proverbial carrot, as it is one of the key mechanisms to soften the impact of "the stick", the proposed Carbon Tax Policy due for implementation in 2015.'

Section 12L(2) originally allowed for a taxable income deduction for EE savings based on a formula. In its current format, the section provides that a taxpayer will be entitled to a deduction of 45 cents per kilowatt hour (or kilowatt hour equivalent) of EE savings. This is in respect of any person carrying on a trade during any year of assessment ending before January 1 2020. The implementation of an EE measure implies that a reduction in the use of fossil fuels, like coal and diesel, will qualify for a section 12L deduction. Projects such as lighting, insulation of certain buildings on the premises and an upgrade of air conditioning systems could potentially qualify for section 12L.6

 

Calculation

The following is an illustration of the after-tax effect of section 12L.7 Assume that a local company has an equivalent diesel fuel saving of 1 000 000 kWh per year. Assume further that the average cost per kWh to the end-use customer is R1.21/kWh. Ignoring other cost implications, the value of the savings would amount to R1 210 000 per year. All else being equal, this saving will positively impact the business' bottom line and increase profit for the year by R1 210 000. This will result in an increase in the company's taxable income by R1 210 000. The results prior and post application of section 12L are tabled below:

A simplified way of looking at section 12L is therefore to consider the after tax benefit for a company, viz. 12.6c/kWh for each kWh saved over the project's lifetime. The Regulations stipulate the calculation of the baseline and limitations of the allowance.8

Other considerations

In order to claim the deduction, the taxpayer must obtain a certificate issued by an institution, board or body prescribed by regulation, which must contain the following information:

  • The baseline at the beginning of the year of assessment;
  • The reporting period energy use at the end of the year of assessment;
  • The annual EE savings express in kilowatt hours (or kilowatt hours equivalent) for the year of assessment;
  • The full criteria and methodology used to do the calculation of EE savings; and
  • Any other information prescribed in the Regulations.

 

The Regulations impose various administrative duties which the taxpayer must comply with in order to claim the allowance. One of these is that the taxpayer must register with the South African National Energy Development Institute (SANEDI) in respect of any EE savings measure for which the allowance is intended to be claimed.9 SANEDI will maintain a database of all the reports and certificates issued and will provide ready access to this information to the Minister of Finance and Commissioner of SARS.

Other procedures include the following:10

  • Appoint a measurement and verification (M&V) professional who must be accredited by the South African National Accreditation System;
  • Submit a report compiled by the M&V professional to SANEDI that shows the calculation of the energy savings made for that year of assessment. This report must depict an accurate reflection of the energy efficiency savings achieved in that year; and
  • Upon receiving a certificate from SANEDI (which contains the requisite information), the claimant should submit the certificate together with their tax returns to SARS.

Proposed amendments

The Taxation Laws Amendment Bill 2015 proposes that the amount of the allowance to be claimed by taxpayers in respect of EE savings be increased from 45c/kWh to 95c/kWh. The amendment aims to address concerns raised by industry of the actual benefit value of the incentive in the first year of operation. This is due to high upfront costs of capital and, possibly, compliance costs incurred in the measurement and verification of savings to obtain an EE savings certificate as described in the relevant regulation. If promulgated, the amendment will come into operation on March 1 2015 and will apply in respect of years of assessment commencing on or after that date.

Lastly, it should be cautioned that no deduction is available if the taxpayer receives any concurrent benefit in respect of EE savings. A concurrent benefit may include a cash grant offered by the Department of Trade and Industry (dti) for any EE savings. It is therefore incumbent on taxpayers to carefully consider the tax implications of their EE decisions.

 


 

1   A quote by Steven Chu, an American physicist and Nobel Laureate, on February 1 2013.

2   SARS Explanatory Memorandum on the Taxation Laws Amendment Bill (2009) at 29.

3   SARS has subsequently issued regulation R.186 on March 9 2015, which deals with the amendments of regulation R.971 (published on December 9 2013).

4   Department of Energy. Media statement by the Director-General of the Department of Energy, Ms Nelisiwe Magubane on the release of the regulations on allowance on energy efficiency savings in terms of the Section 12L of the Income Tax Act and related Taxation Ammendment Laws and the launch of Private Sector Energy Efficiency (PSSE) programme (sic). Available at: http://www.gov.za/speeches/view.php?sid=42536 (last accessed on October 10 2014).

5   See above note.

6   As pointed out by Parker and Naidoo, 'The business end of saving money' (September 18 2013), available at: http://www.ensafrica.com/news/The-business-end-of-saving-energy?Id=1172&STitle=tax+ENSight (last accessed September 10 2015).

7   This example is adapted from Steyn, 'The full value of the Section 12L allowance' (April 16 2014), available at: http://www.greenbusinessguide.co.za/the-full-value-of-the-section-12-l-tax-allowance/ (last accessed September 10 2015).

8   See paragraphs 5 and 6 of the Regulations. For further analysis, see Kasaval, 'Energy efficiency tax incentive Section 12L of the Income Tax Act comes into effect' (January 27 2014), available at: http://urbanearth.co.za/articles/energy-efficiency-tax-incentive-section-12l-income-tax-act-comes-effect (last accessed September 10 2015).

9   SANEDI was established in April 2011 in terms of s 7 of the National Energy Act No. 34 of 2008. Its objectives are set out in s 7(2) of the National Energy Act and includes the following undertakings:·        

  • undertake energy efficiency measures as directed by the Minister of Energy;·        
  • increase EE throughout the economy;·        
  • increase the gross domestic product per unit of energy consumed; ·        
  • optimise the utilisation of finite energy resources; and·        
  • conduct energy research and development.

10  Kasaval n 8 above.

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This article first appeared on the November/December 2015 edition on Tax Talk. 


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