Fiscal incentives for the modern-day Flintstones: a note on energy efficiency
17 November 2015
Posted by: Author: Lee-Ann Steenkamp
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').
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
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
'... 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.'
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
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
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
baseline at the beginning of the year of assessment;
reporting period energy use at the end of the year of assessment;
annual EE savings express in kilowatt hours (or kilowatt hours equivalent) for
the year of assessment;
full criteria and methodology used to do the calculation of EE savings; and
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
- Appoint a measurement and verification
(M&V) professional who must be accredited by the South African National
- 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.
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
energy efficiency measures as directed by the Minister of Energy;·
EE throughout the economy;·
the gross domestic product per unit of energy consumed; ·
the utilisation of finite energy resources; and·
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.