Powering up: A look at section 12B allowance for renewable energy machinery
19 January 2016
Posted by: Author: Lee-Ann Steenkamp
Author: Lee-Ann Steenkamp (University of Stellenbosch Business School)
With the right fiscal
incentives, South Africa could become a leader in renewable energy production
Africa has an abundance of natural resources, with some of the best wind and
solar conditions around the globe. The design of suitable fiscal incentives for
the production of renewable energy could enable South Africa to become a key
producer of renewable energy on the African continent.
acknowledges (albeit rather mildly) that the shortage of electricity in the
foreseeable future will "inconvenience South Africans and constrain economic
activity”.1 National Treasury has recently revisited the section 12B allowance as part of
its initiatives to encourage investment in cleaner energy forms, to reduce
greenhouse gas emissions and to broaden our energy sources.
How the allowance works
12B of the Income Tax Act No. 58 of 1962, as amended (the 'Act'), provides for
a capital allowance for movable assets used in the production of renewable
energy. More specifically, it allows for a deduction on a 50|30|20 basis over
three years in respect of any machinery, plant, implement, utensil or article
(referred to as a qualifying asset) owned by the taxpayer. 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. In other words, the allowance is not limited to
new or unused assets. The wording merely prevents the taxpayer from claiming
the section 12B allowance twice on the same asset.
asset has to be brought into use for the purposes of the taxpayer's trade in
order to generate electricity from the following renewable energy sources:
(gravitational water forces) to produce electricity of not more than 30
comprising organic wastes, landfill gas or plant material.
12B thus provides for an accelerated capital allowance (as opposed to the five
year write-off period in 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:
actual cost to the taxpayer, or
cost under a cash transaction concluded at arm's length on the date on which
the transaction for its acquisition was in fact concluded;
the direct cost of its installation or erection.
charges are excluded, as these are deductible under section 11(bA). The section 12B allowance is also only
available for movable assets, hence it cannot be claimed on buildings.
of the asset includes improvements and foundations. If the lessee undertakes
obligatory improvements on 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
January 2013, the section 12B allowance is also available on foundations or
supporting structures that are deemed to be part of the qualifying asset, if:2
asset is mounted or fixed to any concrete or other supporting structure or
supporting structure or foundation is designed for the asset in such a way that
it is an integral part of the asset; and
foundation or supporting structure is brought into use on or after 1 January
practical difficulty that arises with the interpretation of section 12B, is
which qualifying assets are to be considered when used by a taxpayer in the
generation of electricity? 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?3 As the intention of the legislature was to incentivise the industry by in expanding
the section 12B allowance in 2006 to assets used in the production of renewable
energy, it was likely intended that the allowance should be extended to assets
that also harness electricity. After all, if the energy that is created is not
harnessed correctly, it is a worthless exercise. Quite powerless, really.
then that "generation” in the context of section 12B was probably intended to
include the process of producing electricity in a form that can be sold or
applied for purposes of trade. Assets that are integral to the generation of
electricity from solar energy, include photovoltaic (PV) panels, combiner
boxes, inverters and batteries. Other assets that may be part of a solar farm,
but not integral to electricity generation, could include access roads and
fencing, back-up generation equipment such as diesel engines and telephone
equipment. This latter group of assets will probably not be eligible for the
It would therefore seem
that, if the taxpayer can demonstrate on the facts that any related assets are
integral to the generation of electricity, the assets might qualify for the
allowance. The only helpful guidance I could locate on SARS' website relates to
a binding private ruling that deals with the question of whether various items
used by the taxpayer in the production of solar energy qualified for the section
12B allowance. BPR172 was published on 25 June 2014 and found that the PV
panels consisted of all constituent parts, namely the concrete foundations and
supporting steel structures, the DC combiner and feeder lines and the AC inverters,
including all equipment situated therein. Therefore, the taxpayer was allowed
to claim section 12B on all the constituent equipment. However, I should point
out that this is not a Binding General Ruling, and as such, it is only binding
between SARS and the applicant concerned.
the taxpayer fails to prove that an asset is an integral part of the electricity
generation, one could always rely on other existing provisions in the Act,
although these might not be as beneficial. For example, section 12D provides
for a deduction of 6.67 per cent per annum (prior to 1 April 2015 the allowance
was 5 per cent per annum) for the cost of lines or cables used for the
transmission of electricity. In terms of certain research and development
expenditure, the 100 per cent or 150 per cent deduction of section 11D might be
fall-back, section 12C provides for an allowance for the cost of machinery and
plant used directly in a process of manufacture. In addition to the section 12C
allowance, a further deduction may be claimed on qualifying industrial projects
in terms of section 12I. This allowance applies to machinery and equipment
which have innovative, energy efficient and job creation components.
Taxation Laws Amendment Bill 2015 proposes the enhancement of the section 12B
allowance from its current three year period to a 100 per cent allowance in
year one. This change is in respect of embedded solar PV renewable energy for
self-consumption with a generation capacity of up to 1 000kW (or 1 MW). The
amendment will apply to years of assessment commencing on or after 1 January
National Treasury notes
that the reason for this change is that solar power is classified as a single
concept within the current legislation, without delineating it into its
different forms, for example solar PV or concentrated solar power.
Furthermore, solar PV is favoured because of its low environmental and water
consumption impact, economies of scale and efficiencies of learning. Embedded
solar PV, in particular, does not require the infrastructure of large-scale 5 PV
projects (such as supporting infrastructure like roads and transmission lines)
and is therefore better placed to benefit from the accelerated incentive.
government puts forward this proposal to increase the uptake of embedded solar
PVs for self-consumption to ease the pressure on the national electricity grid
as these solar PVs become energy self-sufficient.
the above-mentioned uncertainties and the steady increase of renewable energy
farms being established in South Africa, it would be helpful if the authorities
provided clearer guidance as to the application of section 12B.
carbon tax looming on the horizon tax breaks to stimulate renewable energy
projects are much-needed countervailing measures to ease the tax burden and
enhance sustainable energy policies. Together with the lowering of technology
costs and barriers to the renewable energy market being dismantled, the future
of renewable energy in South Africa is certainly being powered up.
1 Explanatory Memorandum to the Draft Taxation Laws Amendment Bill 2015 at page 42.
2 Proviso to s12B(1).
3 This issue was identified by Wendy Garner in 'Section 12B allowances: assets used in the generation of electricity from renewable energy', available at: http://www.thesait.org.za/news/132687/OpinionSection12BAllowanceAssetsUsedintheGenerationofElectri.htm
4 The above examples were identified by Garner (see note 3 above).
5 Explanatory Memorandum to the Draft Taxation Laws Amendment Bill 2015 at page 43.
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This article first appeared on the January/February 2016 edition on Tax Talk.