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Powering up: A look at section 12B allowance for renewable energy machinery

19 January 2016   (1 Comments)
Posted by: Author: Lee-Ann Steenkamp
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Author: Lee-Ann Steenkamp (University of Stellenbosch Business School)

With the right fiscal incentives, South Africa could become a leader in renewable energy production 

South 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.

Government acknowledges (albeit rather mildly) that the shortage of electricity in the foreseeable future will "inconvenience South Africans and constrain economic activity”.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 

Section 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.

The 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:

  • wind power;
  • solar energy;
  • hydropower (gravitational water forces) to produce electricity of not more than 30 megawatts; and
  • biomass comprising organic wastes, landfill gas or plant material.

Section 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:

  • the actual cost to the taxpayer, or
  • the cost under a cash transaction concluded at arm's length on the date on which the transaction for its acquisition was in fact concluded; 
  • plus, the direct cost of its installation or erection.

Finance 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. 

The cost 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 directly.

From 1 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

  • the asset is mounted or fixed to any concrete or other supporting structure or foundation; 
  • the supporting structure or foundation is designed for the asset in such a way that it is an integral part of the asset; and
  • the foundation or supporting structure is brought into use on or after 1 January 2013.

Practical considerations 

One 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. 

It follows 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 allowance.

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.

Even if 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 available. 

As a 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.

Proposed amendments

The 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 2016.

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.[1] 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. 

Consequently, 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.

Given 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.

With the 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.


Footnotes

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.

Comments...

Stephen O'Reilly says...
Posted 21 January 2016
Fantastic Article. Thank you.

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