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Income Tax

With load shedding showing no signs of easing, renewable energy tax incentives are serving to encourage businesses to self-suffice off the back of available tax breaks, to address the business impact of frequent outages. In the first of our 3-part blog series on Load Shedding Income Tax Incentives, we revisit S12B to dive into how it works and what you need to be aware of in utilizing this section as a factor in your renewables investment.

S12B explained

S12B of the Income Tax Act No. 58 of 1962, as amended (“the Act”), provides for an accelerated write-off of qualifying assets, including the provision for a capital allowance of assets used in the production of renewable energy, more specifically:

  • Assets used for the production of bio-diesel or bio-ethanol
  • Assets used by a taxpayer for the purpose of his trade, in the generation of electricity from
  • Wind power
  • Solar energy:
  • Photovoltaic solar energy of more than 1 megawatt
  • Photovoltaic solar energy not exceeding 1 megawatt
  • Concentrated solar energy
  • Hydropower of not more than 30 megawatts
  • Biomass

The allowance is based on cost, deducted as follows:

  • Year 1: 50%
  • Year 2: 30%
  • Year 3: 20%
Also covered in the income tax deduction are improvements to such assets, as well as any foundation or supporting structure that is an integral part of the operation of the machinery in question.

The section was amended in respect of assets brought into use for years of assessment commencing on or after 1 January 2016, for photovoltaic solar energy not exceeding 1 megawatt.  In such a case, the deduction accelerates to 100% in year 1, without any apportionment. It was amended again in February 2023 under the Energy Support Package initiative.  From 1 March 2023 and for a 2-year window period, businesses qualify for a 125% tax deduction of qualifying investment costs. 

Implementation guidelines

To ensure your business qualifies for S12B relief, here’s what you need to know:

  • Where the asset is purchased under an instalment credit agreement, the asset qualifies equally.
  • The allowance triggers in the first year that the asset is brought into use i.e. it must be operational.
  • The allowance applies to qualifying assets purchased second hand.
  • The accelerated allowance does not apply to buildings.
  • The Act does not require for the asset to be movable to qualify for S12B.
  • There is no apportionment of cost.
  • S12B applies to the exclusion of S11(e) i.e. both cannot be claimed.
  • Cost is determined as follows:
  • It’s the lesser of actual cost or an arm’s length cash cost.
  • If the asset was acquired for no consideration, no allowance is claimable.
  • Installation and erection costs are included.
  • Finance charges are excluded in the determination of cost
  • Any S8(4)(e) recoupment from a previously damaged or destroyed asset reduces the cost for eligibility of S12B
  • Total deductions claimed under the section cannot exceed total cost.

Closing thoughts

S12B offers an attractive incentive for those businesses wishing to insulate themselves against the potentially devastating impact of erratic electricity supply, but interpretation and implementation of the section is key.  Reach out to our income tax experts for advice on how to apply S12B in your business income tax computation.

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