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S12B Allowance for Renewable Energy Machinery

by | Jan 4, 2023 | Tax

Reading Time: 4 minutes
Reading Time: 4 minutes
4-Jan-2023

Renewable Energy in Southern Africa

South Africa is teeming with natural resources and some of the world’s best wind and solar conditions. As the country continues to face an electricity shortage, we find a small reprieve in Section 12B of The Income Tax Act, which outlines a tax incentive for businesses seeking to create and maintain renewable energy sources. This allowance forms part of a larger initiative to encourage investment in cleaner energy forms and to reduce greenhouse gas emissions.

How does the S12B allowance work?

Section 12B of the Income Tax Act provides a tax incentive in the form of a deduction for movable assets used in the production of renewable energy. This deduction is applicable to qualifying assets owned by the taxpayer. The section 12B allowance is available for any asset brought into use for the first time by the taxpayer, regardless of whether it is new or used. This prevents taxpayers from claiming the allowance twice on the same asset.

Assets used for the production of the following renewable energy sources qualify:

  • Wind
  • Solar
  • Hydropower
  • Biomass

By claiming accelerated capital allowances under section 12B, taxpayers can write off the total cost of an asset, even if it was only used for part of the year of assessment. This Section deems the cost of the asset to be the combination of the following:

  • The actual cost.
  • The cost of a cash transaction, conducted by two unbiased parties on the date the sale was finalised.
  • The cost of its installation.

Finance costs are excluded as they are deductible under Section 11(bA). This allowance is also applicable for movable assets, which means it does not allow for claims on buildings.

The cost of the asset also includes improvements and foundations. Should the lessee undergo necessary modifications on leased property in terms of the Public Private Partnership or for obligations incurred, then the Independent Power Producer Procurement Programme applies. Should the property be used to incur income, Section 12N allows for the depreciation of improvements to be calculated as though the lessee owns the property.

Practical considerations for claiming this allowance

A difficulty when interpreting section 12B is determining which assets qualify as those used by a taxpayer to generate electricity since “generation” could entail the creation of electricity and the processing and harnessing thereof. However, since the legislation intended to incentivise the production of renewable energy methods, we can assume that this allowance extends to the assets that harness electricity rather than only create it.

As a result, the main components necessary to generate electricity from solar power, such as photovoltaic (PV) panels, combiner boxes, inverters, and batteries, will be covered by this allowance. Additional assets that may be a part of a solar farm but aren’t needed to produce electricity are likely to fall into the latter group that does not qualify. If the taxpayer can prove that any related assets are crucial to electricity generation, then those assets might qualify for the allowance.

It’s time to invest in renewable energy!

The future of renewable energy in South Africa is certainly bright with these countervailing income tax that incentivise sustainable energy policies. With costs for technology lowering and barriers to entry into the renewable market being dismantled, there has never been a better time to invest in renewables.

If your business is interested in investing in renewable energy sources but is unsure how to navigate the Income Tax Act incentives, our tax consultants can assist. Reach out for more information.