Section 12B of the Income Tax Act No. 58 of 1962, as amended (the “Act”) allows for a tax deduction in respect of certain qualifying assets (owned and brought into use after 1 January 2016) to reduce the taxable income of the taxpayer. These qualifying assets must be used for purposes of trade in the generation of electricity from renewable sources (our article will exclusively consider solar energy).
Included in the scope of section 12B of the Act is any cost of other equipment utilised in the generation of electricity from photovoltaic solar energy, as well as any cost incurred for the foundation or supporting structure. The direct installation and erection costs are also included in the cost on which the tax allowance is based.
To what extent is the tax deduction available in terms of section 12B of the Act?
The allowance in terms of section 12B of the Act varies depending on whether the electricity generation capacity of the taxpayer’s qualifying assets exceeds one megawatt or not. We have summarised the allowance available as follows (subject to certain requirements being met):
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Generation capacity
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Tax allowance per year of assessment
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1st year
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2nd year
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3rd year
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≤ 1 Megawatt
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100%
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0%
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0%
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> 1 Megawatt
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50%
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30%
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20%
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It is important to note that the allowance is not apportioned even if the asset was not utilised for a full year of assessment (as opposed to other assets used in trade, which are usually apportioned on a monthly basis). Furthermore, it should be noted that the asset may be new or used (i.e. second hand) – it must simply be brought into use for the first time by the taxpayer.
What does the trade requirement entail?
The deduction allowed in terms of section 12B of the Act requires the taxpayer to have brought the qualifying assets into use for the purpose of their trade.
In short, conducting a trade means to embark on an undertaking to make a profit while the person risks something and it implies an active occupation (as opposed to the passive earning of investment income – which is specifically excluded from ‘trade’).
This includes, for example, electricity generation to be used in the course of the taxpayer’s business, or electricity generation for sale/distribution in terms of a purchase power agreement (PPA). This requirement is prohibitive to taxpayers who install solar generation facilities for supply to their residential home.
There are manners in which an installation in a residential home could qualify for a deduction in terms of section 12B of the Act – but this is beyond the scope of this article.
Conclusion
There are a wide range of benefits to be realised from implementing solar generation capacity in your business, including limiting your carbon footprint and reducing ever-increasing electricity bills. Couple those benefits with the knowledge that SARS could effectively cover 28% (for corporate taxpayers in the 2022 year of assessment) of the cost of the qualifying assets and it seems like a no-brainer to make a move towards solar energy generation.
For more information on the tax consequences arising from the application of section 12B of the Act, feel free to contact your local Moore firm here.