Understanding tax incentives and other benefits of using renewable energy in South Africa (Business)

The government announced renewable energy-related tax incentives in February 2023 to assist businesses and consumers alike as they attempt to mitigate the destruction brought about by load-shedding. 

Recently the National Treasury published a draft bill for commentary detailing how the incentive will be applied. In this article, we comment on existing incentives and other benefits currently available to taxpayers. We also summarize the contents of the draft bill.

Tax incentives for businesses involved in the generation of electricity.

The draft bill proposes that section 12BA be added to the Income Tax Act No.58 of 1962. This section will allow qualifying businesses to claim 125% of costs incurred in respect of qualifying investments.

This is limited to investments brought into use for the first time between 1 March 2023 and 28 February 2025. There will be no thresholds on the size of the projects that qualify, and the incentive will be available for two years to stimulate investment in the short term. Below we compare the incentive per the draft bill to existing incentives that businesses can apply to similar projects/assets.

Small business cooperations are defined to be a personal liability company, close corporation, or private enterprise. The entity’s shares (proprietary interests) must be held by natural people at all times during the assessment year and the gross income of the entity may not exceed R20,000,000.

Energy consumption- Section 12L

Section 12L of the Income Tax Act provides for an additional allowance for energy efficiency savings. The deduction of the energy efficiency savings is calculated at 95 cents per kilowatt hour or kilowatt hour equivalent. Before making a deduction under section 12L during any year of assessment, the taxpayer must have a certificate from the South African National Energy Development Institute (SANEDI) that confirms and provides proof of energy savings in their possession.

Carbon Tax/Excise

Renewable energy premium Eskom and other electricity generators who during the tax period purchased renewable energy at a price inclusive of the renewable energy premium under the Renewable Energy Independent Power Producer tariffs are the only ones who are eligible to use the provision in Section 6(2) of the Carbon Tax Act, 2019, which allows the deduction of the Renewable Energy Premium against the taxpayer’s carbon tax liability.

The carbon taxpayer must meet the following requirements to be eligible for the deduction:

1. Be licensed with the National Energy Regulator of South Africa (NERSA); and
2.  Supply electricity to the national grid with a Purchasing Power Agreement (PPA) with Eskom.
3. The carbon tax liability may only be offset by direct and primary purchases of renewable energy for which the renewable energy premium was paid. Therefore, the deduction is only available to carbon taxpayers who are producing electricity and who really paid the premium for renewable energy on those purchases made during the tax period.

For carbon tax purposes, some items are not eligible for the renewable energy premium deduction depending on the purchase, use, and disposal of such renewable energy.