The proposed renewable energy incentive, as introduced on 22 February in the 2023 Budget, resulted in a major point of discussion amongst corporate entities. The proposal by the Minister of Finance focused on the expansion of the current renewable energy incentive as an attempt by Government to address the current electricity crisis in South Africa. It is expected that the incentive will result in R5 billion in tax relief for companies.
On 21 April 2023 National Treasury released the first bath of the draft National Legislation for the 2023 legislative cycle. Prior to the introduction of the expanded incentive, section 12B of the Income Tax Act No 58 of 1962, which contains the accelerated depreciation allowance in respect of the production of renewable energy, applied to allow an income tax deduction, for amongst others, the following:
Where the qualifying asset produces photovoltaic solar energy not exceeding 1 megawatt, the entire cost of the qualifying asset may be deducted in the year of assessment in which the qualifying asset is brought into use.
i) 50 per cent in year 1;
ii) 30 per cent in year 2; and
iii) 20 per cent in year 3.
In terms of the expanded incentive, the current renewable energy tax incentive available in section 12B will temporarily be extended without imposing any threshold on generation capacity. In terms of the draft legislation, assets used to produce the following will be eligible for the expanded incentive:
- Wind power;
- Photovoltaic solar energy;
- Concentrated solar energy;
- Hydropower to produce electricity; and
- Biomass compromising organic wastes, landfill gas, or plant material.
The expanded renewable energy incentive will also apply to the following currently qualifying supporting structure under section 12B, to which eligible assets are mounted or affixed to:
- The foundation or supporting structure if it has been designed for the eligible asset and constructed in such a way that it can be said to be integrated with that asset;
- The useful life of the foundation or supporting structure is limited to the useful life of the asset affixed thereto;
- The foundation or supporting structure was brought into use on or after 1 March 2023 and before 1 March 2025; and
- The foundation or supporting structure shall be deemed to be part of the asset to which it has been mounted or affixed.
The expanded accelerated allowance is intended to assist in reducing pressure on the national electricity grid and will only be available for two years on investments brought into use between 1 March 2023 and 1 March 2025. This expanded incentive allows businesses to deduct 125 per cent of the cost of all eligible assets.
Where a taxpayer qualified for the expanded accelerated allowance and sells, recovers or recoups the purchase price of the asset on or before 1 March 2025, a recoupment will arise as follows:
- 25 per cent of the amount to be recovered or recouped will be included in the taxpayer’s income
- The remaining 100 per cent will be recovered or recouped in terms of the recoupment provisions enacted in section 8(4)(a).