The South African government has introduced tax incentives to promote the adoption of renewable energy sources, particularly solar energy, under sections 12B and 12BA of the Income Tax Act. The aim is to alleviate strain on the national power grid and mitigate the impact of load shedding.
This memo aims to provide a simplified explanation of these tax incentives, or ‘allowances’, and how they will apply to Momint’s SunCash Solar Certificates.
Business tax allowance under 12B:
The current tax allowance under section 12B enables businesses to reduce their taxable income by 100% of the cost of renewable energy project investments made by them under 1MW. For projects greater than 1MW, they can reduce it by 50% in the first year, 30% in the second year, and 20% in the third year.
Business tax allowance under 12BA:
However, the section 12B allowance has now been expanded, enabling businesses to reduce their taxable income by 125% of the cost of their investments into renewable energy projects. This expanded allowance is section 12BA and it supersedes section 12B.
This expanded allowance will apply for two years, have no threshold on the size of projects and will allow the full 125% to be claimed in the first year in which the investments are made. This will certainly encourage private sector investment in renewables and reduce the impact of load shedding.
Example of what section 12BA looks like in practice:
If a business purchases a solar power system (or a part thereof) for R100 000, then it will be able to reduce its taxable income by R33 750.
(Calculated as the amount invested x the 125% allowance x the applicable tax rate [as a business the applicable tax rate is the corporate tax rate]. The formula is therefore: [100 000*125%]*27% = 33 750).
Naturally, the ultimate reduction in the amount of tax the business or individual pays depends on their tax bracket and overall amount of taxable income they earn. It should also be noted that this only applies to those who pay South African tax. If a business or individual does not pay any tax to the South African government, then this initiative will not apply to them.
Lastly, the tax allowance is only eligible for those who make the first purchase of each solar certificate. Any secondary purchase of a solar certificate (i.e. the sale of a solar certificate from someone who has already bought it to a new owner) renders the new owner unable to claim the tax allowance.
Momint’s SunCash Solar Certificates:
Momint’s SunCash Solar Certificates offer a unique opportunity to harness these tax allowances as it enables both business and individuals to be eligible for the tax allowance.
When someone – whether a business or individual – purchases a solar certificate, they are directly investing in the solar project to which that certificate is connected. In return, they receive a beneficial interest in that solar project with the right to receive income generated by the project in proportion to the percentage of beneficial interest their certificate represents.
For example, if the solar certificate represents 10% of the solar project, then the owner will have a beneficial interest of 10% in the project. This beneficial interest will therefore entitle them to 10% of the net revenue generated by the sale of the electricity in that project.
As such, all solar certificates (whether purchased by a business or individual) for future Momint/SunCash projects will be eligible for the section 12BA allowance.
Therefore, in summary, solar certificates shall provide the following benefits:
Individuals and businesses can potentially reduce their taxable income by 125% of the cost of the certificates they buy (again, the ultimate reduction in the amount of tax they pay depends on the tax brackets in which they fall and the overall amount of taxable income they earn).
Individuals and businesses will earn income from the electricity paid for by the user of the solar project (such as a mall or school). (It should be noted that this income will be subject to normal income tax rules).
Individuals and businesses will meaningfully be able to contribute towards:
- accelerating the adoption of renewable energy in South Africa;
- reducing the impact of load shedding;
- boosting the economy; and
- driving the just transition.
The South African government’s introduction of the Section 12BA tax allowance represents a significant step towards encouraging solar energy adoption in the country. By harnessing these allowances, Momint’s SunCash Solar Certificates offer individuals and businesses the opportunity to contribute towards ending load shedding and increasing the adoption of clean, renewable energy all while augmenting their income.