Renewable energy is seen as the long term future to the planet’s energy demands as a result of the increasing effects of climate change due to the long term use of fossil fuels. South Africa, in particular, has certain obligations as a party to the United Nations Framework Convention on Climate Change (UNFCCC) to ensure the reduction of greenhouse gas emissions and to incentivise investments in low carbon, clean energy. In addition to the environmental factors, South Africa’s load shedding and insufficient power supply has resulted in a further demand for the greater procurement and use of renewable energy.
However, renewable energy projects and initial set up costs are expensive. As a result, government has introduced many tax incentives in the renewable energy sector. Some of the incentives or mechanisms which have been introduced are focused on reducing carbon emissions, including the still to be introduced carbon tax. Other incentives are focused on energy efficiency such as the industrial policy projects’ additional allowance contained in s12I of the Income Tax Act, No 58 of 1962 (Act), the energy efficiency savings’ allowance contained in s12L, as well as the production of renewable energy and fuels’ allowance contained in s12B.
The Draft Taxation Laws Amendment Bill, 2016 (Draft TLAB 2016) intends introducing the latest renewable energy incentive. The Explanatory Memorandum to the Draft TLAB 2016 states that large scale renewable energy projects are currently not sufficiently catered for “due to the capital intensive nature of the supporting infrastructure whose tax treatment would need to be specifically targeted”. In particular, ancillary capital expenditures that indirectly support renewable energy production, such as the construction of necessary fences and roads close to renewable energy farms do not qualify for any deductions under the Act. The lack of sufficient tax deductions for such auxiliary outlays is, according to the industry, one of the major restrictions on the feasibility of such projects.
Government therefore proposes that provision is made for further specific tax deductions to encompass the supporting capital infrastructure for large renewable energy projects. The proposal is limited to renewable energy projects exceeding 5MW and above. The reason for this appears twofold, firstly projects within the 5MW to 50MW band are barely economically viable and this will hopefully boost such projects’ viability. Secondly, all renewable energy projects approved under the Renewable Energy Independent Power Producers Procurement Programme of the Department of Energy exceed at least 5MW.
The proposal includes provision for a deduction of pre-trade expenditure in much the same way as s11A of the Act to the extent that the capital expense is actually incurred prior to the commencement of and in preparation of carrying on that trade and where it has not been allowed as a deduction previously in the current or any previous year of assessment. The new intended s12U of the Act also provides for an anti-avoidance mechanism, in that any supporting infrastructure capital expenditure that exceeds the income in any year of assessment be ring fenced to the specific trade of the production of renewable energy. The proposed amendment is due to apply to large renewable energy projects undertaken during any year of assessment commencing on or after 1 April 2016.
While the increase of renewable energy tax incentives is most certainly welcome, it remains to be seen whether the recent round of proposed amendments will have a positive effect on the uptake of large renewable energy projects. An additional tax deduction in a similar form as the additional 50% research and development tax deduction has, despite calls from the industry, not been forthcoming. Nevertheless such an amendment may have a much larger impact on the feasibility of sorely needed large scale renewable energy projects.