The draft Taxation Laws Amendment Bill was published by National Treasury on 08 July 2016. One of the proposals under the draft Bill is to widen the scope of the Income Tax Act regarding allowable capital allowances for supporting infrastructure used in producing renewable energy. National Treasury has recognised that large scale renewable energy projects are not satisfactorily catered for under the existing accelerated depreciation provisions and that this influences the feasibility of many large scale renewable energy projects.
What is the Section 12(B) Tax Allowance of the Income Tax Act No. 58 of 1962?
Section 12(B) of the current Income Tax Act provides for an accelerated capital allowance in respect of certain movable assets owned by the taxpayer, and used by the taxpayer in the production of renewable energy, in respect of generation of electricity from wind power, solar energy, hydropower to produce electricity of not more than 30 mega watts and biomass compromising organic waste, landfill gas or plant materials.
More specifically, the accelerated write off period of 50% in the first year, 30% in the second year and 20% in the third year, provided for in Section 12(B), applies to the costs of the said machinery, plant, equipment, utensils or articles or any improvement thereto. There was amendment to the Act in 2015, which allowed for a distinction between photovoltaic solar energy of more than 1 mega watt, photovoltaic solar energy of less than 1 mega watt and concentrated solar energy. The change provided for an accelerated capital allowance of 100% in the first year, in respect of photovoltaic solar energy of less than 1 mega watt.
The allowance that may be claimed in terms of Section 12(B) of the Act is not apportioned in the first year of the write off. In other words, the allowance is fully claimable in the relevant year of assessment, regardless of at what point in that year the asset was brought into use. No apportionment is done according to the amount of days in that year when the asset was used.
It is important to note that the allowance is only available if the asset is brought into use for the first time by the taxpayer. Accordingly, the allowance is not limited to new or unused assets but rather the wording of the Section merely prevents the taxpayer from claiming the Section 12(B) allowance twice on the same asset.
Furthermore, the asset has to be brought into use for the purpose of the taxpayer's trade in order to generate electricity from the specified renewable energy sources.
Section 12(B) thus provides for an accelerated capital allowance on the cost of the asset and can be claimed in full, even if the asset is used for only part of the year of assessment.
Section 12(B)(3) deems the cost of the asset to be lesser of:
- The actual cost to the taxpayer; or
- The cost under a cash transaction concluded at arm's length on the date on which the transaction for which acquisition was in fact concluded;
- Plus, the direct cost of its installation or erection.
The Section 12(B) allowance is also available on foundations or supporting structures that are deemed to part of the qualifying asset, if:
- The asset is mounted or fixed to any concrete or other supporting structure or foundation;
- The supporting structure or foundation is designed for the asset in such a way that it is an integral part of the asset; and
- The foundation or supporting structure is brought into use on or after 01 January 2013.
Reasons for the change in the Bill
National Treasury is of the view that currently, large scale renewable energy projects are not adequately catered for under the existing accelerated depreciation regime due to the capital intensive nature of supporting infrastructure whose tax treatment would need to be specifically targeted. Capital expenditures that indirectly support renewable energy production, such as the construction of fences and roads, do not qualify for deductions under the Act in its current form. According to industry, this is one of the limitations that influence the viability of most large scale renewable energy projects.
The deduction under the proposed amendment will apply where any amount is incurred in respect of the construction of any road or the erecting of any fence for purposes of generating electricity which exceeds 5 mega watts. The proposed amendment takes into account that all renewable energy projects approved under the endorsement of the Renewable Energy Independent Power Producers Procurement Programme of the Department of Energy currently exceed 5 mega watts. The electricity must be generated from wind power, solar energy, hydro power (to produce electricity of not more than 30 mega watts) or biomass.
According to Treasury, current evidence suggests that renewable energy projects within the band of 5 to 50 mega watts are barely economically viable and as such this proposed incentive will assist in increasing their financial viability.
In addition, any costs incurred by the taxpayer in making any improvements (other than repairs) to roads or fences (including foundations or supporting structures designed for such a fence) will fall within the allowance.
Where any supporting infrastructure capital expenditure exceeds the income in any year of assessment then that expenditure will be ring fenced to the specific trade of the production of renewable energy. Therefore, where the expenditure exceeds the taxpayer’s taxable income from its renewable energy operations it is prohibited from deducting the excess against any other income it may have. However, this excess may be rolled over as an allowable capital expenditure during the next succeeding year of assessment against income which is specific to the trade of the production of renewable energy.
In the event that the capital expenditure on supporting infrastructure is incurred before the taxpayer begins its trade, then specific provision has been made for taxpayers to claim such "pre-trade expenditure" as a capital allowance which can then be deducted against future income derived from the renewable energy projects.
The proposed amendments will apply to large-scale renewable energy projects and if passed by parliament the amendments are to come into effect from 01 April 2016.