Government adjusts the tax incentive for energy efficiency

Government adjusts the tax incentive for energy efficiency

With the rise of energy efficiency programmes, Government introduced Section 12L to the Income Tax Act, No 58 of 1962.

The outline of Section 12L of the Act is that a taxpayer will have access to an allowance when implementing technology which provides for measured and verified energy efficiency savings. There are certain compliance and registration requirements that need to be met, in order to prevent potential fraudulent usage of the allowance. The allowance calculated as per s12L is 45 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings.

The implementation of these renewable energy projects is rather costly and the taxpayer only receives the benefit in the first year of assessment, unless the project continues on a year to year basis. It is noted that the 45 cents per kilowatt hour is insufficient to incentivise energy efficiency projects.

Due to the rise of the energy efficiency projects that companies take on, Government has decided to address the above-mentioned issue. The recently published Taxation Laws Amendment Bill 29 of 2015 makes a proposal to adjust the amount of allowance that qualifying taxpayers can claim. The allowance will be increased from 45 cents per kilowatt hour to 95 cents per kilowatt hour equivalent of energy efficient savings. The amendment is deemed to come into effect on 1 March 2015 and applies in respect of years of assessment commencing on or after that date.

Section 12L applies to all energy forms such as electricity, lighting, insulation of buildings, upgrading air conditioning systems and reducing the use of fossil fuels like coal and diesel.

Compliance and Registration

A company needs to register with the South African National Energy Development Institute (SANEDI) for energy efficiency allowance claims. Once registered and approved (please contact us for details relating to registration process with SANEDI), SANEDI will issue an energy savings certificate which can be submitted to SARS, as well as the claim for the tax allowance. This will form part of the supporting documents and financial statements to be submitted to SARS after submitting the annual tax return.

The increase of the allowance can result in a large tax savings instrument. The allowance under current legislation, with verified kWh of 500,000, will be R 225,000. From the 2016 year of assessment the adjusted allowance will be R 475,000 (for the same kWh 500 000).

This is an opportunity for taxpayers to reduce their energy footprint and take advantage of this tax incentive.