Solar tax benefits from Section 12B of the income tax act
The Section 12B tax incentive in South Africa refers to a tax provision promoting investment in the renewable energy sector.
It provides tax relief for investors who invest in qualifying renewable energy projects. Effective from 1 March 2023 to 28 February 2025, the Section 12B allowance in South Africa has been raised to 125% with no maximum cap on solar installation output.
FAQs
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All taxpayers, individual or corporate, have the opportunity to qualify for this tax benefit.
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There is no minimum prescribed period to hold the asset to benefit from the 12B allowance. However, the enhanced incentive is limited to renewable energy assets first utilized between 1 March 2023 and 28 February 2025.
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Investors qualify for the s12B incentive in the year that the solar equipment comes into operation.
To qualify for this incentive, the investment must be made specifically to earn income or returns through the sale of electricity, rather than personal energy consumption.
An example of the tax benefit
Assume an investor decides to invest ZAR 400,000 in a qualifying solar energy project. With the tax allowance of 125% under Section 12B, she can deduct 125% of the qualifying investment from her taxable income.
Assume the highest tax bracket in South Africa of 45%.
Without the tax allowance:
Taxable income: ZAR 1,000,000
Tax payable @45%: ZAR 450,000
With the tax allowance:
Taxable income: ZAR 1,000,000
Invested in s12B fund @125%: (ZAR 500 000)
Taxable income: ZAR 500,000
Tax payable: ZAR 225,000
By utilising the Section 12B tax allowance of 125%,results in a savings of ZAR 225,000 (ZAR 450,000 - ZAR 225,000). You can use tools like TaxAI or TaxTim for your specific tax scenario.
What benefits are there if I want to invest in solar funds?
Stable and Predictable Returns
Solar energy projects/funds typically generate long-term, stable cash flows through power purchase agreements (PPAs). Yields on solar assets are in the double digits % as measured by IRR. This stability makes solar investments an attractive option for investors seeking reliable returns.
Tax benefit
As mentioned above, there is a s12B benefit of 125% for South Africa investors looking to deploy capital for the purpose of earning an income from their investment.
Energy security for SA
South Africa is currently experiencing a severely constrained electricity grid with no reliable solutions in sight. Your investment in solar helps to both provide a solution to the SA energy crisis but also forms part of a wider environmental effort to shift to sustainable energy.