Section 12BA: Time is running out fast!

By: Morne Mc Grath, tax specialist

Introduction - Section 12BA

The country’s struggle to produce reliable electricity forced Government to encourage greater private sector investment in renewable energy. To encourage rapid private sector investment Government decided to temporarily enhance the current renewable energy tax incentive available in section 12B of the Income Tax Act (“ITA”) with the introduction of section 12BA. The Explanatory Memorandum on the Taxation Amendment Bill, 2023 explains the introduction of section 12BA in the following way:

“The enhanced accelerated allowance is intended to encourage businesses to invest in assets used in renewable energy production sooner rather than later, to assist with alleviating pressure on the national electricity grid. Temporary investment allowances have been shown to induce larger responses sooner. Government recognized that significant projects may require a longer lead time and sought to support smaller businesses in adding generation capacity to the grid. Furthermore, the incentive aims to encourage those that would not have invested in renewable energy if it were not for the incentive.”

Section 12BA provides for a deduction equal to an amount of 125 per cent of the cost incurred by the taxpayer for the acquisition of the machinery, plant, implements, utensils, and articles used in production of renewable energy. The taxpayer will access an “additional” 25% deduction over and above the costs actually incurred. Section 12BA have the following requirements:

1.Applies to the generation of electricity from the following sources:

-wind power.

-photovoltaic solar power.

-concentrated solar energy.

-hydropower.

-biomass comprising organic waste, landfill gas or plant material.

2.The cost(s) must have been incurred in respect of new and unused machinery, plant, implement, utensil, or article which is:

-owned by the taxpayer / acquired in terms of an instalment sale agreement.

-was or is brought into use for the first time by the taxpayer on or after 1 March 2023 and before 1 March 2025 (i.e. latest on 28/2/2025)

3.Was incurred for purposes of the taxpayer’s trade (does not have to trade in electricity and could therefore be for its own use)

Time is running out…….

I was hopeful that the Government will extend the “before 1 March 2025” deadline by at least another 2 years but is unfortunately not going to happen. Electricity generation has improved in the country in the last 12 months and a few of the larger energy projects will start generating electricity during the latter part of 2025. It is understandable that the National Treasury will be concerned about the impact on the fiscus of an extension of this incentive.

On 23 November 2024 SARS published the “Guide on the Allowances and Deductions Relating to Assets Used in the Generation of Electricity from Specified Sources of Renewable Energy” (“the Guide”). The Guide provides guidance on the tax incentives available for the generation of electricity from specified sources of renewable energy under section 12B(1)(h) and (i), the enhanced form of this deduction under section 12BA. It is important to note that the guide is not an “official publication” as defined in section 1 of the Tax Administration Act 28 of 2011 (“TAA”) and accordingly does not create a practice prevailing under section 5 of the TAA. It is also not a binding general ruling (BGR) under section 89 of the TAA.

The taxpayer has less than 2 months before the “expiry date” of section 12BA and it will be unfortunate if the taxpayer does not benefit from the extra 25% that is available “for mahala” (free). Matters of importance and the section 12BA deduction:

The nature of the “asset”

The “asset” that qualifies for the section 12BA deduction include machinery, plant, implements, utensils and articles and where the “asset” is mounted on or affixed to a foundation/supporting structure which is designed to be integrated with the “asset” it will also then form part thereof i.e. the 125% deduction can also be claimed on the foundation or supporting structure. On pages 6-8 the Guide offer valuable insights including the following phrases:

1.“The words “machinery,” “plant,” “implement,” “utensil” and “article” are not defined in the Act and must, therefore, be interpreted according to their ordinary meaning…”

2.“It is apparent from the definitions and considerations above and the word “any” that “machinery, plant, implement, utensil or article” has a wide meaning. Machinery, plant, implement, utensil, or article, however, refer to corporeal assets and do not include incorporeal assets, for example, patents or licenced rights.”

3.Under section 12B(1)(h) and (i) and section 12BA (1), the assets concerned must be used “in the generation of electricity” from the specified sources of renewable energy. The word “in” implies that the deduction is not only for assets producing electricity. If, for example, storage and conversion assets form part of a system of assets that produce electricity, such assets will qualify for the deduction if all the requirements of the particular section are met. Of importance is that it needs to be part of a system that generates electricity. Therefore, if a taxpayer is only drawing power from the grid and storing it, such storage assets will not qualify.”

Brought into use for the first time.

The determination of when an asset is brought into use for the first time by a taxpayer is important for purposes of having a valid deduction in terms of section 12BA and it must be before 1 March 2025. “Brought into use the first time” means that the asset is brought into use for the first time in a way which is consistent with its intended and future use but excludes the installation- and testing phase of the asset. Proof as to when the asset was brought into use for the first time may include an electrical certificate of compliance, generation- and utilization reports and if the electricity is being sold the initial metering reports, and contracts / invoices. One can expect SARS to be focus on section 12BA deductions and taxpayers must ensure that they have “bullet-proof” evidence that the “assets” were brought into use before 1 March 2025.

Concluding remarks

1 March 2025 is unfortunately a non-negotiable deadline for purposes of the section 12BA deduction. The crux of the deduction is whether the asset(s) was brought into use (generated electricity) before 1 March 2025. If the deadline is missed the taxpayer will unfortunately default to a section 12B deduction. Is it possible to bring some of the “assets” into use and generate electricity prior to 1 March 2025 even if the plant is running a reduced capacity?

The section 12BA deduction should be valid even if the “assets” are not running at full generating ability. I have no idea if an “energy plant” can be brought into use in stages i.e a phased approach with maximum capacity of the plant only being achieved after 1 March 2025. In such a scenario the taxpayer should have a strong argument for a section 12BA deduction to apply to all the asset(s). Alternatively, the taxpayer will have to apportion the deduction between a section 12BA and a section 12B deduction which would still be beneficial for the taxpayer.

All the best to the taxpayers in their “Amazing Race” to 1 March 2025!!!!!