Understanding how the Enhanced Renewable Energy Tax Incentive works

2024-10-03 14:58:16

The Enhanced Renewable Energy Tax Incentive in South Africa aims to encourage businesses to invest in renewable energy projects, helping to address the country's energy crisis and support the transition to a greener economy. 

This incentive provides substantial tax benefits for businesses that invest in qualifying renewable energy assets, with a temporary enhanced deduction available for a limited time.

Key Features of the Enhanced Renewable Energy Tax Incentive

1. 125% Deduction on Qualifying Expenditure

Businesses can claim a once-off deduction of 125% of the cost of qualifying renewable energy projects. This incentive is available for projects brought into use between March 1, 2023, and February 28, 2025. This means that if a company invests R1 million in a qualifying project, it can deduct R1.25 million from its taxable income, providing significant tax savings.

2. The Scope of Qualifying Assets

The incentive covers various renewable energy sources, including:

- Wind power
- Solar photovoltaic (PV) energy
- Concentrated solar power
- Hydropower
- Biomass energy from organic waste, landfill gas, or plant material

These assets must be new and unused and include not only the primary energy-generating equipment but also supporting infrastructure and the direct costs of installation or assembly.

3. No Threshold on Generation Capacity

Unlike previous incentives, there is no limit on the generation capacity of renewable energy projects. This change removes the previous distinction where projects generating less than 1 MW of power were treated differently than those above this threshold. This expansion aims to make the incentive more accessible and attractive to larger renewable energy projects.

4. Restrictions on Leased Assets

To claim the incentive, the asset must be used directly by the business or leased under specific conditions. Leases must be either an "operating lease" as defined in the tax act or a lease of at least five years, with the lessee earning income from the lease. This provision ensures that the tax incentive supports genuine investment in renewable energy infrastructure rather than short-term or passive leasing arrangements.

5. Accelerated Depreciation Allowance

In addition to the enhanced deduction, businesses can benefit from accelerated capital depreciation under Section 12B of the Income Tax Act. This allows companies to write off the cost of renewable energy assets over a shorter period, improving cash flow and making renewable energy investments more financially viable.

Strategic Benefits for Businesses

Investing in renewable energy offers several advantages beyond the immediate tax benefits. By reducing reliance on the unstable national grid and mitigating exposure to rising electricity costs, businesses can achieve long-term operational resilience and cost stability. Additionally, supporting the green energy transition aligns with corporate social responsibility (CSR) goals and enhances a company's sustainability credentials.

How to Maximise the Benefits

To take full advantage of the enhanced renewable energy tax incentive, businesses should consider:

  • Conducting a feasibility study to identify the most suitable renewable energy projects.
  • Consulting with tax professionals to ensure compliance with all requirements and to optimise the timing of their investments.
  • Engaging with reputable suppliers and contractors to ensure that all assets qualify under the incentive’s terms.

The enhanced renewable energy tax incentive represents a unique opportunity for businesses to invest in sustainable energy solutions while benefiting from significant tax savings. With the incentive available only until February 2025, businesses should act swiftly to capitalise on this opportunity.

For more detailed information, you can access the Treasury's FAQ on the Enhanced Renewable Energy Tax Incentive ​(National Treasury) ​(Cliffe Dekker Hofmeyr) ​(KPMG).