Adjustment of energy savings tax incentive

In recent years, the South African energy landscape has undergone significant changes with the introduction of a number of private and public sector renewable energy projects.

In order to ensure the commercial viability of the renewable energy projects, Government introduced an energy efficiency program which provides for qualifying tax allowances so as to assist and encourage taxpayers to reduce their energy footprint.

In particular, the energy efficiency savings tax incentive was implemented in November 2013, following the promulgation into law of s12L of the Income Tax, No 58 of 1962 (Act). Section 12L of the Act was introduced mainly to encourage the uptake of energy efficiency measures that result in improvements in energy use and which contribute towards reductions in greenhouse gasses.

Section 12L provides a qualifying taxpayer with an allowance for implementing technology resulting in measured and verified energy efficiency savings. Subject to certain compliance and registration requirements being met, the allowance under s12L is calculated at 45 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings.

The potential difficulty with s12L in its current form is that a taxpayer would essentially only receive a once-off benefit in their first year of assessment, unless continuous energy efficiency processes are put in place year-on-year. The costs incurred could possibly outweigh any benefits under s12L after the first year of assessment in which the allowance is claimed, which is mainly due to the calculation of the baseline from which energy efficient savings is measured. Furthermore, since the introduction of the incentive, the rate of 45 cents per kilowatt hour has not been adjusted and is therefore deemed insufficient to incentivise energy efficiency projects.

In order to address the aforementioned anomaly, the recently published Taxation Laws Amendment Bill 29 of 2015, which was tabled in Parliament on 27 October 2015 - which is likely to be promulgated in its current form - makes a welcome proposal to adjust the amount of the allowance to be claimed by qualifying taxpayers. In particular, it is proposed that the amount of the allowance to be claimed by qualifying taxpayers, in respect of energy efficiency savings, be increased from 45 cents per kilowatt hour to 95 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings.

The promulgation of the proposed amendment is likely to ensure that the substantial investment and compliance costs, relating to the uptake of energy efficiency projects, are commercially viable thereby assisting and encouraging taxpayers to reduce their energy footprints.

The amendment is deemed to come into operation on 1 March 2015 and applies in respect of years of assessment commencing on or after that date.