Energy Efficiency Tax Incentive Section 12L Of The Income Tax Act Comes Into Effect

Submitted on Urban Earth Website by: Kathryn Kasavel, Monday, January 27, 2014

Section 12L of the Income Tax Act – Deduction in respect of energy efficiency savings- came into effect on the 1 November 2013. This tax incentive allows taxpayers to claim deductions of 45 cents per kilowatt hour, or kilowatt hour equivalent, of energy efficiency savings made against a baseline measured at the start of each year of assessment. This opportunity to claim tax deductions applies to all measured and verified savings achieved before 2020.For example, a company that achieves energy savings of 500,000 kWh in a year, would calculate their savings by multiplying 500,000 kWh by 45c which would equal a total of R225,000 in potential tax savings. Barry Bredekamp of SANEDI explains, “unfortunately, this is then subject to a deduction at the company tax rate, which is currently 28%, ie. resulting in a ‘real’ rebate of approximately 12c/ kWh”. In this example, the company would claim a total of R60,000 in tax savings.

In a speech to the media, the Director General of the Department of Energy, Neliswe Magubane stated “The allowance for Energy Efficiency Savings will provide tax incentive for energy efficiency improvements as outlined in the Regulations for businesses based on measured and verified energy savings through registration with the South Africa National Energy Development Institute (SANEDI) and ultimately linking to the Tax process by the South Africa Revenue Services (SARS)”. She also states that the initiative will not only create energy savings for individual companies but also reduce the greenhouse gas emissions associated with electricity production.

Regulations on the allowance for energy efficiency savings

The corresponding regulations on the allowance for energy efficiency savings were published on the 9th of December 2013 and detail the procedures required to claim allowances, how to calculate a baseline and limitations of the allowance.

Procedure to claim allowances

The regulations state that a person who intends to claim an allowance must:

  1. Appoint a measurement and verification (M&V) professional who must be accredited by the South African National Accreditation System (SANAS).
  2. Register with SANEDI.
  3. Submit a report compiled by the M&V professional to SANEDI that shows the calculation of the energy savings made for that year of assessment. This report must depict an accurate reflection of the energy efficiency savings achieved in that year.
  4. Upon receiving a certificate from SANEDI that contains details about the baseline study done at the beginning of the year of assessment, the details of the M&V professional that undertook the study and the energy efficiency savings in kilowatt hours achieved in that year, the claimant should submit this certificate together with their tax returns to the South African Revenue Service (SARS).

SANEDI will keep a database of all the reports and certificates issued and will provide ready access to this information to the Minister of Finance and the Commissioner of SARS. A new report with a new baseline should be compiled for every year of assessment.

Calculating a baseline

The baseline needs to be calculated at the beginning of each year of assessment for which the allowance is claimed. Bredekamp clarified, “The benefit is only applicable for 1 year and the measurement at the end of that financial year, becomes the baseline for any new energy efficiency interventions in the following year.” If the baseline is undertaken for a Greenfield project i.e. a new project that uses new and unused assets, the baseline must be established from comparable data in the relevant sector.

Limitations of the allowance

The rebate is only applicable for energy savings achieved in the year in which the particular project is commissioned. Any energy savings achieved in subsequent years as a result of that particular project cannot be claimed because a new baseline will be established for every year of assessment. This is meant to “encourage a process of continual improvement” explained Bredekamp.

This incentive is primarily for energy efficiency measures. Energy savings achieved by generating energy from renewable energy do not qualify for the rebate. Energy generated from a solar PV installation for example does not qualify. Only energy generated in the process of waste heat recovery can qualify for the rebate, if a minimum of 35% improvement in energy efficiency of that plant can be proven in that year.

Implementation of the tax incentive

SANEDI will assist the Department of Energy with the management of the technical aspects of the energy efficiency savings tax incentive, says Magubane. She explains that the regulations, standards, policies and incentives to support implementation have been developed with input from key stakeholders since 2005 when the Act was first published in draft form. Magubane states that these regulations, standards, policies and incentives will focus on specific subsectors and will include the implementation of various energy efficiency programmes. SANEDI and SARS will conduct national workshops in 2014, in order to help businesses to understand and familiarise themselves with the registration processes and implementation, explains Magubane. She states further that “Businesses are therefore encouraged to take this opportunity to continuously scale up or intensify their energy efficiency improvement measures to take full benefit of this tax incentive”.