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What costs can taxpayers deduct in pursuance of installing solar energy systems?

Source: https://www.golegal.co.za/solar-energy-tax/

Provided By Cliffe Dekker Hofmeyr 
By Jerome Brink 
Topics Energy & Environmental Law | Tax Law
23 Oct 2018 

It is beyond doubt that South Africa enjoys sunshine more than most places on earth. The South African Department of Energy (DoE) states on its website that the majority of regions in South Africa average more than 2,500 hours of sunshine per year, and average solar-radiation levels range between 4.5 and 6.5kWh/m2 in one day.

The DoE further states that the annual 24-hour global solar radiation average is about 220 W/m2 for South Africa, compared with about 150 W/m2 for parts of the United States of America, and about 100 W/m2 for Europe and the United Kingdom. Given these statistics, South Africa is undoubtedly “resource rich” when it comes to the ability to exploit sunshine for energy purposes.

With this background, various tax “incentives” pertaining to renewable energy (including especially solar energy) have been introduced over the years. One of the key “incentives” provided for is set out in s12B(h) of the Income Tax Act, No 58 of 1962 (Act) which allows a taxpayer (ie a person subject to tax in terms of the Act) to claim a deduction on the costs incurred in respect of plant, machinery, implements and articles owned by it, that are first brought into use by that taxpayer in the course of its trade in the generation of electricity from various renewable energy resources (including specifically photovoltaic solar energy). Three of the critical requirements which need to be met in order to qualify for the s12B(h) deduction include:

  1. that the plant, machinery, implement, utensil or article is owned by the relevant taxpayer claiming the deduction (or purchased by it under an instalment credit agreement);
  2. that such plant and machinery is brought into use for the first time by that taxpayer; and
  3. that such plant and machinery is utilised by the taxpayer in the course of its trade in the generation of electricity from specific renewable energy resources.

In respect of photovoltaic solar energy of more than one megawatt, a taxpayer is allowed a deduction of the costs to the taxpayer of the asset producing the electricity on a 50/30/20 basis. In other words, one is allowed a 50% deduction of costs in the first year of use, 30% in the second year and the balance in the third year of use. Where the photovoltaic solar energy system produces less than one megawatt of power, then the taxpayer is allowed a 100% deduction in the first year of use.

One of the critical questions, however, pertains to what can be technically included as “costs” pursuant to the s12B(h) deduction. Section 12B(3) of the Act provides some guidance as follows:

For the purposes of this section the cost to a taxpayer of any asset acquired by that taxpayer shall be deemed to be the lesser of the actual cost to the taxpayer or the cost which a person would, if he or she had acquired the asset under a cash transaction concluded at arm’s length on the date on which the transaction for the acquisition of the asset was in fact concluded, have incurred in respect of the direct cost of acquisition of the asset, including the direct cost of the installation or erection thereof.

The costs, which can thus be deducted in terms of s12B(h), is the lesser of the actual cost to the taxpayer, or the costs incurred in respect of the acquisition of the relevant assets under a hypothetical “arm’s length” scenario. In a recent ruling issued by SARS on 11 October 2018, namely Binding Private Ruling 311 (Ruling), SARS was tasked with determining, amongst other things, the extent of the costs to be deducted pursuant to the installation of a specific solar energy system. While the taxpayer in the Ruling wished to deduct the usual costs incurred in respect of plant and machinery (and related equipment) required to erect the solar installation, the taxpayer also wished to deduct (as part of the cost of the installation of the solar system) the following related expenditure:

  • installation planning costs;
  • panels delivery costs;
  • installation costs; and
  • installation safety officer costs.

In this regard, SARS ruled, among other things, that the taxpayer would be entitled to claim deductions in respect of the direct costs of the installation and erection of each of the plants, consisting of the installation planning costs, panel delivery costs and the cost of the installation safety officer to be appointed, under s12B(3).

While taxpayers should be careful of blindly relying on binding private rulings issued by SARS as they are very fact and circumstances specific and are only binding between SARS and the specific taxpayer applicant, this particular Ruling is welcomed as it provides further clarification as to what costs can be included when claiming a s12B(h) renewable energy deduction.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)DEPARTMENT OF ENERGY (DOE)INCOME TAXRENEWABLE ENERGYSOLAR ENERGYSOUTH AFRICAN REVENUE SERVICE (SARS)TAXPAYER

About Us

LRG Solar (Pty) Ltd delivers cost effective power solutions to the entire scope of industries across the continent. The technologies that are used to render these offerings are completely environmentally friendly compared to traditional technologies and complies with the Kyoto protocol and global carbon footprint reduction objectives.

Our approach is to first optimise the client’s operation, building, development, agricultural holdings or residential dwelling, to be able to lower the total kW usage of the project by using solar water heating, LED lights and power management devices, to make it feasible for an alternative power solution. The generation of alternative power is done through a number of technologies, for example solar and wind technology. 

We use only state of the art technologies and we keep constant stock of the various components.

The market segments on which we concentrate can be divided into three main categories:

• Agriculture;

• Private developers (residential);

• Buildings and factories (industrial & commercial).

We offer the complete spectrum as an EPCMOM contractor (engineering, procurement, construction, monitoring, operations and maintenance) for solar grid-tied and off- grid solutions as illustrated in some of our project photos.

Who We Are

LRG Solar (Pty) Ltd was officially established in August 2015 and is owner managed ensuring efficiency and superb services to our clients. The shareholders are from a diverse and experienced green Industry, offering outstanding knowledge and knowhow skills. Specialising in the sustainability of green energy, energy optimization and energy saving technology advanced solutions are offered for on and off-grid applications, making use of the latest and best technologies available in the green environment. 

The services offered are designed to help clients to improve the efficiency in resource utilization, to promote the dimensions of environmental sustainability and the total cost of ownership. Sustainability of business depends on the ability to create value in the ever-changing environment.

Vision

Our vision is to become the leading green product and service provider in the African market, and beyond, by supplying cutting edge technology, superior quality products and tailor made solutions to all that aspire to take part in the green evolution – and thereby setting ourselves apart from other service providers in the green industry.

Mission Statement

We will assist Commercial Enterprises and private individuals to implement sound and sustainable environmental solutions and practices, which hold both economic benefit and which have become regulatory, social and ethical imperatives. We will also remedy the failings of many competitors by designing product and service recommendations to satisfy the actual utilization, expenditure and other client specific efficiency requirements.

Philosophy

Our commitment is to deliver a durable proposition and to continuously seek out new opportunities that meet client needs. Whilst striving to define and remain at the cutting edge of global best practice, our business culture remains rooted in the strength of our relationships with our clients. We believe that advice is inextricably linked to product solutions that best address the client’s needs. Our approach emphasizes independence of advice and is based on a best of breed concept, which allows us to offer our client’s independent product and service opportunities.

Sustainability

Energy from our sun is free and the sun will continue to shine for billions of years to come. While the solar energy is inexhaustible and renewable, its irradiance is environment-friendly. The solar power system does not emit CO2, which is environmentally damaging. In addition, silicon, the raw material in making solar cells, is the second most abundant element in the Earth’s crust. Since the Solar industry has been developing and the technology is maturing, the PV power systems are efficient for commercial, residential and industrial use. In contrast, fossil fuels, as our main source of energy, are depleting. Our high dependence on fossil fuels is inevitably going to push up their prices continuously until they are completely depleted. Fossil fuels are (realistically) non-renewable and environmentally damaging. 

Recent climate change is in part a consequence from the increased CO2 concentration in the atmosphere caused by burning fossil fuels. All major world governments are committed to reducing carbon emissions. Therefore, it is essential for us to seek alternative renewable energy resources for guaranteed energy supply and environment protection. Solar PV energy generation is the answer.

“Excellence is our standard; Pride our driving force” 

Except for all of our commercial installations, We at LRG Solar also pride ourselves on the fact that we currently have more than 150 residential solar power systems currently producing power in Southern Africa. We can therefore with pride state that we are definitely a force to be reckoned with. Our slogan: Excellence is our standard, Pride our driving force, is what we adhere to in our daily lives, to ensure that our customers’ experience with LRG Solar will remain in their minds, long after the project has been completed. 

Solar Installations

Installing a new Solar System is very important. you need to know how to mount things, What Policies and Procedures to use, Where to take your cable, etc.

When you think of installers you need to look at what they use. Do they follow the right codes? Are they neat? How many installations have they done?

“Whether it be a small residential system, or a system that is designed to assist a farmer to save money, while keeping the lights on during load shedding, or even a system that will greatly reduce the energy cost to a Factory, or Shopping Centre, it is our commitment that all customers will receive the same, impeccable level of service, that they deserve. – N. Bekker (MD)”

The most important thing about a good installation is an understanding of the products, impact and general maintenance of a solar system. LRG Solar keeps all these elements in mind when they design and install a system. With years of experience they have gained a wealth of knowledge to support their installations.

All installations are done according to

Electrical Wiring to be done according to the electrical wiring code.

SANS 10142-1

Requirements for special installation or locations – Solar PV power supply systems

SANS (IEC) 60364-7-712

Testing of Low voltage electrical installations

IEC 60364-6

Minimum requirements for system documentation, commissioning tests and inspection

IEC 62446

Our guidelines and quality control is of utmost importance and it shows in our work. 

Check out our installation team portfolio: www.nrgservices.capetown

Solar System Design

When we talk about Solar Design, we talk about the type of system, the yield range, PV Module Layouts as well as load profiles on your mounting structure.

When you look at a LRG Solar Design, you can expect to see:

  • Type of System Suggested (Grid Tied, Off-Grid or Hybrid)
  • Total Yield Report on suggested System.
  • Panel Layouts on your roof.
  • Single Line Diagram
  • Mounting Structure Layout
  • Mounting Structure Load Profile

We use the Solar Industries’ foremost expert software to assist us in all our designs. That means the data is pulled according to your buildings location and we use such things as current Weather data, Irradiation Monitoring, 3D design and Shading Calculators.

If you so choose, LRG Solar can also monitor your house and business’ power usage. With our unique systems we can monitor up to 40 points of usage (40 Strings). This can help assist us in determining what you can do to create a more energy efficient building as well as the best possible Solar Solution for you.

When you request a Solar Design we need the following Information:

  • Address of Installation
  • 3-6 Months worth of Electricity Bills
  • A Photo of your roof and Roof type.
  • A Photo of your DB Board
  • A description of what you want from the Solar System.

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