Section 12B allowance: Assets used in the generation of electricity from renewable energy
By Wendy Gardner
Section 12B (1)(h) provides for a deduction in respect of any machinery, plant, implement, utensil or article (referred to as a qualifying asset), owned by the taxpayer and brought into use for the first time by that taxpayer for the purpose of trade to be used by that taxpayer in the generation of electricity from renewable energy (i.e. wind power, solar energy, hydropower and biomass).
The allowance is calculated on the cost to the taxpayer of the qualifying asset and the rate of the allowance will be 50% in respect of the first tax year during which the asset is brought into use, 30% in the second tax year and 20% in the third tax year (i.e. 50/30/20).
The question which arises is which qualifying assets will be considered to be used by a taxpayer in the generation of electricity. Put differently, what does the generation of electricity in the context of section 12B entail? Is it simply the creation of the electricity in, say, the solar panels of a solar farm, or does it include the ‘processing’ or ‘harnessing’ of such electricity in a form which can be sold?
The authorities have not specified which qualifying assets of a typical renewable energy operation are eligible for the section 12B capital allowance. The intention of the legislature in extending section 12B allowance in 2006 to assets used in the production of renewable energy, was to incentivise the industry and therefore it is unlikely that the legislature could have intended the incentive to stop at the lowest common denominator of energy (e.g. solar panels that convert light in direct current, or the wind turbines that do a similar job in some respects) which if not harnessed correctly is worthless.
Consequently it is considered that to generate electricity in the context of section 12B must mean the process of producing electricity up to the point at which it is in a form which can be sold, i.e. applied for purposes of trade. In circumstances where Eskom is the buyer, the electricity contemplated must enter the national grid at precisely the correct voltage and frequency, and generated power (electricity) for public supply by Eskom is in the form of alternating current (AC).
If follows therefore that all the assets of a renewable energy operation which are integral to the production or generation of electricity up to the point where the electricity is in a form which can be sold should be eligible for the section 12B allowance. In circumstances where Eskom is the buyer, this implies AC power in the correct voltage and frequency, and therefore only once the electricity enters Eskom’s substation for distribution into the national grid, does the generation process end for the taxpayer and the transmission or distribution process begin for Eskom.
Examples of solar farm assets, for example, which should qualify for the section 12B allowance since they should be integral to the generation of electricity from solar energy, could include PV panels, modules, combiner boxes, inverters and cabins, transformers, related foundations or supporting structures, related equipment, including control and power conditioning equipment, equipment designed to store electrical energy (batteries) and the transmission equipment up to the interface with the distribution system.
Examples of assets which may not be eligible for the section 12B allowance (although part of a solar farm) since they may not be integral to the electricity generating process could include the security and control systems, access roads and fencing, electrical distribution equipment and facilities, other back-up generating equipment (such as diesel engine, main switch or power bar), vehicles, telephone equipment, etc. However, if it can be demonstrated on the facts that any such assets are integral to the generation of electricity, a different conclusion may be reached. Whether by accident or design, section 12B does not exclude buildings or other structures or works of a permanent nature excluded by section 11(e)(ii).
No authority exists for this view. Given the uncertainty and the number of renewable energy farms being established in South Africa, it is incumbent on the authorities to provide guidance.