Section 12L of the Income Tax Act, 1962 (Act 58 of 1962) was announced to be in operation as from 8 November 2013 and entails the opportunity for tax deductions in terms of energy savings presented at 45c per kWh saved. However some clarity around this section and the workings thereof reveal the true potential of this incentive.
Section 12L allows companies/individuals the opportunity to reap a small benefit in terms of tax deductions as result of the ESM (energy saving measures) implemented by that company/individual. To qualify for these deductions a certificate must be awarded to the pursuing body/individual by a SANAS (South African National Accreditation System) accredited M&V (Measuring & Verification) body or professional in which the savings are certified by SANEDI (South African National Energy Development Institute).
Energy savings are established after the implementation of an ESM. These savings (as determined by an accredited M&V body/professional) are established using the methodology presented in SANS50010. This standard states that the magnitude of energy savings are calculated as the difference between the electricity usage after implementation of an ESM (Energy Saving Measure) and the established baseline of energy consumption. This baseline would be the electricity usage of the preceding year, for the same load conditions, without any ESM. It is thus important to emphasize that the energy savings are not purely the difference between the energy savings before and after implementation of an ESM.
Moving from one year to the next Regulation 729 of the National Energy Act 2008, section 19 (Act no. 34 of 2008) “Regulations on the allowance for energy efficiency savings” states under the definition of the baseline:
(a) for the first year of assessment for which the allowance is claimed must be derived from data gathered between the first day and the last day of the year of assessment preceding the first year of assessment for which the allowance is claimed; and
(b) must be adjusted for every year of assessment for which the allowance is claimed in accordance with the methodology in the standard by taking into account the reporting period energy use at the end of the immediately preceding year of assessment for which the allowance was claimed for computing the baseline for the beginning of the subsequent year of assessment for which the allowance is claimed.
If, before implementing an ESM, one would typically consume 1 000 kWh per year. This 1 000 kWh would typically be the baseline. Now suppose an ESM is implemented, the consumption on this subsequent year is now 700kWh. Thus a saving of 300kWh is observed as compared to the baseline. Now for the following year the new baseline becomes the preceding years’ energy consumption. This means that the baseline for the next year is now 700kWh. With an ESM already in place the only means of achieving energy savings on the 700kWh baseline is to implement another ESM.
Thus this paragraph, defining the baseline, restricts a constant annual tax claim under section 12L and actually encourages constant energy saving initiatives each year.
So if you implement savings in any given year you can only claim tax rebates according to 12L in that year. This restricts the tax rebate considerably and lessens its financial impact to companies.
As mentioned 12L tax incentive claims are based on the reports compiled by a registered M&V professional to ensure accurate and transparent claims. Organisations wishing to claim for this incentive are therefore required to appoint an M&V Professional as part of the requirements of the regulation.
According to the Income Tax Act, 1962 (Act 58 of 1962) under section 12L “The amount of the deduction contemplated in subsection (3) must be calculated at 45 cents per kilowatt hour or kilowatt hour equivalent of energy efficiency savings.” In view of the entire section this stipulates that the 45c per kWh claimable is identified as a taxable deduction and not a pure rebate as some would expect. The following example illustrates this more clearly:
Suppose one would typically expect a taxable income of around R 1 000 000. With an ESM implemented energy savings of 10 000 kWh was achieved during that year and at 45c kWh per energy saving one would be able to claim 0.45c/kWh x 10 000 kWh = R 4 500 in terms of taxable deductions. Suppose, for this argument, the only taxable deductions are in fact those under section 12L the profit before tax is now R 1 000 000 – R 4 500 = R 995 500. However this amount still needs to be subjected to tax at 28 %. Thus one only sees 28 % of this compensation under section 12L as actual cash inflow.
It was initially expected that 12L would be applied not on taxable income but on income tax due. This would have meant that the full amount and not only 28% of the amount would benefit the party implementing the energy efficiency measures.
With other incentives also open to companies one would expect to be able to qualify for multiple claims. However in some cases such opportunities are explicitly limited as in the case of section 12L.
Under subsection 4 in the Income Tax Act, 1962 (Act 58 of 1962) in section 12L the following statement is expressed: A deduction must not be allowed in terms of this section if the person claiming the allowance receives any concurrent benefit in respect of energy efficiency savings.
To clarify the statement presented above, any claims under section 12L as taxable deductions are inadmissible if any other compensation is provided to the claiming body as result of energy savings achieved. For example SWH (solar water heaters) usually carry an instant rebate from ESKOM upon installation. Upon acceptance of this rebate received any claims under section 12L may be declared inadmissible. What is currently unclear is exactly what other rebates would be considered “concurrent benefits”. Terra Firma Solutions and its partner SASFIN Bank are working together to get clarity on this important issue.
In light of this detailed analysis of section 12L one would contemplate whether this incentive is worth all of trouble especially with the possible costs incurred appointing a professional M&V to validate the savings. With the proposed carbon tax (at R 120 per tonne of CO2e above the tax free threshold) on the horizon, the motive behind section 12L could very well be an incentive just to cushion the blow from this carbon tax policy.
In conclusion one would need to say that 12L is a welcome addition but that more clarity is required to determine its full impact in specific projects. Only time will tell!