By Esther van Schalkwyk, Associate Director
Individuals fed up with load shedding would have been pleased to hear the Minister announce the rooftop solar tax incentive in his February 2023 Budget Speech. While the incentive is welcome in principle, it appears that the quantum of the incentive and practical difficulties with its implementation will reduce its effectiveness.
The 2023 Budget outlined that individuals would be eligible for a tax rebate of 25% of the cost of any new and unused solar photovoltaic (PV) panels purchased and installed at a private residence for which a certificate of compliance was issued from 1 March 2023 to 29 February 2024. The rebate would be offset against the individual’s personal income tax liability for the 2024 year of assessment, up to a maximum rebate of R15 000 per individual. It was clarified from the outset that the rebate would only be calculated on the cost of the solar PV panels, not inverters or batteries.
Given the average cost of solar power systems, the upper limit of R15 000, and the exclusion of inverters or batteries from the calculation, it was thought that the incentive would do little to “incentivise” the acquisition of solar power systems but would rather constitute a small bonus (relatively speaking) for those individuals who would have acquired one anyway.
Proposed wording for the incentive has now been released for public comment by way of the initial batch of the 2023 draft Taxation Laws Amendment Bill (TLAB), which inter alia proposes a solar energy tax credit in a new section 6C to the Income Tax Act. The requirements are unaltered from those contained in various Budget documents released by National Treasury in February.
The calculation of the incentive is proposed to be 25% of the cost of solar PV panels with an upper limit of R15 000. The incentive will limit the credit to solar panels that meet all the following requirements:
- New and unused solar PV panels acquired by the individual and brought into use for the first time by the individual on or after 1 March 2023 and before 1 March 2024.
- The minimum generation capacity of each panel must not be less than 275W.
- The panels must form part of a system that is connected to the distribution board of a residence that is mainly used by an individual for domestic purposes.
- An electrical certificate of compliance must be issued to the individual in terms of Electrical Installation Regulations, 2009.
The individual need not own the residence and may rent or simply occupy it to qualify for the credit, provided that he or she incurred the cost of acquiring the solar panel(s). Where the cost is incurred by more than one person, each individual’s credit is calculated based on his or her pro-rata share of the cost.
The draft TLAB also proposes a clawback if an individual disposes of a solar panel before 1 March 2025 that qualified for the solar energy tax credit, in that the credit previously granted will be regarded as an additional amount of normal tax payable by that individual on disposal. The clawback does not apply if the individual disposes of or vacates the residence to which the solar panel is affixed, rather than disposing of the solar panel itself. An anti-overlap rule will apply to assets used in the production of renewable energy in respect of which an allowance was granted under section 12B or the limited period enhanced deduction for such assets proposed by way of the new section 12BA, in that such assets would not also qualify for the section 6C solar energy tax credit for individuals. Since such assets would only qualify for the section 12B or 12BA allowance, were the individual to dispose of the panels for consideration, only the recoupment provisions applicable to those sections would apply and there could be no clawback under section 6C.
Apart from the various restrictions on the credit as mentioned above, SARS is separately proposing administrative requirements on the issuers of solar installation compliance certificates (i.e. installers). SARS’s draft notice (Returns of information to be submitted by third parties in terms of section 26 of the Tax Administration Act) issued on 29 March 2023 proposes that installers would have to submit a third-party return by 31 May 2024 in respect of solar PV panels that were first brought into use from 1 March 2023 to 29 February 2024 (thus aligning with the period for which the credit is intended to be available). Although the exact details are still being determined, installers will be required to report the following information to SARS:
- Income tax number (or identity number where no income tax number is available) of the person for whom the installation was done;
- The physical address of the installation;
- Cost of the solar PV panels; and
- The date on which the panels were first brought into use.
Information such as the date on which the panels were first brought into use will be problematic to obtain where the installer is different from or does not form part of the same organisation as the electrician who connects the panels to the distribution board.
It is doubtful whether all issuers of solar installation compliance certificates will be aware of the requirement to submit third-party returns, let alone have the systems in place to report the required information to SARS. Installers will also need to go back to installations already completed from 1 March 2023 onwards to obtain and report the required third-party data to SARS, thus creating further difficulties. This is sure to present an additional hurdle for individuals seeking to claim the solar energy tax credit (relatively small as it may be) since presumably, SARS will question the claiming of the rebate in circumstances where the installer failed to submit the required third-party return to SARS.
Uncertainty is further created by the fact that National Treasury’s Frequently Asked Questions on the Solar Panel Tax Incentive, released as part of the Budget documents in February, indicated that individuals wanting to claim the incentive would need to obtain a VAT invoice specifying the cost of the solar PV panels separately from other items. This requirement, which would essentially limit the incentive to installations by VAT-registered installers, was not included in the draft TLAB and it is uncertain whether it will resurface once the Amendment Act is finally promulgated. Time is ticking, as the incentive is only available in respect of solar panels brought into use for the limited time between 1 March 2023 and 29 February 2024, which means that individuals who are currently having installations done may end up not qualifying for the incentive for one reason or another.
Unfortunately, the incentive is unlikely to achieve its objectives, given the relatively small quantum of the incentive and the onerous administrative requirements in claiming it. Therefore, it seems that it will not play a meaningful part in helping solve South Africa’s electricity crisis.