An invitation to produce electric vehicles

An invitation to produce electric vehicles

Will the proposed accelerated allowance attract investment in the automotive industry?

Marcus Botha, Director: Tax
Thabo Sithole, Assistant Manager: Tax

South Africa’s GDP growth averaged less than 0.8% in the last ten years. The weak growth rate is attributable to various reasons, but a handful stands out. The Government’s failed infrastructure maintenance and the obvious reason, electricity, resulted in a lack of private sector and investor confidence underpinned by Eskom and Transnet.

Despite the challenges, National Treasury forecasted an ambitious 1.6% growth in its 2023 Medium Term Budget Policy Statement. An assumed and expected increase in energy-related fixed investments supports the growth forecast. There will also be a projected increase in Government spending of 9.3% for economic regulation and infrastructure.

The National Development Plan set an investment target of 30% of GDP by applying the principle that rapid economic growth is attainable through high levels of investment. In the same breath, it is interesting that National Treasury notes, in its 2024 macroeconomic policy review of trends and choices, that investment has rarely surpassed 20% of GDP since 1994.

The Government identified the automotive sector as the new kid on the block to improve investment levels, specifically producing electric and hydro-generated vehicles. National Treasury is proposing a tax allowance for local electric vehicle producers for new production capacity investments from 1 March 2026. The proposal grants an allowance of 150% for qualifying investment spending in the first year of investment.

In terms of the Income Tax Act (ITA), an expense of a capital nature is not deductible under section 11(a). Capital expenditure in the context of a producer of electric vehicles typically include, among other things, the acquisition of plant, machinery, utensils, manufacturing buildings and other related equipment. An allowance for these items is generally governed by sections 11(e), 12B, 12C, and 13 of the ITA. Subject to certain provisions and requirements, allowances under these sections are normally spread over an extended period. The new proposed allowance will allow electric vehicle producers to claim these capital expenses in full in year one, plus a further 50% of the actual costs incurred.