Before we look at how the new tax incentive might affect you, it’s important to understand the purpose of this incentive. Eskom can no longer meet the country’s electricity needs. It goes without saying that this creates a big crisis. Not only does it put the economy at large at risk, but it’s also seriously affecting small businesses and people working from home. Not to mention productivity in general.
Why’s government doing this?
Government created the program to encourage households and businesses to invest in clean electricity generation capacity while also supplementing electricity supply. The focus on solar PV panels is to maximise the use of limited government funds to create additional generation capacity.
How does it work?
There are two incentives, one for businesses and one for individuals.
- Individuals will be able to claim a rebate to the value of 25% of the cost of new and unused solar photovoltaic (PV) panels, up to a maximum of R15,000 per individual. The rebate applies to qualifying solar PV panels that are brought into use for the first time in the period 1 March 2023 – 29 February 2024. Individuals who pay personal income tax can claim the rebate against their tax liability. This rebate is not intended for solar installations at business premises. Only solar PV panels with a minimum capacity of 275W per panel (design output) qualify for the rebate. Other components of a system – batteries, inverters, fittings or diesel generators – and installation costs do not qualify. Portable panels will also not qualify.
- From 1 March 2023, businesses will qualify for a 125% tax deduction on qualifying investment costs for a 2-year window period. There will be no limit to the qualifying cost of such investments. This means that businesses will qualify for a cost-plus-25% allowance on renewable projects in the year the cost was incurred. This incentive heavily benefits businesses investing in renewable energy and has been widely praised by experts.
The incentive for businesses is great … But what about individuals?
First, the good stuff. The incentive is in the form of a rebate, not a tax deduction. This decreases your tax payable (not your taxable income) and is an obvious benefit to your pocket. What’s more, “trade” is not a requirement: this is for domestic use solar panels.
This is all very well, but the price of a solar power installation can range from around R60,000 to R200,000, depending on the size of the property and the required electrical output, according to Gauteng-based NexSolar. The R15,000 rebate is simply a drop in the ocean.
What’s more the rebate only applies to PV panels. Other components of a system – batteries, inverters, fittings – and installation costs do not qualify.
Why the caveats?
Government has explained that while an inverter and batteries are vital components of a solar power system, they can also be operated without solar panels – in which case they offer no additional capacity to the grid. This is proof that the incentive is not about relieving an unfair burden placed on the taxpayer, but is rather a way of trying to get taxpayers to solve the energy crisis created by Eskom with limited monetary benefit to themselves.
Since the Covid pandemic, a significant portion of the population is now working from their homes. These taxpayers must now plan to get electricity in their homes since Eskom can no longer supply basic electricity to enable taxpayers to do their work. Energy expert Chris Yelland has strongly criticized the incentives for individuals, saying: “the announced tax incentives for solar PV installations by individuals are very timid and weak, and as a result, will likely be ineffective in reducing load-shedding in SA.” Who are we to disagree?
Is there a legal argument to allow a full deduction for individual taxpayers?
The Income Tax Act allows a deduction for expenditure actually incurred, during the year, on the repair of property occupied for the purposes of trade or in respect of which income is receivable, or for the purpose of repairing machinery, implements, utensils and other articles used by the taxpayer for the purposes of his trade, or for beetle treatment of the timber of the property mentioned above.
There is no definition of a repair in the Act, but the courts (CIR v African Products Manufacturing Co Ltd, 1944 TPD) have given the following guidelines:
- A repair is restoration by a renewal or replacement of a subsidiary part of the whole.
- The materials used need not be the same as the original material.
- A repair is different from an improvement or renewal.
Renewal is a reconstruction of the entire asset whereas improvement is the creation of a better asset. For an asset to be repaired, there must be damage or deterioration to a part of the original asset or structure and the intention of the taxpayer must be to restore the asset or structure to its original condition.
Are taxpayers not attempting to “repair” the electricity supply?
When a taxpayer generates their income from home, could they potentially claim a deduction for the “repair” of their electricity supply? And if not, could this expense be considered a capital expense (and therefore an improvement) to their home which could be added to their base cost for capital gains tax purposes when they decide to sell their residence at a later stage?
It could be argued that the original electricity structure is no longer in place / damaged, and that by buying an inverter (or battery or solar panels) your intention is to restore the electricity supply which no longer exists. This could be considered as a motivation to get a full tax deduction.
It is, however, also important to consider S23 with regards to home office expenses. Section 23 prohibits the deduction of the cost of maintenance of the taxpayer, his family or establishment (home); domestic or private expenses. Expenditure such as bond interest, repairs to domestic dwellings, domestic servants’ wages and costs of running a private motor vehicle are all disallowed.
It should be noted, however, that the Act does make provision for the deduction of expenditure incurred in respect of any portion of a private dwelling occupied exclusively and regularly for the purpose of trade (normally computed using floor area). That portion must however be specifically equipped for the trade.
A full-time salaried employee will not be permitted a deduction in respect of a home workspace, unless it is specifically equipped for the purposes of the employee’s trade and regularly and exclusively used for that purpose and one of the following applies:
- The employee’s income from employment is derived mainly from commission or other variable payments based on his or her work performance and the employee’s duties are performed (mainly) outside any workspace provided to him or her by the employer; OR
- The employee’s duties are mainly performed in his/her home workspace. This would be the case with most taxpayers working from home.
It is submitted that if an employee also carries on some other trade he will still be entitled to a deduction if he uses his home workspace regularly and exclusively for the purposes of that trade and it is specifically equipped for trade.
The Act specifically allows deductions in respect of cost of repairs or expenses in connection with domestic premises which are not disallowed under Section 23. It seems that none of these considerations have been taken into account before implementing the tax incentive for individuals.
The bottom line
Businesses considering installing solar power systems should take full advantage of the government’s incentive program to drastically reduce their tax bills. Individuals contemplating installing a solar system in their home should not do so for tax purposes but rather for their own sanity and domestic comfort. While the legal arguments expressed above may be valid, it would take years for such a challenge to work its way through the courts. In the meantime one can only hope that government reconsiders its incentive for individuals to make it more appealing to taxpayers.