The South African Reserve Bank estimated that the rolling blackouts hitting South African businesses and households cost the economy approximately ZAR 900-million a day.  In addition, the Deloitte Centre for Sustainable Progress reported that – if left unchecked – climate change could cost the global economy USD 178-trillion over the next 50 years. Therefore, the proposed solar energy tax incentive aimed at encouraging the installation of rooftop solar panels to expand electricity generation represents an opportunity to address the current energy supply crisis and the imminent climate catastrophe, proverbially, killing two birds with one stone. Or does it? 

The eagerly anticipated introduction of tax breaks for homeowners and businesses intending to invest in renewable energy sources and increase electricity generation was announced by Finance Minister Enoch Godongwana in his 2023 budget speech. These include the below two tax relief measures for a respective one- and two-year duration:

• A tax rebate of 25% of the installation cost, up to a maximum of ZAR 15 000, of rooftop solar panels from 1 March 2023 (solar energy tax incentive); and
• A tax rebate of 125% of businesses' cost of investment in renewable energy sources such as solar, hydropower, biomass, and wind (enhanced renewable energy tax incentive). 

In April, Treasury and the South African Revenue Service published the draft legislative amendments (the Taxation Laws Amendment Bill, 2023) to give effect to the tax relief measures announced in the 2023 Budget for public comment. While these tax breaks are most certainly welcomed, taxpayers are left wanting for various reasons.

A fully functioning solar energy system does not only require the installation of rooftop solar panels — each component, which includes inverters and batteries, is crucial. However, the solar energy tax incentive is restricted to the cost of solar panels only. Inverters and batteries (which power the inverters) are typically just as, or even more, expensive than the solar panels themselves. Treasury advised that the solar energy tax incentive is aimed at bringing more generation capacity online. However, any rooftop solar system which feeds into the grid, as supposedly encouraged by the solar energy tax incentive, requires an inverter to convert the direct current (DC) electricity (generated by the solar panels) to alternating current (AC) electricity, which is what is needed for the energy to be fed back into the national electricity grid. An inverter is evidently a crucial part of any solar energy system and is thus the sine qua non for qualifying for the solar energy tax incentive. For inverters to not be covered by the solar energy tax incentive is therefore unintelligible. 

During a virtual public workshop held on 22 May 2023, Treasury recognised that many taxpayers already had inverters and batteries but argued that these did not generate more electricity; they "simply consumed electricity during one period, stored it and then released it later". Treasury then explained that by encouraging the installation of solar panels, more power would be brought to the grid, and that inverters and batteries were excluded from the rebate due to budgetary constraints. Ironically, while Treasury does not recognise the necessity of inverters and batteries for the purposes of applying the solar energy tax incentive, it confirmed the necessity of these components for the enhanced renewable energy tax incentive. During the virtual public workshop, a concern was raised that the wording of section 12BA, which refers to assets "to be used by that taxpayer in the generation of electricity" does not cover inverters and batteries. Treasury said that the use of the word 'in' made the provision wider than the actual generation part of the system, and thus includes inverters and batteries as a necessary part of the electricity generation system. Treasury's misunderstanding of the workings of an efficient solar energy system and its approach to combatting South Africa's energy crisis through the application of the solar energy tax incentive is not only disconcerting but also appears short-sighted.

Moreover, to apply for the solar energy tax incentive, the solar panels must be 'new and unused'. Treasury explained that the use of the word 'new' means that the tax credit can only be claimed for panels that are recently acquired. Therefore, panels that have been held in storage for a while before installing them would be considered 'old and unused'. On the face of it, it seems as though this qualifying criterion was inserted to prevent taxpayers from claiming a deduction on solar panels that were acquired prior to 1 March 2023 but only installed on or after 1 March 2023. The only clear reason for doing this appears to be cost saving on the part of Treasury. 

When one considers the magnitude of the energy supply crisis that South Africa is facing, as well as the imminent climate catastrophe, the pecuniary gain that Treasury seeks to obtain is injudicious and defeats the so-called purpose of the solar energy tax incentive. Therefore, while the introduction of the solar energy tax incentive constitutes a clear indication by the government of its commitment to tackle the current energy supply crisis and the imminent climate catastrophe, the fiscal conservatism by Treasury may ultimately be its undoing. 

Treasury is expected to take the relevant public comments into account and revise the Taxation Laws Amendment Bill, 2023 accordingly for further review.

Written by Carryn Alexander, Partner & Sakiwe Canca, Candidate Attorney from Webber Wentzel