What is the solar tax incentive for businesses in South Africa?

Posted January 2024

How can you save tax with a commercial solar solution?

Many commercial businesses simply need to get through load shedding, so they may start with a battery backup solution only. However, if you install solar power on your business premises, you not only benefit from more stable output and revenue (as outlined in our previous article), but you’ll also be able to unlock significant tax savings. What are the solar tax incentives for businesses in South Africa – and how can you capitalise on them? 

There are two aspects of tax savings when it comes to a commercial solar solution: 

1. Normal Tax

As of 1 March 2023, South African businesses can qualify for a 125% tax deduction on qualifying investment costs for renewable energy projects, with no thresholds on generation capacity. This is intended to be a temporary two year window that aims to increase private investment and alleviate the strain on South Africa’s energy grid.

Under the existing S12B of the Income Tax Act, businesses enjoyed a write-off of qualifying assets, but this new expansion takes it up a notch. For the next two years, forget the traditional 50-30-20 allowance for solar energy projects (not exceeding 1 megawatt) – now, you get a full 125% deduction in the first year.

2. VAT

A business that is a registered VAT vendor can claim the VAT input for the purchase of the commercial solar system, thereby decreasing their VAT payable to SARS.

Let’s break down the benefits in an example. If a business invests R1 million in a renewable energy project, the 125% deduction would then allow for a R1.25 million wear and tear allowance. At the current corporate tax rate of 27%, this translates to a tax reduction of R337 500. Additionally, a VAT input of 15% on the R1 million decreases VAT payable by R150 000, resulting in a total tax benefit of R487 500.

If a business faces an assessed loss, installing a commercial solar system worth R500 000 would increase the assessed loss by R625 000, providing additional tax relief. The associated VAT input of R75 000 (15% of R500 000) is also claimable, reducing VAT that would be payable to SARS.

Key considerations for S12B relief

To qualify for the tax relief that comes from a commercial solar installation, your business should consider the following: 

  1. Costs include the solar system cost, installation, and erection expenses. Inverters and batteries are included in the wear and tear allowance.
  2. The allowance triggers in the first operational year of the solar system.
  3. There’s no need for cost apportionment – your business receives the full 125% wear and tear allowance immediately.

It’s important to note that this tax incentive is only available for assets brought into use between 1 March 2023 and 28 February 2025. Commercial solar installation companies like SSESA can facilitate the claiming of wear and tear allowance and VAT input by providing your business with a tax invoice.

The tax advantages of a commercial solar installation has significant financial benefits for businesses. These incentives not only contribute to environmental sustainability but can also enhance your financial bottom line. If you’re looking for a solution to the challenges posed by load shedding with a battery backup solution, integrating solar panels as well will make your solution eligible for tax deductions, even if the battery backup portion constitutes the majority of the overall cost. Doing so means you’ll be able to seize the opportunity for both economic and environmental gains in your business. 

Want to take advantage of the tax benefits with a commercial solar system? Talk to us today.