1927. Renewable energy incentives

Certain tax incentives have been introduced to stimulate the growth of renewable energy projects in 

South Africa. 

In terms of section 12B(1) and (2) of the Income Tax Act No. 58 of 1962 (the Act), the cost of 

machinery and implements used by a taxpayer to produce bio-diesel or bio-ethanol or to generate 

electricity from wind, sunlight or gravitational water forces is deductible from a person’s taxable 

income over a three year period with 50% of the cost deductible in the year in which the equipment is 

brought into use, 30% in year two and 20% in year three. 

South Africa, being a developing country, is not obliged to reduce its Greenhouse Gas Emissions in 

terms of the Kyoto Protocol (the protocol to the United Nations Framework Convention on Climate 

Change). However, mechanisms such as the Clean Development Mechanism (CDM), to facilitate the 

participation of developing countries in the carbon emissions reduction market have been introduced. 

Qualifying CDM projects yield greenhouse gas reduction credits also referred to as carbon emission 

reduction credits (CERs), which are marketable in developed countries. 

To incentivise the uptake of CDM projects in South Africa, section 12K of the Act provides that the 

proceeds received on the disposal of the CERs derived in the furtherance of a qualifying CDM project 

(registered before 31 December 2012) will be exempt from normal tax and capital gains tax. However, 

on the basis that the disposal of the CERs will not constitute taxable income, the expenditure incurred 

by the South African resident in securing the CERs will not qualify as a deduction for tax purposes in 

terms of section 11(a) of the Act. 

The proposed section 12L of the Act will allow taxpayers to claim a notional allowance for income 

tax purposes as part of the energy savings incentives during any year of assessment ending before 

1 January 2020. The main requirement for companies to gain this benefit is that they need to use 

independent and registered measurement and verification professionals (M&V). A claim under section 

12L must be evidenced by an energy efficiency savings certificate, which can only be attained 

following the M&V process. 

Accordingly, the energy use of a consumer will be measured before the implementation of the energy 

efficient project and again after the implementation. These two measurements will then be compared 

to determine the savings achieved. 

Section 12L will come into operation on a date determined by the Minister of Finance by notice in the 

Government Gazette. 

There are other environmental related allowances and deductions provided for in the Act, In 

particular, in respect of new and unused "environmental treatment or recycling assets", section 37B of 

the Act provides for a 40% allowance in the year that the asset is brought into use and 20% in each of 

the three succeeding years and in respect of "environmental waste disposal assets", a 5% deduction in 

the year that the asset is brought into use is provided for and 5% in each of the 19 succeeding years. 

Section 37A of the Act allows for deductions of payments made by persons  that hold certain 

prospecting, exploration or mining permits or rights and persons engaged in prospecting, exploration 

or mining in terms of said permits or rights and the sole object of the company or trust to which the 

payment is made must be to apply its property solely for the rehabilitation upon premature closure, 

decommissioning and final closure. 

Edward Nathan Sonnenbergs

IT Act: s 11(a), s 12B(1), s 12B(2), s 12K, s 12L, s 37A, s 37B