Solar Tax Incentive – Wear and Tear Clarification

Solar Tax Incentive – Wear and Tear Clarification

• 27 January 2025
• Corporate Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2025.

Question:

Provide details on how the solar tax incentive wear and tear applies to companies and the required documentation for this process.

The client completed their solar project in January 2025 and has both a certificate of completion and an invoice.

Answer:

1. The Problem / Facts

An explanation of how the solar tax incentive wear and tear allowances apply to companies, along with the documentation required to claim such tax relief for a recently completed solar project.

2. Applicable Law

Income Tax Act 58 of 1962 – Section 12BA

3. Application of the Law to the Facts

The incentive is available for a limited period of two years, from 1 March 2023 to 28 February 2025. Businesses can claim an upfront deduction of 125% of the cost incurred to acquire qualifying assets used in electricity generation (including supporting structures) against their taxable income.

To qualify:

• The business must own the asset.
• The asset must be used in the production of income.
• Only new and unused assets qualify, ensuring that the capacity is additional to the business’s existing generation.
• The assets must be brought into use for the first time between 1 March 2023 and 28 February 2025.
• The assets must be used to generate electricity from any of the following renewable energy sources:
  • Photovoltaic (PV) solar energy
  • Concentrated solar energy
  • Wind power
  • Hydropower
  • Biomass (organic waste, landfill gas, or plant material)
• No electricity generation limits apply during the duration of this temporary incentive.

The solar tax incentive wear and tear allowance operates under the accelerated capital allowance provision in Section 12B. Companies can claim a 100% deduction of the system’s cost in the year it is brought into use, provided it is used for business purposes. This applies to solar PV systems, including related equipment such as inverters and batteries, that are installed and operational within the relevant year of assessment. The system must also comply with renewable energy standards.

Documentation Required to Claim the Incentive

To claim this incentive, the company must retain:

• A valid certificate of completion, indicating the project completion date (e.g., January 2025).
• An invoice detailing the cost of the solar system, including VAT.
• Proof of payment.
• Fixed asset register entry, ensuring the asset is recorded for depreciation purposes.

Steps to Claim

1. Include the qualifying expenditure in the company’s tax return.
2. Attach all required documentation to substantiate the claim, ensuring compliance with SARS guidelines under the Tax Administration Act.
3. VAT-registered businesses can claim input tax on the purchase and installation costs as per Section 17 of the VAT Act 89 of 1991.

Capital Asset Recognition

The cost of the solar project, as supported by the invoice, must be recorded as a capital asset under property, plant, and equipment in the company’s financial statements.

Depreciation for Tax Purposes

In terms of Section 12BA of the Income Tax Act 58 of 1962, the full cost of the solar project can be claimed as an accelerated wear-and-tear allowance (125% deduction) in the year the asset is brought into use (i.e., January 2025 in this case).

Book Depreciation

For accounting purposes, depreciation is calculated over the asset’s useful life (e.g., straight-line or reducing balance method). This results in a difference between book depreciation and tax allowances, leading to a deferred tax adjustment.

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