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.

 

FAQs

1. What is the solar tax incentive in South Africa?

The solar tax incentive allows businesses to deduct the cost of qualifying solar energy assets—like solar panels and batteries—over a specified period, reducing their taxable income. This encourages the adoption of renewable energy systems in line with SARS's wear-and-tear policy.

2. How does wear and tear apply to solar energy systems?

Wear and tear allowances (also known as capital allowances) apply to the depreciation of solar assets used in business. SARS prescribes specific deduction periods depending on the asset type, allowing taxpayers to recover the cost over time through annual tax deductions.

3. Can I claim a wear and tear allowance on solar panels used for business?

Yes. If solar panels are used for business purposes, you can claim a capital allowance (wear and tear) over three years under SARS’s asset write-off schedules. The panels must be owned by the business and used to generate taxable income.

4. Are solar batteries and inverters included in the solar tax incentive?

Yes. Solar batteries and inverters may also qualify for wear and tear deductions if they are integrated into a business’s energy system and used to support taxable activities. Each component is subject to its write-off period.

5. What is the write-off period for solar panels according to SARS?

SARS allows a 3-year write-off period for solar panels used in business, under the wear and tear schedule. This means you can deduct one-third of the cost each year for three years, starting from the date of use.

6. Do homeowners qualify for the solar tax incentive?

Homeowners do not qualify for wear and tear allowances unless they use the property for income-generating purposes, such as running a home office or renting part of the property. Personal-use solar installations typically don’t qualify for deductions.

7. Can I claim wear and tear on solar equipment used in a rental property?

Yes. If the solar system is installed in a residential rental property, and it helps generate rental income, you may be eligible to claim wear and tear over the relevant period, subject to SARS approval and proper documentation.

8. How do I calculate wear and tear for solar installations?

Use SARS’s prescribed depreciation schedules, which specify the write-off period for each asset. For example, if your solar panels cost R90,000 and the write-off period is 3 years, you can claim R30,000 per year as a deduction.

9. What documents are required to support a solar tax incentive claim?

You need to keep:

• Tax invoices for the equipment

• Proof of payment and installation

• Evidence of business use

• Asset registers showing depreciation schedules

These documents are required if SARS audits your tax return.

10. What are the common mistakes when claiming solar wear and tear deductions?

Common mistakes include:

• Claiming on personal-use systems

• Using the wrong write-off period

• Failing to prove business use

• Not keeping proper supporting documentation

Consulting a tax professional can help ensure compliance with SARS requirements.

0 COMMENTS

LEAVE A COMMENT