NATO OOSTHUIZEN: Tax breaks for solar in budget need more details than speculation

When President Cyril Ramaphosa revealed plans to “fix” the energy crisis that included an urgent call for “all South Africans to be part of the solution”, he failed to include much-needed detail that explained the how.

Now, as we deal with our worst round of load-shedding,  finance minister Enoch Godongwana will table the national budget in the hope that there will be more clarity on the missing details. 

SA is experiencing a residential solar installation boom. In the first half of last year,  households imported more than R2.2bn worth of solar photovoltaic (PV) panels. It is estimated that once installed this will more than exceed what the government has procured in solar energy over the past decade. Individual South Africans have in six months procured and are in the process of installing more solar photovoltaic capacity than the government has done in 10 years of attempting to manage an energy emergency.

These numbers are staggering and bode well for the future of residential solar to lighten the load on the national grid. But a caveat blocking solar could be the lack of any tax incentives for private solar solutions. It raises the question: what are the serious steps the finance minister will take this week to put words into action?

Brought into effect in 2016, section 12B of the Income Tax Act allows a tax deduction for certain qualifying assets used for electricity generation from renewable sources in the course of the taxpayer’s trade. Primarily targeting shopping centres, business premises, farms, small manufacturing plants and property with larger than residential roof space, if the solar panels are exclusively used for domestic and private purposes no deduction can be claimed. All well and good in 2016, but nobody could have foreseen the extent to which the energy crisis has worsened in the past six years.

Now, with residential solar installations hitting a record (and increasing) high, is it not prudent to cast a spotlight on residential tax incentives, especially because the only time changes to tax policy can be made is during the national budget, at the sole prerogative of the minister? Tax breaks for residential solar solutions just make sense. Businesses that are investing in renewable energy get an accelerated tax allowance, but as it stands there is absolutely no incentive for individuals to invest — leading to residential installations being a lot more expensive for the end user.

The more people we can get off the national grid the more we as a country will benefit. This could be considered a bold statement, and, yes, tax incentives can be a slippery slope. But should they be allowed and regulated correctly the economic ripple effects have the potential to transform the country’s future financial outlook.

Solar system installations could be made tax deductible, allowing refunds when tax returns are filed. Deductions from taxable income could be limited by an annual and lifetime threshold. Another route the government could take would be not imposing VAT on any solar products and materials, which is essentially a zero rating. There are many options that can and must be explored.

The case for investment will also increase. It simply has to. We have demand that outstrips supply. It is nothing more than basic economics. There is untapped opportunity for small scale investment into communities where solar installation solves the energy crisis for those who can’t afford to invest, with the investor reaping the reward of the deduction. On a larger scale, attraction for international investors becomes more alluring with a far wider pool.

On a commercial level, SA is one of the most important markets on the continent — imagine the possibilities if the residential sector offered incentives for international investors too. Tax breaks would mean investors can expect higher returns right from the outset, meaning the business case goes well beyond the personal household impact. It is actually an attractive business model for everyone involved, and affects the broader SA economy directly.

With residential tax breaks, the opportunity for small business solar providers is also limitless. Installations at households could be made tax deductible, allowing refunds when tax returns are filed. And the ripple effects will have a broad reach because there is the opportunity to also incentivise the production and manufacturing of renewable energy-associated equipment. A circular economy of supply and demand will increase only as more end users make the move towards renewable options, which would put local manufacturers in a far more favourable financial position.

It certainly seems a win-win situation across the board. Yet it will require a mind shift from key stakeholders such as the SA Revenue Service and municipalities, which will experience initial losses should these tax breaks be implemented. These losses may seem extreme, but we must realise that to navigate the energy crisis means playing the long game. We can simply no longer afford to sacrifice long-term gains for short-term wins. But is this a game these stakeholders are willing to play?

Any residential solar tax incentives would need to ensure the end user pays less for the system so they can plough more into the economy. The numbers need to be considered beyond personal tax easing and what the amplified impact would be on the broader economy.

There are no quick fixes, but to echo the president’s own sentiments in his recent state of the nation address: “Extraordinary circumstances call for extraordinary measures. The energy crisis is an existential threat to our economy and social fabric. We must spare no effort, and we must allow no delay in implementing these measures.”

We agree. But we must allow no delay in implementing these measures — across the board, and for everyone equally — before our economy is plunged into darkness. The minister must now put the political money where the government’s words are. There is no reason to delay any longer.

• Oosthuizen, a renewable energy expert, is a partner at BDO SA.