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Unless the National Treasury has a change of heart and announces an extension, there is just more than a year to go before the expiry of the accelerated tax incentives for renewable energy assets under section 12BA of the Income Tax Act.

These incentives allow for accelerated depreciation at 125%, for costs incurred for trade purposes of qualifying assets brought into use between March 1 2023 and February 28 2025.

Most mining companies that are planning renewable energy projects to keep their operations going in the face of SA’s energy crisis are unlikely to be able to bring these projects online before the accelerated incentives expire.

Theoretically, these incentives came into effect on March 1 last year, shortly after being announced in the finance minister’s budget speech in late February 2023. However, almost 10 months of the two-year period for the incentives went by before the relevant amendments to the Income Tax Act were published in their final form in December. 

All is not lost though. While the time limits will prevent most mining companies from qualifying for the section 12BA accelerated tax incentives for renewable energy projects, they should — providing they prepare well — qualify for the mining capital expenditure tax incentives under section 36 (11)(a) of the Income Tax Act. 

This section allows mining companies specifically to claim tax incentives for capital expenditure related to shaft sinking and mining equipment. As these concepts are broad in scope and not clearly defined, renewable energy assets should, on the face of it, fit into the ambit of section 36 (11)(a). 

That is not a foregone conclusion though, and mining companies wishing to qualify for the capital expenditure incentives will need to do careful analysis to check that their renewable energy projects meet the requirements. 

Several key factors stand out as particularly important. Regarding constructing a renewable energy project it is not only the capital cost that companies should bear in mind when assessing the tax implications; there is also the question of location.

Own operations

If the energy asset is located on the mine property, the owner should easily be able to prove that the energy generated is directly associated with the mine’s production. If the power plant is located outside the mine property, the tax implications could be more complicated. 

For instance, a wind farm would not typically be located in the largely wind-free Rustenburg area or North West province, where many gold and platinum mines are located. If a mining company were instead to construct a wind farm in another area, one known for its favourable wind profile, it would need to be able to prove that the energy generated is being used for its own operations. 

The solution could lie in selling the energy generated back to Eskom in exchange for an energy credit. However, the benefit of such an arrangement would depend on how carefully the agreement governing it is drafted. The commercial agreement with the national utility would need to be extremely clear on elements such as how the electricity generated would be fed into the grid, what tariff Eskom would pay, and how the credit-offsetting process would work.

The issue of location also brings up other important aspects pertinent to renewable energy projects, such as constructing foundations and access roads, which have different tax implications to consider. The earlier in the process a company is aware of such implications, the greater the benefit that can be derived from a tax and cost perspective. 

Yet another issue mining companies should consider carefully is the ownership structure of the energy asset. If ownership is placed in a separate entity such as a special purpose vehicle, the tax implications would differ from if the mine itself was the owner. Indeed, setting up a separate ownership structure could make the company ineligible for the tax incentives available under section 36 (11)(a). 

It is also critical to consider the procurement process and commercial arrangements with contractors. If a mine appoints engineering, procurement and construction contractors to design and construct the renewable energy asset, there will be tax implications associated with the fees and costs paid. 

Companies should consider the possible VAT and customs aspects of renewable energy projects. Some assets, such as wind turbines and solar panels, might have to be imported, which raises questions such as whether the company would be entitled to input VAT credits, or be liable for customs duties. 

All these issues — and others that might still arise during the commercial unpacking of a project — could end up having a material effect on the project costs or the company’s tax liability.

Time might not be on the side of mining companies regarding benefiting from the accelerated tax incentives under section 12BA of the Income Tax Act but, providing they consider all the implications and plan strategically, their prospects look brighter under section 36 (11)(a). 

• De Jager is tax executive at Bowmans. 

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