On 16 September 2011 the Minister of Energy ("the Minister") published Regulations on the Allowance for Energy Efficiency Savings ("the Regulations") under section 12L of the Income Tax Act No. 58 of 1962 ("the  Act").

Section 27(1) of the Taxation Laws Amendment Act No. 17 of 2009, inserted section 12L: Allowance for energy efficiency savings, into the Act.

Section 12L(2) allows for a taxable income deduction for energy efficiency savings based on the following formula:

A =  
B x C

  in which formula—

  1. 'A' represents the deduction amount to be determined;
  2. 'B' represents the energy efficiency savings expressed in kilowatt hours or kilowatt hours equivalent for the year of assessment of the taxpayer as contemplated in section 12L(1)(c) of the definition of the energy efficiency savings certificate, i.e. the annual energy efficiency savings expressed in kilowatt hours or kilowatt hours equivalent for the year of assessment including the full criteria and methodology used to calculate the energy efficiency savings determined in accordance with the Regulations;
  3. 'C' represents the applied rate as the lowest feed-in-tariff expressed in Rands per kilowatt hour in effect at the beginning of the year of assessment as determined in terms of the Regulatory Guidelines of the National Energy Regulator of South Africa issued in terms of sections 4 (a) (ii) and 47 (1) of the National Energy Regulator Act No. 40 of 2004; and
  4. 'D' represents the number two, unless a different number has been announced by the Minister in the Gazette in which case 'D' represents that number.

To be able to claim the allowance, the taxpayer must:

  1. register with the South African National Energy Development Institute ("SANEDI") in respect of any energy efficiency savings measure for which the allowance is intended to be claimed;
  2. appoint a measurement and verification professional to compile a report, to be submitted to SANEDI, that contains a computation of the energy efficiency savings in respect of that person for which the allowance is claimed;
  3. submit a certificate from SANEDI together with the claim for the allowance to the South African Revenue Service.

SANEDI was established in April 2011 in terms of section 7 of the National Energy Act No. 34 of 2008, to:

  1. undertake energy efficiency measures as directed by the Minister;
  2. increase energy efficiency throughout the economy;
  3. increase the gross domestic product per unit of energy consumed;
  4. optimise the utilisation of finite energy resources; and
  5. conduct energy research and development

SANEDI must appoint a committee to evaluate the reports and issue the certificates if they are satisfied that the report complies with the South African National Standard 50010.

The deduction will not be allowed if the taxpayer receives any concurrent benefit that is prescribed in the Regulations as any credit, allowance, grant or other benefit granted by any sphere of government for any energy efficiency savings. 

The Clean Development Mechanism ("CDM") was established in December 1997 by the Third Conference of Parties to the United Nations Framework Convention on Climate Change ("UNFCCC"). The CDM allows industrialised countries with emission-reduction commitments to meet part of their commitments by investing in projects in developing countries that reduce greenhouse-gas emissions while contributing to the local sustainable development needs of the host country.

Carbon credits are "units" that an entity acquires for developing or funding a project that assists with the reduction of Green House Gases ("GHG") in the atmosphere in the form of tradable carbon credit certificates.

To allow CDM projects to occur, host countries need to designate national authorities to evaluate and approve the operation of CDM projects in their country.

The Director-General of the Department of Minerals and Energy (now the Department of Energy ("DoE")) was designated the Designated National Authority ("DNA") by regulations under the National Environmental Management Act No. 107 of 1998, in 2004.

The main task of the DNA is to assess potential CDM projects to determine whether they will assist South Africa in achieving its sustainable development goals and to issue formal host country approval for potential CDM projects. As part of its functions, the DNA issues Letters of Approval that, amongst other functions, authorise the project proponent to sell the title and all rights to the greenhouse gas emission reductions generated by the CDM project.

Taxpayers that earn carbon credits based on Letters of Approval issued by the DoE could potentially be disallowed the deduction in terms of section 12L since it represents a benefit granted by a sphere of government. 

The Developmental Electricity Pricing Programme ("DEPP"), administered by the Department of Trade and Industry ("the DTI"), aims to attract industrial investment projects to South Africa, which would in the absence of DEPP not invest in South Africa, through providing them with electricity tariffs that will, where justified in terms of competitive international electricity prices:

  1. enable an internal rate of return that will ensure that the applicant can invest in South Africa;
  2. facilitate beneficiation of downstream industries in the Republic by requiring approved applicants to apply an equivalent pricing policy and domestic supply policy;
  3. contribute to economic growth and employment, which includes the realisation of a more labour-absorbing growth path.

Taxpayers that receive beneficial electricity rates under DEPP should also qualify for a section 12L allowance since the benefit received is not a benefit granted for any energy efficiency savings.

We further understand that the DTI is in the process of developing new incentives for investment in renewable energy sources.

The Department of Finance should exclude taxpayers that receive only the benefits of carbon credits for energy efficiency savings from the provisions of section 12L(4) and the DTI should consider the implications of section 12L(4) in developing any incentives for the renewable energy industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.