Invest in Commercial Solar and Access S12BA Tax Deductions
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As we all know, South Africa has been facing a power generation challenge marked by frequent power outages that reached a crescendo in the 2022 and 2023 years. Load shedding became a routine challenge for South Africans, with the government struggling to meet the escalating demand for electricity in those years. The severity of the situation cannot be overstated: daily rolling blackouts, lasting between 6 to 12 hours, cost the economy between R204 million and R899 million per day, per the South African Reserve Bank.
What is Section 12BA?
The South African government introduced Section 12B of the Income Tax Act in 2016. Initially focused on solar projects, this provision offered a 100% tax deduction over three years for projects over 1MW and an immediate 100% deduction on solar projects under 1MW. However, these incentives did not attract significant investments, especially due to the capacity restrictions, limited awareness and the absence of major market players.
Government and the Treasury approached the private sector for input in the 2022 year and to get them fully onboard to provide renewable energy solutions that could assist with SA’s power generation crisis. The Treasury heeded the guidance of the private sector on this, and our finance minister Enoch Godongwana announced the introduction of expanded S12BA in the February 2023 budget speech, which was then legislated in the Income Tax Act later that year.
The Role of Section 12BA
Section 12BA allows taxpayers to claim a 125% first year deduction on assets that generate power from renewable energy sources such as wind, hydropower, and solar-related assets. This expansion in S12BA, effective from March 2023 to February 2025, removed limitations on project size and energy to be generated and extended the benefits beyond solar energy.
With no limit on deductions and tax deductions ranging from 125% to 208% of the investment value, an investor would be able to yield tax savings of up to 90% of the value of renewable energy investment. The private sector has embraced this fully with significant renewable energy projects commissioned to date. This has significantly eased the pressure on the national grid at present, with around 15% of the power generated by the private sector. Section 12BA presents a significant opportunity for companies that can provide renewable energy solutions and is applicable for individuals, companies, and trusts.
Innovate Alternative Assets & Solutions
Innovate Alternative Assets & Solutions primarily serves high-net-worth individuals and family office clients, providing access to carefully vetted investment opportunities in asset classes such as private equity, private debt, renewable energy, export led agriculture and property. These alternative assets typically generate strong, predictable returns, enabling investors to grow their wealth at double digit returns and generate optimal income streams to fund their retirement objectives.
As a leading player in the South African alternative investment industry, Innovate is well-positioned to guide investors through the Section 12BA investment landscape. By partnering with various investment houses, Innovate ensures diversification and maximizes benefits for investors. Instead of investing R1 million in a single investment house, Innovate assesses the investor’s financial needs and offers options to the investor diversify across multiple houses. This strategy promotes objectivity, independence, and risk mitigation through diversification.
Exploring Section 12BA Opportunities
Section 12BA offers a unique opportunity to assist with your retirement objectives with significant tax savings upfront and double-digit returns over 13 to 20 years. The investor can explore pathways to earn steady passive income streams without having to navigate S12BA solar options on their own.
Benefits of Section 12BA Solar Tax-Deductible Investments:
- Receive a 125%-208% (with debt) tax deduction: Effective for the February 2024 and February 2025 tax years.
- Achieve 56% to 90% in tax savings: Equivalent to R562,500 to R900,000 on a R1 million investment.
- Enjoy steady passive income for 13-20 years: Unaffected by market fluctuations due to long-term power purchasing agreements.
- Access a historically moderate risk asset class: Similar to property investments.
- Diversify with multiple high-quality off-takers: Through Innovate’s Section 12BA options.
Current Section 12BA Opportunities:
- Renewable Energy Opportunity: This opportunity was established in 2012 and is in partnership with an experienced developer and operator that has 80+ years’ combined experience in the development of Energy Solutions. They focus on projects across multiple industries to ensure diversification. With over R3.5 billion in alternative energy investments and utilising 40% debt against the equity contributed, this option offers a 93% tax saving for marginal taxpayers (45%) and a 2.8x investment yield on top of that, translating to a 3.7x pre-tax internal rate of return (IRR).
- Solar Opportunity: Have a solid network of alternative energy operators and good long-term relationships with the banks. Managing over R2 billion in assets and focused on projects across multiple industries to ensure diversification. They commissioned R365m in 159 solar projects in the February 24 year. Offering 33% debt against the equity contributed, this option provides an 84% tax saving and a 2.1x investment yield on top of that, translating to a 2.9x pre-tax internal rate of return (IRR).
Section 12BA investments, facilitated by Innovate Alternative Assets and Solutions, presents a lucrative investment opportunity. By accessing these investments, individuals, companies, and trusts can unlock substantial tax benefits and high internal rates of return (IRR) while contributing to the country’s transition to sustainable power generation. Innovates’ expertise and diverse investment offerings enable investors to navigate the Section 12BA landscape much more easily.
To learn more about how Innovate can help you reduce your tax and generate significant returns, please contact our team.