The government plans to introduce a tax refund framework that targets individuals and incentivises them for installing solar panels in their homes to reduce their dependence on Eskom for electricity. 

It is a breakthrough proposal because current tax laws (mainly the Income Tax Act) only make specific provisions for incentivising businesses, and not individuals or households, for solar panel installations.

In the National Treasury 2023 Budget review, it has been proposed that tax incentives on solar panel installations should also target individuals, in the form of tax refunds/rebates. But this incentive will only run for one year.

How it will work is that individuals and households will be able to receive a tax rebate to the value of 25% of the cost of any new or unused solar panels that they have bought. This incentive does not include inverter or battery purchases. 

In other words, solar panel installations will be tax-deductible (known more formally as capital allowances), paving the way for individuals to be able to get refunds when tax returns are filed every year. This was a preferred tax incentive avenue considering that there is already a tax system in place for deductions.

The avenue can be used to offset the individual’s personal income tax liability for the 2023/24 tax year up to a maximum of R15,000 per individual. “For example, an individual who purchases 10 solar panels at a cost of R40,000 can reduce their personal income tax liability for the 2023/24 tax year by R10,000,” the budget document reads.

To qualify, the solar panels must be purchased and installed at a private residence, and a certificate of compliance for the installation must be issued from 1 March 2023 to 29 February 2024. This means that the benefit will only run for one year. 

The move by the Treasury will see SA join the ranks of the US, the UK, and Germany, which have similar tax regimes.

It has been estimated that the tax relief measure will put about R4-billion in the hands of households in the one year that it will run. It is unclear if the government plans to extend this measure beyond a year. 

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Experts have warned that there is a risk of the tax on solar panel installations disproportionately benefitting only a privileged few. After all, solar panel installations are expensive — typically costing from R60,000 upwards — so only a privileged few might be able to benefit from tax incentives.

Incentives for businesses

The 2023 Budget review also expanded benefits to businesses that have solar panel installations at their operations. 

The Income Tax Act provides for capital allowances relating to renewable energy and the generation of energy from solar panels. But the act only targets businesses, allowing them deductions if they use solar panel installations for trading or business activity. They can deduct the value of their solar power systems as a depreciation expense from the profits they generate.

Currently, they are able to deduct 50% of the solar panel costs in the first year, 30% in the second year, and 20% in the third year. But businesses will now be able to claim a 125% deduction in the first year for all renewable energy projects with no thresholds on generation capacity. 

The adjusted incentive will only be available for solar panel investments that are installed and used for the first time between 1 March 2023 and 28 February 2025. This is a two-year incentive that is expected to provide R5-billion in relief to businesses.

“For a business with positive taxable income, the deduction will reduce its tax liability. For example, a renewable energy investment of R1-million would qualify for a deduction of R1.25-million. Using the current corporate tax rate, this deduction could reduce the corporate income tax liability of a company by R337,500 in the first year of operation,” the budget document reads. 

Furthermore, there will be loans and grants offered to small and medium-sized businesses that want to install solar panels. The government plans to repurpose a loan guarantee scheme, which was initially designed to offer loans to businesses to help them survive the Covid pandemic. 

The scheme initially intended to disburse loans to small businesses at favourable interest rates (at or below the repo rate) and repayment terms (loans could be repaid after one year). Banks would not be taking much lending risk because any loans disbursed under the scheme would be guaranteed by the Reserve Bank and the Treasury, meaning if businesses fail to pay back the loans, the fiscus (or the taxpayer) would be on the hook and honour any shortfall. 

But instead of targeting businesses and helping them through the pandemic, the scheme would be repurposed to offer businesses loans for solar panel installations. The government will guarantee solar-related loans for small and medium-sized businesses. Commercial banks will be allowed to borrow directly from the scheme to facilitate the leasing of solar energy equipment to small businesses. DM/BM