SOLAR BENEFITS EXPLAINER
Get electricity credit when you feed back to your municipality… AND claim a tax deduction
While generating enough electricity from your solar installation to sell some of it back to your local municipality looks great on paper, the tax implications are all too real.
South African municipalities are addressing the billing issues involved in exporting electricity back to them in different ways. For example, Cape Town will allow companies and individuals to offset the value of the power they export to the municipality against their electricity bills, first as a credit and then as a cash payment above a certain minimum. Tshwane has announced that it will credit prosumers for excess power exported to the municipality, but has not announced a cash-back scheme.
The George Municipality allows municipal customers to be on the small-scale embedded generation (SSEG) tariff and, where the network allows, the customer may also be credited (on their municipal bill) for the energy that is fed back to the grid if they are a net consumer. In other words, you cannot feed back more electricity than your total usage.
Responding to a reader complaint, electrotechnical manager Bongani Mandla told the George Herald that the amount of credit may not exceed the total rand value of energy bought from the council in the financial year.
“Customers have to apply for the SSEG tariff. This cannot be automatically done by the municipality in situations where more than one tariff is applicable. The impact of the tariff change will be investigated by the client or his consultant before any application is submitted, since the municipality cannot be held liable for the effect of such a change on the monthly bill,” Mandla said.
How net billing would work
A draft guide published by the South African Revenue Service (SARS) notes that there are different ways to implement net billing. You can temporarily bank or store the excess power in the grid so that you remain the owner of the power and the value can be offset against your future electricity consumption.
Net billing in practice
Joon Chong, a partner at Webber Wentzel, said because that power is not sold, but merely gives rise to a credit that you still own, you will not incur a tax liability.
“If you enter into a connection agreement to feed power back to your municipality, you can deduct certain expenses that are linked to the income-producing activities; for example, administrative and other costs related to the export of that power. A capital allowance can be claimed on the equipment installed to generate the electricity if the qualifying requirements under the Income Tax Act are met,” she explained.
The municipality does not have to issue a VAT credit note for this future credit because the banking of this electricity is not a “supply” for the purposes of the VAT Act. According to SARS’ draft guidlines, the credits are not a form of payment because you are receiving your own excess electricity in the form of a credit, which can only be offset against your own consumption of electricity (and not against any other municipal charges or transferred to another person’s bill).
To qualify for the special dispensation under the net-billing tariff framework, you have to:
- Enter into a connection agreement with the distributor;
- Install a renewable energy system that complies with Nersa standards;
- Have a bidirectional meter installed; and
- Comply with all technical requirements of the net-billing system. DM