How to take advantage of this unique tax incentive while you still can
*This content is brought to you by Innovate Alternative Assets and Solutions
With tax season about to conclude, many people in South Africa who pay a large chunk of their income to the tax man cannot help but feel frustrated when it seems like the only thing their tax money is used for is to line the pockets of the government's elites. South Africa has one of the highest tax rates in the world, and a large majority of the tax revenue comes from a small minority. Because of the exorbitant amount of tax South Africans pay each year, it is more important than ever to be on the lookout for incentives and ways to reduce your tax bill. Whether it is through business write-offs, an RA investment, a Section 12J investment, or even more recently – a Section 12B investment. One must be savvy with their incomes and taxes to save for the long term. Section 12B is a unique tax incentive that is available for this year and next, after which it will be gone forever. It is a great way for individuals, companies and trusts to earn yields of 10%+ per annum while getting a 125% tax deduction.
Why invest in a Tax Deductible Alternative Energy Investment?
There are many reasons for investing in a solar 12B investment these include, but are not limited to:
- Retail investors get to participate in a high-quality infrastructure asset class at a lower minimum investment (R250k compared to historically high R5mil+ entry point).
- 125% tax deduction on investment available only this year and next (see below for more information).
- Diversification – many 12B investments have multiple off-takers thereby reducing risk.
- Reliable asset class with consistent yields – 10+ year PPAs are signed with fixed rates baked into the agreement. As long as there is a buyer and the sun is fairly normal throughout the year, the cash flows can be forecasted quite accurately.
- Insulated from broader economy and returns are not as much affected by macroeconomic trends as other asset classes like bonds and equities.
How does it work?
Funds are deployed into a partnership, which is then used to deploy solar systems for various off-takers. The off-takers purchase the electricity at a fixed rate that increases each year for the next 10 – 20 years (depending on the agreement). Revenue is generated through an en-commandite partnership and is distributed to the relevant limited partners (investors). The general partners (GPs) deploy the solar, manage the funds, have the relationship with off-takers, maintain the panels, and take a small annual fee.
Tax Savings Explained:
The tax deduction and saving is a key part as to why the investment opportunities are as attractive as they are, and why there has been hundreds of millions of rands flowing into the space this year. The below table shows the tax savings that come with a R1 million investment from an individual with a taxable income of R5 million.
| Description | Individual with no 12B | Individual with 12B |
| Taxable Income | R 5 000 000 | R 5 000 000 |
| S12B investment | R 0 | R 1 000 000 |
| Tax deduction (125%) | R 0 | (R1 250 000) |
| Tax income | R 5 000 000 | R3 750 000 |
| Tax due (2024) | R 2 234 133 | R1 784 133 |
| Tax saving | R 0 | R562 500 |
You can see above that a R1mil investment will save this investor a staggering R562 500 in tax. If you invested last year, or after the incentive is over, you will invest R1 million and get no tax savings. However, if you invest this year you essentially get R562 500 for free. Unique investment structures allow trusts, companies and individuals to participate in the investment and get the deduction. This coupled with a compelling investment case and structure is why there has been so much buzz and investment in the sector.
Innovate Alternative Assets and Solutions, a prominent player in the South African alternative investment industry, is well-positioned to guide investors through the Section 12B investment landscape. It is Innovate's job to cherry-pick the best opportunities in the market, conduct the necessary due diligence, and share with its high net worth client base. The value for the investor is that Innovate is independent, objective, and can put forward the best solution that suits the investors needs at no extra cost
This approach not only promotes objectivity and independence but also mitigates risk through diversification. If you are interested in determining which tax-deductible investment best suits you, please click here to find out more.