Section 12B investments offer a last-chance opportunity to maximize tax savings through renewable energy projects, but investors must choose wisely to avoid potential pitfalls.
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Section 12B Investments have gained immense popularity over the last year due to the substantial tax benefits they provide, given that the lucrative tax incentives will close at the end of this financial year. Investors and their advisors must diligently research a 12B fund and know what to look for and avoid. We will go over some key points and benefits of what to look out for and what to avoid or be cautious of so that investors can make a more informed decision on which 12B investment provider they join up with.
First off, what is 12B, and how does it work? In February 2023, the Minister of Finance Enoch Godongwana announced an expansion of the Section 12B incentive to allow taxpayers to deduct 125% of the capital cost of qualifying assets. The intention of the expansion, known as Section 12BA, is to encourage rapid private sector investment in renewable energy generation assets to assist in alleviating the energy crisis. Section 12BA will be available for the last time in the tax year ending February 2025. Read the Treasury’s FAQ on 12BA. Investment firms and funds have used this tax incentive to structure investments where individuals can invest money into solar projects and receive the 125% tax benefit. Debt can be taken out to further enhance this deduction.
A 12B investment usually occurs when you invest in a limited partnership into a portfolio of solar assets and receive annual yields. It may sound simple, but there are many factors that investors must consider when making a 12B investment.
What to look out for:
- Experienced fund manager with a strong track record
- Diversification of projects
- Fair fee structure
- Debt to enhance the deduction
- Clarity on structure and risks
- Understand the time horizon
Because of this incentive, many new solar companies and 12B funds have been popping up, resulting in a perfect storm of oversupply and lack of demand. Many of these companies and funds are still finding their feet and finding out the hard way that running a solar business requires expertise gained through technical training and years of experience. Investors must ensure that they partner up with a firm that has a strong record and expertise in the industry to make sure their investment has a high chance of success.
What to avoid:
- Inexperienced fund manager with no track record
- Lack of diversification
- Lack of clarity on tax consequences
- Misaligned fee structure and conflicts of interest
- High deployment risk (capital not being deployed before the end of the financial year)
Decentral Energy and Pangea Wealth have teamed together to develop a 12B investment that elevates the pros of a 12B investment and mitigates the cons and downsides.
Investors join a limited partnership that invests in a portfolio of 44+ projects and earns annual profits from selling electricity to the off-takers. The major benefit of this investment is that it allows you to turn your tax liability into an asset, giving a 100% tax saving for 45% marginal income payers. For every R1 you invest, you can receive R1 back from SARS. This is made possible by the National Treasury’s tax incentive and a unique structure.
This approach allows one to deploy solar energy using a combination of equity and debt to earn a 125% deduction on both. For example, if R100 of equity is invested and R80 of debt is taken out, the investor can claim the 125% deduction on the total of R180, despite only contributing R100. Thanks to this innovative approach, DGE enables investors to claim a 222% deduction on the invested amount.
With this being the last year, the incentive will be available, and with limited capacity, now is the perfect time to consider a 12B investment to maximize your tax savings. The 12B tax incentive offers an unparalleled opportunity to reduce your tax burden and contribute to a sustainable future. Pangea Wealth, the distribution and administration partner for Decentral Green Energy, is ready to help investors leverage this unique tax-saving incentive. Investors aiming to reduce their tax liability may contact a Pangea Wealth representative to explore how they can benefit from this opportunity.
Download the Decentral 12B Energy Fact Sheet here.
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