On 22 February 2023, the Minister of Finance Enoch Godongwana, delivered the 2023 budget speech. The only major tax proposals included in the Minister’s speech relates to the tax incentives in respect of the installation of renewable energy equipment by individuals, the expansion of the allowance for renewable energy projects given to businesses and the expansion of the scope of the diesel rebate to include manufacturers of foodstuffs.
Rooftop solar tax incentive
To incentivize private electricity generation, a new tax incentive is proposed which will allow private individuals to receive a tax rebate equal to 25% of the cost of any new and unused solar PV panels up to a maximum of R15,000 per individual for the 2024 tax year. The panels must be purchased and installed at a private residence and a certificate of compliance must be issued between 1 March 2023 and 29 February 2024.
Importantly, only the solar panels qualify for the rebate and not inverters, batteries or other equipment. There will be no recoupment in respect of the panels should the taxpayer sell their residence after claiming the rebate.
It is unclear whether only the owner of the relevant panels will qualify for the rebate or whether, similar to the provisions of section 12B of the Income Tax Act, panels purchased as part of an instalment credit agreement will also qualify for the rebate.
Expansion of the renewable energy tax incentive
Section 12B of the Income Tax Act currently provides businesses with an allowance in respect of the cost of machinery, plant, implement, utensil or articles brought into use by a taxpayer for purpose of their trade in the generation of electricity through renewable sources. The current allowance allows the relevant taxpayer to claim 100% of the cost incurred over a one or three year period.
It is proposed that this allowance will be expanded for a limited period to allow a business to claim 125% of the cost of renewable energy projects in year 1 with no thresholds on generation capacity, provided the project is brought into use for the first time between 1 March 2023 and 28 February 2025.
Expansion of the scope of the diesel rebate system
It is proposed that that the diesel rebate will be expanded to include diesel used in the manufacturing process, such as for generators, by the manufacturers of foodstuffs.
Further tax proposals
Annexure C to the budget does contain several further significant tax proposals. We summarise below some of the most pertinent proposals.
Delay in the withdrawal of Practice Note 31 and 37 - During 2022, the South African Revenue Service published a notice requesting public comment on their intention to withdraw Practice Notes 31 (‘Interest Paid on Moneys Borrowed’) and 37 (‘Deduction of Fees Paid to Accountants, Bookkeepers and Tax Consultants for the Completion of Income Tax Returns’) with effect from 1 March 2023. It is proposed that the withdrawal of these practice notes will be delayed until relevant amendments are made to the tax legislation. However, on 22 February, SARS published a notice stipulating that the withdrawal of the practice notes has been postponed to 1 March 2024.
Clarification of anti-avoidance rules dealing with third-party backed shares – It is proposed that the exemption from the anti-avoidance provisions related to third-party backed shares be clarified to provide that dividends received by a person holding third-party backed shares will be deemed to be income if the shares in the operating company are no longer held by the person who initially acquired same.
Amendments to the rules regulation contributed tax capital – The definition of contributed tax capital of a company will be amended to address the abuse of the provisions relating to CTC by foreign holding companies which redomicile their intermediary holding company to South Africa in order to distribute the dividends received from an operating company as CTC tax free to the offshore holding company. Clarification will also be provided as to the manner and timing of the conversion of CTC to Rands.
Clarification of the dormant company exemption applicable to the debt concession rules – The dormant company exemption to the debt concession rules will be amended to clarify that the exemption does not restrict the timing of the disposal of any assets under the reorganization rules.
Clarification of the interest limitation rules – It is proposed that the recently amended interest limitation rules in section 23M of the Income Tax Act will be further amended to clarify that:
- only the balance of assessed loss from assessed losses from a prior year be added in the adjusted taxable income calculation;
- exchange gains will be classified as interest received or accrued;
- the proviso to section 23M which reduces the amount of interest disallowed for deduction based on the extent to which withholding tax on interest is paid will only apply to interest paid to non-residents;
- the exemption from the application of 23M for lending institutions will be extended to apply to South African lending institutions; and
- the interaction between the definition of ‘controlling relationship’ in section 23M(1) and 23M(2)(c).
Clarifying the meaning of ‘person’ in provisions dealing with PBO’s recreational clubs and associations – It will be clarified that the three unconnected ‘persons’ who accept fiduciary responsibility in relation to a PBO, recreational club or association must be natural persons.
Extending the anti-avoidance provisions to cover foreign dividends from shares listed in South Africa – The exemption of foreign dividends from income tax will be excluded insofar as the foreign dividends are funded directly or indirectly by amounts that were deductible in South Africa.
Clarification of the foreign business establishment exemption for controlled foreign companies – It is proposed that the foreign business establishment exemption in respect of the income of CFC’s will not apply insofar as the important functions for which the CFC is compensated are not performed by the CFC or by the company which meets the requirements in the proviso. This proposal seems to be related to the recent decision by the Supreme Court of Appeal in Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd which decision is in line with the proposal.
Taxation of non-resident beneficiaries trust – Section 25B of the Income Tax Act will be amended in line with paragraph 80 of the Eighth Schedule to ensure that amounts flowing through a trust to non-resident beneficiaries are taxed in the trust. This proposal follows the recent decision by the SCA in CSARS v The Thistle Trust where the Court had to consider the interplay between section 25B and paragraph 80 of the Eight Schedule.
Extension to the utilization period in the Carbon Offset Regulations - The period for the utilization of carbon offsets will be extended from 31 December 2022 to 31 December 2025.
Aligning tax registration requirements for non-resident employers – The provisions in the Fourth Schedule applicable to the registration as employers and the payment of employees’ tax by non-resident employers will be clarified and aligned for consistency.
It is important to bear in mind that the enacting legislation in respect of these proposals will only be sent out for public comment later in the year.
