Section 12L Sunset Clause

What is section 12L and why do you need to know about it now more than ever?

What is section 12L?

Section 12L of the Income Tax Act No 58 of 1962 (section 12L) is an energy efficiency tax incentive. Under section12L, a taxpayer can claim for energy savings for a period of 12 months from a specific energy efficiency project.

Section 12L offers taxpayers a tax deduction of 95 cents per kilowatt hour saved. The cash benefit is then calculated as the 95 cents per kWh multiplied by the corporate tax rate.

The benefit can be claimed for any form of energy savings (i.e. electricity, coal, natural gas, diesel, petrol, heavy fuel oil, etc.). It is claimable for both greenfields and brownfields projects.

Why do you need to know about it now more than ever?

Currently, section 12L is only claimable for tax years of assessment ending before 1 January 2023. This means that a taxpayer can claim the tax incentive up to their last financial year ending before 1 January 2023.

As an example, if a taxpayer has a June year-end, the last period for which the taxpayer would be eligible to claim the section 12L tax incentive would be for energy savings achieved between 1 July 2021 to 30 June 2022. This means that to claim the full 12-month tax benefit, the taxpayer would have to implement and commission the energy efficiency project by 1 July 2021 so that the energy savings would be realised from 1 July 2021 until 30 June 2022. If energy savings projects are commissioned later in the tax year, this would mean that taxpayers may not being able to claim the full 12-month tax benefit for energy savings achieved.

The possible extension of the section 12L sunset clause date will be contingent upon a review conducted by National Treasury and the relevant stakeholders in parallel with the carbon tax review to be conducted in 2022. If this deadline is not extended, it means that limited time remains for taxpayers to make use of this tax incentive. In other words, the time is now! Taxpayers need to focus on utilising this benefit now before it is too late!

In addition, according to National Treasury, Section 12L was also introduced as one of the ways in which to recycle the revenue from the carbon tax. As such, carbon taxpayers should be trying to maximise the benefit from section 12L as much as possible before it comes to an end.

What else do you need to know about section 12L?

Although there is this sunset clause on section 12L, it is important to remember that section 12L can be claimed retrospectively for energy savings realised from energy efficiency projects already implemented. Taxpayers that have already implemented energy efficiency projects but have not yet claimed section 12L on the energy savings from these projects should consider doing so.

Contact Catalyst Solutions if you have implemented or are planning to implement an energy efficiency project and are interested in accessing the section 12L incentive.

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