The other day there was a lot of hammering, grinding, drilling and shouting emanating from the roof of my neighbour’s house. During the previous week, our street had endured 32 hours of power outages in three days owing to load shedding and power tripping. Sure enough, it turned out that my neighbour had become fed up and gone the whole hog with solar. It got me thinking about what deductions would be available to residential home owners for a solar installation.
Unfortunately, at this point there are no tax incentives for persons who do not carry on a trade in their houses. So, unless you have a home office which you use as an employee, commission earner or sole proprietor, there is no fiscal relief for you. Even employees on a fixed salary are effectively precluded from any relief, not because they are not carrying on a trade but because of the provisions of the Income Tax Act 58 of 1962 (Act).
Two sections of the Act are potentially available: section 12B(1)(h) and 11(e).
But before we get to those sections, it is necessary to examine s 23(b).
Section 23(b): Who can claim home office deductions?
Section 23(b) sets out the limitations for the deduction of amounts relating to domestic premises. It provides as follows:
‘23. Deductions not allowed in determination of taxable income.—No deductions shall in any case be made in respect of the following matters, namely—
(b) domestic or private expenses, including the rent of or cost of repairs of or expenses in connection with any premises not occupied for the purposes of trade or of any dwelling-house or domestic premises except in respect of such part as may be occupied for the purposes of trade: Provided that—
- such part shall not be deemed to have been occupied for the purposes of trade, unless such part is specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for such purposes; and
- no deduction shall in any event be granted where the taxpayer’s trade constitutes any employment or office unless—
- his income from such employment or office is derived mainly from commission or other variable payments which are based on the taxpayer’s work performance and his duties are mainly performed otherwise than in an office which is provided to him by his employer; or
- his duties are mainly performed in such part;’
All taxpayers (salaried employees, commission earners or sole proprietors) will not be entitled to a home office deduction unless the part of the dwelling set aside for that purpose is specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for that purpose.
Commission earners can be supplied with an office by their employer but must perform their duties mainly outside that office. This requirement does not mean that the home office has to be used mainly to perform the commission earner’s duties, merely that they must spend more than 50% of their time outside the employer-supplied office. For example, commission earners could spend more than 50% of their time visiting clients or working from the home office.
Salaried employees are required to perform their duties more than 50% of the time in the home office. SARS notes in Interpretation Note 28 (Issue 3) dated 4 March 2022 ‘Deductions of home office expenses incurred by persons in employment or persons holding an office’ (IN 28) that this determination must be made for the full year of assessment. For example, an employee who worked for three months full-time from the home office and spent the other nine months of the year of assessment at the employer’s premises will not qualify. SARS also notes that employees who spend most of their time travelling or working at premises outside the home office will not qualify. Typically, this could apply to articled clerks performing audit work at clients premises.
Section 23(m): Limitation on deductions for fixed salary earners
Section 23(m) throws a spanner in the works for employees on a fixed salary seeking a deduction for a solar installation. It provides that
‘(m) subject to paragraph (k), any expenditure, loss or allowance, contemplated in section 11, which relates to any employment of, or office held by, any person (other than an agent or representative whose remuneration is normally derived mainly in the form of commissions based on his or her sales or the turnover attributable to him or her) in respect of which he or she derives any remuneration, as defined in paragraph 1 of the Fourth Schedule, other than—
- [retirement fund contributions under s 11F];
- any allowance or expense which may be deducted from the income of that person in terms of section 11(c), (e), (i) or (j);
(iiA) [s 11(nA) or (nB)];
- any deduction which is allowable under section 11(a) or (d) in respect of any rent of, cost of repairs of or expenses in connection with any dwelling house or domestic premises, to the extent that the deduction is not prohibited under paragraph (b);’
Section 23(m) thus prohibits an employee on a fixed salary from claiming any expenditure, loss or allowance ‘contemplated in section 11’ other than the items listed in subparagraphs (i) to (iv).
Also falling within s 11 is the catch-all s 11(x), which provides a deduction in determining taxable income from trade for:
‘(x) any amounts which in terms of any other provision in this Part, are allowed to be deducted from the income of the taxpayer’.
The words ‘this Part’ refer to Part I which covers ss 5 to 37G. Since Part I includes s 12B, it means that a fixed-salary employee is unable to claim a deduction under s 12B(1)(h) for the cost of a solar installation.
While s 23(m)(ii) permits a deduction under s 11(e) (the wear-and-tear or depreciation allowance), this does not assist a fixed-salary employee in obtaining a deduction for the cost of a solar installation. The opening words of s 11(e) state that the deduction applies to assets ‘other than machinery, plant, implements, utensils and articles in respect of which a deduction may be granted under section 12B …’. Although it is unnecessary to decide this point, it may also be that elements of a solar installation form part of a building and are structures or works of a permanent nature and hence precluded from deduction under proviso (ii) to s 11(e). Whether proviso (ii) applies would depend on the facts and circumstances of the particular installation. It is interesting that s 12B(1)(h) recognises the components of a solar installation as machinery, plant, utensils and articles, and not as forming part of a building.
Therefore, the best a salaried employee can hope for is to claim an allowance under s 11(e) on a movable asset such as a portable inverter and battery or generator used to power the home office wi-fi and computer equipment during power outages.
Section 24J: Is a portion of interest on an increased bond deductible?
Can an employee claim a portion of interest paid on an increased bond used to fund the installation? SARS used to allow a portion of the interest attributable to the home office, but following the release of IN 28 (Issue 3), it took the view that such interest was debarred because it was expenditure ‘contemplated’ in s 11(x).
SAICA has pointed out that the interest in most cases, particularly bond interest, is deducted under the stand-alone provisions of s 24J on a yield-to-maturity basis, and falls outside s 11(x). It is only interest on a demand loan that potentially falls under s 11(a) (excluded under s 24J(12)).
But it is understood that SARS’s view is that s 23(m) does not require the expenditure to be deducted under s 11(x), merely that it be ‘contemplated’ in that provision. In support of this view, one of the expenses that is allowed under s 23(m) is a deduction for retirement fund contributions under s 11F, which is also a self-contained deduction. Had a deduction under s 11F not also been ‘contemplated’ in s 11(x), there would have been no need to exclude it from s 23(m).
It is disappointing that SARS and National Treasury did not address this issue in the draft Taxation Laws Amendment Bill, 2022.
Section 12B(1)(h)(ii)(bb): Potential deduction only for commission earners and sole proprietors
Commission earners and sole proprietors can potentially claim a deduction under s 12B(1)(h)(ii)(bb) for the cost of a solar installation.
Section 12B(1)(h)(ii)(bb) read with s 12B(2)(b) provides a 100% write-off for any machinery, plant, implement, utensil or article (the solar installation) owned by the taxpayer or acquired by the taxpayer under an instalment credit agreement which was or is brought into use for the first time by the taxpayer for the purpose of his or her trade to be used by that taxpayer in the generation of electricity from photovoltaic solar energy not exceeding 1 megawatt. Under s 12B(1)(i) the cost of any improvements to the solar installation is also allowed as a 100% write-off. Provision is also made for the write-off of foundations but it is unlikely that this will be relevant in a home installation.
Section 12B(3) provides as follows:
‘(3) For purposes of this section the cost to a taxpayer of any asset acquired by that taxpayer shall be deemed to be the lesser of the actual cost to the taxpayer or the cost which a person would, if he or she had acquired the asset under a cash transaction concluded at arm’s length on the date which the transaction for the acquisition of the asset was in fact concluded, have incurred in respect of the direct cost of acquisition of the asset, including the direct cost of the installation or erection thereof.’
Thus, if the solar installation is acquired under an instalment credit agreement, it is the cash cost that qualifies for the write-off. The interest element must be claimed under s 24J on the yield-to-maturity basis. The cost of installing the solar system is included in the cost for the purposes of the 100% write-off.
Since it is likely that the solar installation will also be used for domestic or private purposes, the taxpayer will be able to claim only the portion of the cost of the installation used for the purposes of trade.
SARS IN 28 in 4.6.1 applies the floor-area basis for making the apportionment, though other methods such as usage may be possible.
As to what costs can be deducted under s 12B, a binding private ruling issued in 2018 provides some useful guidance.
In BPR 311 dated 11 October 2018 ‘Photovoltaic solar energy plants’, the applicant was a resident private company that intended to install photovoltaic solar energy plants generating less than 1 MW of electricity at each of its various properties in order to reduce electricity costs. SARS ruled that the company could claim the cost of the following under s 12B(1)(h)(ii)(bb):
- each of the photovoltaic solar energy plants to be installed at each of the sites, consisting of the photovoltaic solar panels, inverter, DC combiner box, racking, and cables and wiring; and
- the direct costs of the installation and erection of each of the plants, consisting of the installation planning costs, panel delivery costs and the cost of the installation safety officer to be appointed, under s 12B(3).
In the 2021 Budget, National Treasury stated that it would undertake a multi-year review of home office allowances, but we are yet to see anything emerge from this review.
Given the detrimental effects of load shedding on South Africa’s economy, one would think that the state would have moved with a far greater sense of urgency to incentivise residential home owners to install solar panels, inverters and batteries on their properties. Unfortunately, at this point, only commission earners and sole proprietors can claim a small portion of the considerable cost of such an installation attributable to their home offices.
Editor’s Note: This article was originally published in the December 2022 / January 2023 issue of ASA Magazine and is reproduced with kind permission. Subsequently, in the Budget 2023 the Minister of Finance announced a number of incentives for solar installations. These have now been given expression in a first batch of the draft Taxation Laws Amendment Bill, 2023 which was released on 21 April 2023. The draft legislation provides for a new s 6C (Solar energy tax credit), which comprises a tax rebate of 25% of the cost of solar panels installed between 1 March 2023 and before 1 March 2024 at private residences, capped at a maximum of R15 000 per person. Also proposed is a new s 12BA (Enhanced deduction in respect of certain machinery, plant, implements, utensils and articles) used in carrying on a trade. It provides for an immediate deduction of 125% of the cost of new and unused assets used to generate electricity from wind power, photovoltaic solar energy, concentrated solar energy, hydro power and bio mass. The assets have to be brought into use between 1 March 2023 and before 1 March 2025. There are no limits on generation capacity, as is the case with the existing s 12B(1)(h). The draft bill states that s 12BA will apply to years of assessment commencing on or after 1 March 2023 but it may be necessary for National Treasury to reformulate this commencement date to accommodate companies with years of assessment other than the last day of February.