South Africa’s energy supply system is in flux. While this is causing some pain, it is also opening up new income-earning opportunities for those with the capital to spend on installing solar PV or wind generation facilities at their homes or premises.
Certain municipalities, such as the City of Cape Town and Tshwane, have announced that they will accept excess power from citizens (who are called 'prosumers') with power generators, to supplement the municipality’s drawdown of power from Eskom.
There are several ways to account for the value of this power. For example, Cape Town will allow companies and individuals to offset the value of the power they export to the municipality against their electricity bills, first as a credit and then as a cash payment above a certain minimum. Tshwane has announced that it will credit prosumers for excess power exported to the municipality but has not announced a cash-back scheme.
Following the publication of draft net billing rules by the National Energy Regulator of SA (Nersa), on 15 June 2023 ), SARS issued for comment (by 30 June 2023) a draft guide on the tax treatment of the net billing tariff system.
According to the draft guide from SARS, there are various ways to implement net billing. One way is where the prosumer’s excess power is temporarily banked or stored in the grid, rather than sold, so that the prosumer remains the owner of that power. The value is offset against future electricity consumption. Because that power is not sold, but merely gives rise to a credit that the prosumer still owns, the prosumer does not incur a tax liability.
A prosumer who enters into a connection agreement with a distributor may deduct certain expenses that are linked to the income-producing activities, eg administrative and other costs related to the export of that power. A capital allowance can be claimed on the equipment installed to generate the electricity if the qualifying requirements under sections 11(e), 12B or the new proposed 12BA of the Income Tax Act are met.
The municipality need not issue a VAT credit note for this future credit because the banking of this electricity is not a “supply” for the purposes of the VAT Act. According to SARS’ draft guidance, the credits are not a form of payment because the prosumer is only receiving their own excess electricity in the form of a credit, which can only be offset against the prosumer’s own consumption of electricity (and not against any other municipal charges or transferred to another person’s bill).
The prosumer has to comply with certain conditions, ie enter into a connection agreement with the distributor, install a renewable energy system that complies with Nersa standards, have a bi-directional meter installed, and comply with all technical requirements of the net billing system.
While this draft is to be welcomed, we hope that the final guidance would also explain the tax implications of net billing systems that have a cash component, such as what was announced by the City of Cape Town.