New solar investment fund launches in South Africa with a 100% tax break – but there’s a catch

 ·14 Feb 2023

A new solar and renewable energy fund is launching in South Africa, offering investors a 100% tax break using Section 12B of the Income Tax Act. However, investors will need a minimum of R100,000 to get through the door.

The fund, called the Twelve B Green Energy Fund, relies on Section 12B of the Income Tax Act, which allows for a tax deduction from qualifying assets which are used for renewable electricity generation.

A similar tax incentive was launched in 2014 – Section 12J – which was the fastest-growing alternative asset class in South Africa. Under the section, over 200 funds raised R12 billion. However, Section 12J was sunset in June 2021.

According to Investec, Section 12J was specifically implemented to draw venture capital to the South African market and boost SMMEs and infrastructure development. However, it ultimately ended up being used as a tax haven for property development and wealthier individuals, missing its goals of boosting smaller businesses and creating an inclusive investment environment.

One of the key hangups for the scheme was the high participation threshold – requiring a minimum investment of R100,000 just to partake, leaving many individuals and smaller funds out in the cold.

While Section 12J was more broadly aimed at venture capital ingestion, Section 12B is specifically aimed at renewable energy generation. When first adopted in 2013, the section offered a longer-term tax break of a three-year (50%, 30%, 20%) accelerated depreciation allowance on renewable energy. This was changed in 2016 to a one-year allowance of 100%.

SARS commissioner Edward Kieswetter recently alluded to discussions between the revenue service and government to review the tax regime around renewables to potentially offer better tax breaks to further incentivise the rollout of solar and other projects.

President Cyril Ramaphosa also pointed to tax incentives for the government’s plans to push rooftop solar across the country. More details on these plans are expected at the 2023 Budget scheduled for 22 February.

Should these plans come to fruition, South Africans can expect more funds and investment opportunities to crop up in the coming months and years.

SARS on tax breaks and other incentives for solar in South Africa

How the fund works

According to Twelve B founder, Jeff Miller, green energy has become a necessity in South Africa due to the country’s unreliable electricity supply.

“The private sector needs to step in to urgently improve the situation,” he said.

Miller said that through the new Twelve B fund, South African individuals, businesses, trusts and pension funds will be able to write off 100% of their solar infrastructure investment against their taxable income for the year.

The Twelve B Green Energy Fund invests in solar panels, inverters and batteries in residential, commercial and industrial areas across different locations for different end users.

Every project is governed by a power purchase agreement (PPA), which rules over the amount of energy generated at an agreed price during the term of the PPA. All projects are vetted by an investment committee before they are approved, he said.

The fund is managed and administered by Grovest and regulated by the Financial Services Conduct Authority (FSCA). Grovest was one of the largest administrators of Section 12J funds, with R3.5 billion in assets.

“The Twelve B Green Energy Fund is targeting an internal rate of return (IRR) to investors of 14%-15% net of fees and taxes and has a moderate risk profile. The ability to write off the cost of the investment against taxable income provides downside protection and enhances overall returns for investors,” said Miller.

The Twelve B Green Energy Fund has a tax-efficient partnership structure, with investors receiving bi-annual payments from the partnership’s profits.

The term of the fund is ten years, but there is no specified minimum period to hold the asset to benefit from Section 12B allowance, he said.

However, as was the case with Section 12J investments, the Twelve B fund comes with a high entry point. Those who want to invest in the scheme will need a minimum of R100,000 – and there is no maximum cap for investment.

Thus, only investors with large amounts of capital will be able to invest in solar and receive a deduction in their taxable income.

As an example, Miller said that an investor who invests R100,000 in March 2023 – with the full amount being invested in a solar kit that stats generating in May 2023 –  will be able to deduct R100,000 from their taxable income in February 2024.

If only R70,000 is invested in a solar kit that starts generating in February 2024, the investor will be able to deduct R70,000 from their taxable income for the year ended in February 2024, with the remaining R30,000 reduced from their taxable income the following tax year.

It should be noted that these are one-off deductions, and cannot be repeated on the same investment.

“We will endeavour to give investors the opportunity to deduct their Section 12B allowance in the year in which they make the investment,” the group said. “As such, we will be raising capital in tranches of R200 million on a first-come, first-serve basis.”

In terms of the investment mandate of the fund, at least 70% of capital contributions will be invested in projects under 1 megawatt. As such, the fund will be investing in a portfolio of renewable energy projects focused on sectional title complexes and select commercial and industrial installations.

“These installations incorporate the latest technology in solar panels, inverters, and battery storage,” it said, “spread across various sectors – multi-family residential, retail, and industrial off-takers. They are also geographically spread across South Africa.”

Currently, the fund has approximately R80 million of potential deals in the pipeline.

On top of the high barrier to entry, investors should be aware of the fees involved, including:

  • Set-up fee: A once-off set-up fee of 1% of the capital raised is paid to the manager.
  • Management fee: A management fee of 2% per annum is paid to the manager on the capital invested. This fee is paid quarterly in arrears.
  • Performance fee: The manager will earn a performance fee of 20% of all distributions paid to investors after returning the risk capital to investors.

Read: South Africa on the cusp of an R18 billion energy boom

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