Section 12B tax investments explained in South Africa
By Robin Hayes
CRAIG ABBOTT, a director of asset management and tax advisor at The Financial Emporium, unravels the mysteries of Section 12B investments – highlighting the scheme’s advantages of legally minimising one’s personal tax liability, although it is not without potential risks.
Consider this. You are currently sitting with a tax problem – you may have just sold a business, been paid out as a major shareholder, or received a substantial bonus.
On the face of it a good “chunk” of your well-earned funds will be payable to the South African Revenue Service. However, the good news is that the money that is due to SARS can be invested to offset your tax liability via a Section 12B investment into a solar project.
What is section 12B?
Section 12B of the Income Tax Act, No 58 of 1962 “The Act” provides for a write-off of qualifying assets, including the provision for a capital allowance of assets used, in the production of renewable energy.
Until recently, the depreciation allowance has moved up from 100% to 125% that is claimable in a single financial year.
Practically, how does it work?
You as the taxpayer you can deduct the investment against your taxable income, in the year of the investment.
For example; in the 2025 financial year, let’s say you are liable for say R700 000 in tax. You do the necessary investigating and make an investment into a reputable business that offers a 12B investment. That investment of R700 000 is pooled with other likewise individuals and then gearing is applied (a term for borrowing or lending money from the bank). In year one gearing is pegged at 50%, year 2, 30% and year 3, 20%. Together with your R700 000, plus other investors and the gearing from the banks – a total amount of say R10m is raised to start a large solar project in a smaller town, in the Western Cape. The period for completion on these projects can vary, depending on the project owners and could be as long as 15-20 years.
If we look at your R700 000 and apportioned 50% gearing in year one, it provides you with a total investment of R1,400,000 @ 45% tax rate. Remember that your SARS deduction INCLUDES the gearing from the banks. Your SARS recoupment for that financial year would be R630 000. This is deducted from the R700 000 that you HAD to pay SARS for your tax liability.
Additionally, every year you will receive income from your solar investment (this is deemed income in your hands and is taxable.) Where SARS recoupments are very large based on higher gearing in a particular year, SARS will rollover the taxable allowance for you into the next financial year.
The good news is that, this is not just for individuals, but is also accessible for trusts and companies.
So, what are risks?
There are many risks to consider; lack of gearing, SARS ruling changes, environmental and engineering risks, off taker risk and counter party risks amongst others.
One of the biggest risks you as a taxpayer faces is the timing risk of when your investment is actually deployed into a project – this is vital as it ensures you can qualify for your tax deduction. Investing in January for example, before the financial year-end – means that you will run a very high risk that the funds will NOT be deployed.
As a final word of caution – please ensure you have researched the investment company thoroughly and they have a long record of accomplishment of multiple projects before investing into a 12B.
