The South African Revenue Service (SARS) has released an updated Interpretation Note 95 (Issue 3) on the deduction for energy efficiency savings dated 4 July, 2024, providing guidance on the deduction for energy efficiency savings under section 12L.

Section 12L, read with the Regulations, allows any person registered with South African National Energy Development Institute (SANEDI) to claim a deduction for energy efficiency savings derived from activities performed in the carrying on of any trade, provided all the requirements of the section are met.

The term “energy efficiency savings” is defined in the Regulations as “The difference between the actual amount of energy used in the carrying out of an activity or trade, in a specific period and the amount of energy that would have been used in the carrying out of the same activity or trade during the same period under the same conditions if the energy savings measure was not implemented.”

The Note covers several key aspects, including the deduction for energy efficiency savings under section 12L of the ITA, identifying qualifying and non-qualifying activities, calculating the allowance, and the procedure for claiming it.

It also addresses the requirement to obtain an energy efficiency certificate, the appointment of a measurement and verification professional, and record-keeping obligations.

In response to South Africa ranking as one of the top 20 contributors of greenhouse gas emissions in the world, the government voluntarily announced during the 2009 United Nations Climate Change Conference in Copenhagen and confirmed in Paris in 2015 that it would act to significantly reduce domestic greenhouse gas emissions.

The government has thus proposed a carbon tax policy to encourage behavioural change towards cleaner low-carbon technologies. As a complementary measure, it has introduced environmental-related tax incentives to address concerns related to global warming and energy security. One such incentive is section 12L, which allows a qualifying taxpayer to claim a deduction for most forms of energy efficiency savings that result from activities performed in the carrying on of any trade and in the production of income. The deduction can create or increase an assessed loss.

Section 12L became effective on 1 November 2013 and applies to years of assessment ending before 1 January, 2026.