South Africa has the good fortune of possessing many renewable energy sources that remain largely untapped, wind and solar energy being amongst them. However, despite abundant renewable energy sources, developing sustainable markets for renewable energy technologies presents complex challenges as financial obstacles often hinder advancement.
Machinery and plant relating to electricity generation from wind, sunlight, gravitational water and from biomass (that comprises of organic wastes, landfill or plants) is depreciable. These assets are depreciable over a three-year period at a 50:30:20 per cent rate. The purpose of this accelerated depreciation regime is to stimulate investment in these assets, thereby encouraging investment in renewable energy projects. The lower the cost of electricity generation, the higher will be the profit margin for taxpayers involved in electricity generation from renewable energy.
One of the initial questions to resolve is whether the plant and machinery becomes fixed to the land in such a manner that it loses its separate identity and becomes an integral part of the land. This is usually decided on the basis of a 'facts and circumstances' test having regard to the nature of the 'thing' (for example, wind turbine, gas turbine, etc), the manner of its annexation to the land and the intention of the owner of the thing at the time of its annexation to the land. Having regard to the transportable character of the wind tower, the common practice to transport plant and machinery of this nature, the economic incentive on the project company to remove it, the relatively slight degree of attachment to the ground (relative when compared to say a gas turbine) and the ease with which detachment can occur, it is usually concluded that the wind tower should be regarded as movable property. What then of the foundation to which the wind tower is fixed?
Assuming that the structure retains its separate identity the secondary question is whether all the elements of that structure qualify for the accelerated depreciation regime. Machinery and plant (such as windmills and solar energy projects) dedicated to energy renewal often require ancillary supporting structures that can be quite costly in relation to the associated plant and machinery. For instance, a wind tower rests on a supporting structure such as a reinforced concrete foundation that is wider than the tower. The foundation is usually held in place by its own weight and the weight of the wind tower sitting on top of it. The foundation provides a solid base for the unit which is needed for its proper operation. The tower is mounted on a steel frame that is bolted into the foundation. The anchoring is necessary to hold the tower in place to prevent misalignment caused by vibration. The use of bolts makes it a relatively simple logistic process to place or remove the tower which is lifted or lowered into position by crane. As a technical matter, only the plant and machinery (such as, in the case of a wind tower, the rotor blades, the tower itself, and the generator) is depreciable – not the supporting structures.
The proposed amendment contained in the recently released Taxation Laws Amendment Bill 2012 states that supporting structures associated with machinery and plant that are dedicated to energy renewal will be depreciable over a three-year period at the accelerated 50:30:20% rate. More specifically, the supporting structure must be mounted or fixed to the machinery or plant and must be integrated with the machinery or plant. The useful life of that structure must also be limited to the useful life of that machinery or plant. According to the Explanatory Memorandum, these requirements match the requirements for supporting structures that are associated with other forms of depreciable machinery or plant.
This ought to prove to be a valuable concession to taxpayers that generate electricity from renewable energy projects.
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