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Investors in Section 12BA tax incentive warned about what to look out for

08 April 2024 Twelve B Green Energy Fund
Jeff Miller

Jeff Miller

Many South Africans are taking advantage of Section 12BA of the Income Tax Act which offers a 125% SARS-approved tax deduction.

However, some investors have learned the hard way that it is imperative for the fund manager to deploy all capital into new green energy investments in the year in which they invest.

Explains Jeff Miller, founder of the Twelve B Green Energy Fund, “You may not get the full 125% tax incentive, or be unable to take advantage of the tax incentive at all if your fund manager doesn’t have a strong project pipeline. And the energy projects need to be new, not existing projects to qualify for the full incentive. Fortunately, all investors in our first Twelve B Green Energy Fund qualified for the full 125%.”

Following the successful close of Twelve B’s first fund where ten new projects were funded, a second private equity fund has just been launched allowing green energy investors to qualify for the full Section 12BA 125% SARS-approved tax deduction. Section 12BA has a sunset clause and will not be available after 28 February 2025 - only Section 12B will likely be available which offers a 100% tax incentive.

“Just like the first fund, South African individuals, trusts and companies can write off their investment against their taxable income in the year the assets produce electricity. Fund II already has R5 million deployed, and an additional R6 million has been allocated for deployment. The earlier you invest, the better your chances of securing the 125% tax benefit in the 2025 tax year,” Miller adds.

Qualifying investments

The Twelve B Green Energy Fund has a mandate to invest in solar panels, inverters and batteries in residential complexes, and commercial and industrial installations.

Twelve B’s portfolio of assets is spread over several solar projects which are at different locations and have different end users. No one project accounts for more than 16% of the total deployed capital which reduces risk. The ten projects in Fund 1 included both residential and commercial properties across Gauteng, Western Cape and North West, all of which were fully deployed and generating energy before 28 February 2024.

Projects include Nicolor Gold Processing Plant in the Northwest which generates 4MW of solar and Hedingley Body Corporate in Johannesburg which generates 230 kWp solar and storage of 600 kWh.

“We have expanded our network significantly, which has resulted in a larger pipeline of projects,” says Miller.

Each project is governed by a long-term power purchase agreement (PPA), which details the amount of energy generated at an agreed price over the term of the PPA. All projects are vetted by an experienced investment committee before they are approved.

Target returns and fund management

The Twelve B Green Energy Fund targets an IRR to investors of around 18% net of fees and taxes and has a moderate risk profile.

The fund is regulated by the FSCA. It is managed and administered by Grovest, the pioneers of Section 12J, which brought the first Section 12J fund to the market in 2014. Today, Grovest is one of the largest administrators of Section 12J funds, with over R3.5 billion in assets under administration.

Whilst the term of the fund is 10 years, there is no minimum prescribed period to hold the asset to benefit from the Section 12BA allowance.

“The ability to write off the cost of the investment against taxable income provides downside protection and enhances overall returns for investors,” concludes Miller.

The minimum investment amount is R100,000 and there is no maximum cap on investments into the fund. Twelve B is a Shariah-compliant investment.

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