Scoring a big tax break from green energy
Investors who mourned the demise of the section 12J tax incentive — which was stopped in June 2021 — now have another, arguably better option for an upfront tax break: a section 12B initiative in renewable energy that 12J stalwart Grovest is offering. The FM spoke to CEO Jeff Miller.
How exactly does the section 12B tax incentive work?
JM: If you invest R100,000, you will be able to deduct R125,000 from your taxable income in terms of the 12B allowance. Now, it only comes into effect if the monies you’ve invested in the fund are deployed into assets that start generating electricity in the same tax year. So, deployment is key.
In other words, it has to happen in the year in which you’ve invested in it?
JM: Yes — in order to get the full 125% tax benefit, otherwise you get a proportion of the amount that has been invested. So in our 12B funds, we’re doing them in tranches of R200m, and we’re confident that we can deploy the full R200m in this tax year so all investors will be able to get the full allowance.
Is the appeal here more the initial tax break you get, or actually the returns of investing in a renewable energy project?
JM: I think it’s multiples. For one, it’ sa moderate-risk investment. You enter into these long-term power purchase agreements with contractual monthly cash flows. The second thing is that for the moderate risk, you’re getting a very high cash-oncash return and a high internal rate of return (IRR). And third, the tax incentive makes it that much sweeter.
Is there a lock-in period for investors? Practically, how many years would you want to have your money in a section 12B fund?
JM: This is a typical private equity structure where the term is 10 years. But in order to get the tax break, you don’t have to be invested for a minimum amount of years like section 12J, where you had to be invested for five years. There’s no minimum amount of time and our fund makes allowance for investors who want to exit early. It’s an 18% IRR and you’d get a very high cash-on-cash return over that period.
Is that return taxable as per your marginal tax rate?
JM: There would be two distributions a year from the profits of the sale of electricity, and those distributions would be taxed in the investor’s hands at their marginal tax rate. But the tax benefit upfront would shield all taxable income — it could be your salary, it could be capital gains tax, it could be [dividend] income.
If R100,000 is the minimum, is there a maximum investment amount?
JM: In 12J, for individuals and trusts the limit was R2.5m, for companies it was R5m. Here there’s absolutely no maximum.
Do you already have projects and offtake agreements set up?
JM: We are consistently building our book and we have a pipeline of about R80m currently. We’ve got people going to sites, getting proposals. We’re confident we can deploy the capital raised.
So the risk at this stage is that you get too much capital, and not enough projects?
JM: That’s why we are doing it in lots of R200m.
Was it quite easy for you to segue from section 12J investments to this? How long has this taken you to set up?
JM: 12B has been around since 2016 but it hasn’t been used in this structure. Knowing that there is a problem with energy in South Africa, we then set up this fund before the February announcement but we did anticipate that there would be some benefits in terms of solar.
What did you learn from 12J that you’d apply to section 12B investments — things you wouldn’t do again or things you would?
JM: We’ve learnt how to deal with retail investors; we have R3.5bn under administration. It was a big learning curve in this alternative asset class, and understanding their needs in terms of reporting, returns, risk profiles and so on.
I’m sure many people might wonder if their money is safe in an investment such as this?
JM: Grovest has been around for 10 years and we have a meaningful amount of money under administration, which gives us credibility. Also this is a moderate risk investment and it’s governed by the FSCA [Financial Sector Conduct Authority]. You get quarterly reports and at the end of the year you get a tax certificate which would tell you how much your share of profits and interest received is.
What might trip you up? For one thing, it’s taking a lot longer to get hold of solar panels thanks to the demand now.
JM: Logistics and procurement are a big issue at the moment; there’s a three-month delay on panels. But we have standing orders, we use large batteries and inverters and we have standing orders for these types of units. The biggest price problem has been the currency.