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Tax cuts greener developments

Will tax cuts create more ‘greener’ developments

Could the UK’s zero VAT on energy-saving materials work in South Africa?

By Zeenat Moosa Hassan

, |

Will tax cuts create more ‘greener’ developments

Could the UK’s zero VAT on energy-saving materials work in South Africa?

By Zeenat Moosa Hassan

, |

3 min read

In a bid to reduce energy costs, the UK government last month, announced that it has scrapped VAT on energy-saving materials like solar panels, insulation, and heat pumps for the next five years. Could something similar work in South Africa?

A possible incentive for consumers

According to Bruce Abbot, business development manager at JLL / Tétris SA, the answer is: “yes”. ‘Adopting a similar VAT exemption approach like the UK could certainly promote greener construction locally especially as there currently are no financial incentives in place for residential developments and estates to go green,’ he says.

He goes on to explain that despite this, most residential estate developers are trying to do something to pass on savings and reliable energy to residents. ‘Developers are, for example, looking at using their internal grids to create mini-grids that use renewable energy and a centralised storage system,’ he says.

Attacq is one such developer. Their flagship mega-project in Midrand called Waterfall City has not only been master-planned as greenfield development but also leverages global best practices in urban design and technology.

Sustainability has been integrated into every aspect of Waterfall City, with their onsite Courtyard Hotel Waterfall winning the Green Building Council South Africa 4-star green rating for Best Practice. The certification makes it the first hotel and the 21st building within the precinct to be recognised for best-in-class sustainability and green design.

Yet, the biggest winners will always be the consumer. For example the residents at Waterfall City enjoy lower energy bills.  A no VAT system will give consumers slightly more affordable energy-efficient equipment, which is another welcome bonus, given that domestic energy prices have increased by around 200% over the last three years.

Current incentives are doing the trick

This growing demand for commercial real estate that is ESG compliant, and green star-rated properties is good news for developers too. For a start, this niche market has been very resilient over the last two years and developers have maintained strong yield performance in this category.

It would make sense for them to welcome a UK-based VAT exemption but not everyone shares this view. Georgina Smit, head of technical at the Green Building Council of South Africa (GBCSA) suggests that ditching VAT on energy-efficient materials may have already been considered by the South African government and then dismissed.

Instead, she argues that the country should continue relying on the successes of existing schemes, designed to motivate businesses to implement energy efficiency solutions, such as the 12L Energy Efficiency tax incentive.

This essentially rewards businesses for implementing energy efficiency projects and is not prescriptive of the type of technology they can use. If a developer can prove energy enhancement (a simple lighting retrofit and switching to LED bulbs, implementing an efficient heat pump system within a precinct, or retrofitting numerous buildings with upgraded insulation can suffice), they can receive financial allowances of up to 95 cents per kWh as a tax deduction from SARS.

‘This incentive is aimed at companies and businesses, rather than individuals and it is already operational, assisting ​all types of businesses to improve their energy efficiency for several years now,’ she says.

More legislation on the horizon

The government might not be scrapping VAT on energy-efficient materials any time soon, but that does mean they are resting on their laurels. According to Aubrey McElnea, divisional CEO, Tsebo Energy Solutions, energy wastage remains a huge concern in South Africa.

Later this year, in December 2022, new legislation is set to mandate every public and privately owned building with a floor area of more than 1,000 square metres (public) and 2,000 square metres (private) will need to display an Energy Performance Certificate.

The new rule will apply to all buildings that fall under-occupancy class A1, A2, A3, and G1, and include entertainment facilities, theatres, indoor sports facilities, universities, and schools, as well as office buildings.

McElnea welcomes the new law and suggests that the best way for businesses to ensure compliance is to consider the implementation of remote metering, utility-bill verification, online energy reporting, maintaining up-to-date carbon reporting, and contracting convenient tenant billing and recovery services.

‘While the need for compliance serves a greater purpose, setting in motion mechanisms to conserve energy for our children and future generations, it also supports business imperatives by ensuring that energy is an enabler and not a dis-enabler,’ he concludes.

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