The Section 12I Tax Allowance Incentive is a government initiative designed to boost South Africa’s manufacturing sector by supporting both Greenfield (i.e. new industrial projects that utilise only new and unused manufacturing assets) and Brownfield (i.e. expansions or upgrades of existing industrial projects) investments.
This incentive offers tax benefits based on capital investments and training costs.
- For Greenfield projects, the minimum required investment in qualifying assets is R50 million.
- For Brownfield projects, an additional investment of R30 million is required.
The Objectives of the Incentive
This incentive aims to:
- Encourage investment in manufacturing assets to enhance productivity in the South African manufacturing sector.
- Promote the training of employees, improving both labour productivity and the overall skills profile of the workforce.
To qualify for Section 12I, projects must receive prior approval from the Minister of Trade and Industry before any contracts are signed or assets ordered. Once approved, the applicant has up to four years (with an optional 12-month extension) to order and bring the qualifying assets into production.
Additional Investment Allowance
After receiving approval, the Department of Trade & Industry (DTI) issues a letter confirming the specific amount approved for your project’s qualifying assets. Approved companies are publicly listed by SARS as recipients of the Section 12I Tax Allowance Incentive.
A company’s status as a “Preferred” or “Qualifying” project determines the percentage of tax deductions allowed:
Greenfield Projects:
- Up to 55% of qualifying assets, capped at R900 million, for projects with preferred status (100% if located in a Special Economic Zone or SEZ).
- Up to 35% of qualifying assets, capped at R550 million, for projects without preferred status (75% in an SEZ).
Brownfield Projects:
- Up to 55% of qualifying assets, capped at R550 million, for preferred status projects.
- Up to 35% of qualifying assets, capped at R350 million, for non-preferred projects.
Scoring Points for Project Status
Projects are scored to determine if they qualify for tax deductions:
- A project earns “Qualifying status” by scoring at least 4 out of 8 points.
- “Preferred status” is granted if a project scores 7 out of 8 points.
Points are awarded for achieving specific outcomes:
- Innovative industrial processes (max. 1 point).
- Using new technology that improves energy efficiency and promotes cleaner production (max. 2 points).
- Creating business linkages within South Africa (max. 1 point).
- Acquiring goods and services from SMMEs (max. 1 point for Greenfield, 2 points for Brownfield projects).
- Offering skills development programs (max. 2 points).
- Locating a Greenfield project within a Special Economic Zone (max. 1 point).
Training Allowance for Personnel Development
In addition to capital investment deductions, businesses can claim an additional training allowance for employee development. The training allowance can be deducted in the year the training cost is incurred, even if the asset has not yet been brought into use.
Training can be provided:
- By the company itself.
- By a connected person to the company.
- By an independent third party.
The training allowance is capped at R36,000 per employee, and for projects with preferred status, the maximum total allowance is R30 million over the compliance period. For projects without preferred status, the cap is R20 million.
Non-Qualifying Projects
Certain industries are excluded from the Section 12I incentive, including:
- The production of spirits, ethyl alcohol, and wine.
- The manufacture of beer, other malt liquors, and malt.
- Tobacco products.
- Arms and ammunition.
- Biofuels if their production negatively impacts food security in South Africa.
Conclusion
With this powerful incentive, your business can maximize returns on investments in manufacturing and workforce development. Our team at Zuva Financial Services is here to help you navigate the application process and ensure you meet all the requirements for Section 12I tax benefits. Contact us today for expert guidance on how to take advantage of this opportunity!
