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The Jaltech Refinance Tax-Deductible Solar Investment

JALTECH’S REFINANCE TAX-DEDUCTIBLE SOLAR INVESTMENT

Jaltech is offering South African taxpayers the opportunity to take advantage of National Treasury’s Section 12B solar tax incentive and gain exposure to a solar-backed investment that is projected to generate predictable yields in excess of 20% p.a (as detailed below). What makes this investment stand out is that Jaltech is looking to acquire or refinance a number of existing solar systems.

Because these solar systems are already producing electricity, investors will have peace of mind that:

  • their investment will qualify for a 100% Section 12B tax deduction before the end of the February 2024 tax deadline; and
  • they will have exposure to solar systems which have an existing track record of performance.

UPSIDE POTENTIAL

A notable aspect of the majority of the solar systems earmarked to be acquired is that they have not integrated batteries. Consequently, there exists the potential to leverage debt within the investment to incorporate batteries into the systems, enhancing the yield to over 30% p.a (refer to details below).

100% TAX DEDUCTION EXPLANATION

Section 12B allows a taxpayer to claim a 125% tax deduction where the taxpayer’s capital is used to invest/acquire new solar systems. Where capital is used to re-finance existing solar systems, the taxpayer will only qualify for a 100% tax deduction.

Given the short window period in which to construct new solar systems before the end of February deadline, Jaltech will be re-financing existing solar systems. This strategy is implemented to ensure complete deployment of capital before the end of February and will entitle taxpayers to a 100% tax deduction.

Investment highlights

Limited capital raise of R85 million
100% tax deduction
Solar assets have an existing track record
Minimum investment:

R500 000

Guaranteed deployment
Diversification:

30+ solar systems

Energy consumers have an existing payment history
Annual income distribution to investors for 10 years

RETURN PROFILE & CASH-INFLOWS

Returns – Base case scenario:

Jaltech’s Refinance Tax-Deductible Solar Investment aims to generate a consistent annual yield paid to the investor over a period of 10 years.

Below is an example of cash-inflows over the period of the investment to an investor who invests R1 million.

Milestones Cash-inflows from deployment
Year 1 – SARS refund R450 000
Year 1 – Pre-tax income (after fees) R76 465
Year 2 – Pre-tax income (after fees) R81 383
Year 3 – Pre-tax income (after fees) R86 596
Year 4 – Pre-tax income (after fees) R92 122
Year 5 – Pre-tax income (after fees) R97 979
Year 6 – Pre-tax income (after fees) R104 188 – Investor de-risked – Y6 & M2
Year 7 – Pre-tax income (after fees) R110 769
Year 8 – Pre-tax income (after fees) R117 746
Year 9 – Pre-tax income (after fees) R125 140
Year 10 – Pre-tax income (after fees) R852 821
Total pre-tax income + tax benefit (net of fees) R2 195 210
Total post tax + tax benefit (net of fees) R1 409 866
Pre-tax IRR + tax benefit (net of fees) 20% p.a

Assumptions:

1) The investor is in the highest tax bracket
2) The Prime Rate remains unchanged
3) Assets are sold at year 10

Returns – Upside scenario:

A significant portion of the solar systems comprises of solar panels and associated equipment, excluding batteries. Therefore, there is potential to secure debt within the investment to integrate batteries. The inclusion of batteries is expected to enhance returns for investors for the following reasons:

  • The solar systems will yield a higher return since electricity can be generated during load shedding and nighttime periods;
  • Acquiring batteries will make investors eligible for an additional tax deduction (in the next financial year) of up to 125% on the battery spend. The combined annual tax benefit (over the two financial years) for investors would be 162%;
  • The solar systems may be able to supply electricity during high tariff times, thereby taking advantage of tariff arbitrage;

Taking the above into account and on the assumption that debt funding at 34% of funds invested is raised and used to acquire batteries for 50% of the solar assets the following cash-inflows are projected:

 

Milestones Cash-inflows from deployment
Year 1 – SARS refund R450 000
Year 1 – Pre-tax income (after fees) R87 549
Year 2 – SARS refund (debt funding) R289 773
Year 2 – Pre-tax income (after fees) R50 939
Year 3 – Pre-tax income (after fees) R59 011
Year 4 – Pre-tax income (after fees) R67 519 – Investor de-risked
Year 5 – Pre-tax income (after fees) R76 482
Year 6 – Pre-tax income (after fees) R85 921
Year 7 – Pre-tax income (after fees) R95 857
Year 8 – Pre-tax income (after fees) R106 310
Year 9 – Pre-tax income (after fees) R117 301
Year 10 – Pre-tax income (after fees) R1 303 797
Total pre-tax income + tax benefit (net of fees) R2 790 457
Total post tax + tax benefit (net of fees) R1 635 831
Pre-tax IRR + tax benefit (net of fees) 30% p.a

Assumptions:

1) The investor is in the highest tax bracket
2) The Prime Rate remains unchanged
3) Assets are sold at year 10
4) Debt funding at 34% of funds invested across 50% of the solar assets

DEBT FUNDING

Jaltech aims to introduce debt funding at the underlying investment level during 2024, at a maximum of 34% of funds under management (including the debt portion). The benefit from an investor’s perspective is that the additional funding allows the investor to claim an additional tax benefit, thereby further de-risking the investor.

By way of example:

  • In year one, an investor will receive a sum equivalent to 45% of the investment amount from SARS as a refund.
  • During 2024, through debt funding, the investor will be entitled to an additional tax refund of up to 56% of the debt funding.

Investors must be mindful that where debt is raised within the investment, investors will have limited recourse exposure based on their pro-rata share in the partnership.

Jaltech will look to reduce investors’ exposure by:

  • Limiting the debt levels in the investment to a maximum of 34%. In other words, for every Rand of debt, the investment will hold two Rand of equity.
  • Securing debt funding where the debt providers will only have recourse against existing solar systems.

RISKS

As with any investment, there are numerous risks investors need to consider. With this investment, we believe that there are three main risks, namely:

Credit Risk

Credit Risk

The performance of this investment is dependent on the energy consumer’s ability to make regular payments towards their energy consumption. To mitigate this risk, Jaltech will undertake due diligence and credit checks on a portfolio level and diversify its investment across multiple solar systems.

Deployment Risk

Deployment Risk

Investors will only be entitled to claim a tax deduction in the year of investment if the solar systems are producing electricity. In this regard, Jaltech will only be refinancing or acquiring solar systems that are already producing electricity.

Debt Financing Risk

Debt Financing Risk

The investment will aim to introduce debt at a maximum of 34% of funds under management (including debt portion). As a result (by way of example), if the debt provider repossesses all the underlying investments, the investor will stand to lose his/her original investment value, and the investor may recoup a portion of the tax savings. Jaltech has mitigated this risk by limiting the debt facility to a maximum of 34% of funds under management.

Fees

Fees
Management fee 2.25% p.a.
Performance fee 20% above a hurdle of the investment amount, calculated and charged annually with a high-water mark (with catch-up) – see explanation.

Jaltech earns a performance fee annually on returns generated above the investment amount divided by the total average term of the power purchasing agreements (PPA) signed with the end customers.

As an example, if the total average PPA term is 10 years, and an investor invests R100 the annual hurdle would be R10. Accordingly, if Jaltech returns R12 in year one, Jaltech would charge a fee of 20% on the R2 (R12 less R10). If in year two, Jaltech returns R5 no performance fee would be earned. For Jaltech to earn a performance fee in year three, Jaltech would need to return more than R15.

How to invest?

By simply completing the investment form, Jaltech’s dedicated team will take you through the investment process.

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SIGN UP

Complete the application form

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SUBMIT

Submit your investment form and FICA docs

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INVEST

Let your investment journey begin!

Disclaimer: The contents of this document does not constitute and should not be construed as an offer to subscribe for shares or investment, tax, legal, accounting and/or other advice. For advice on these matters consult your preferred investment, tax, legal, accounting and/or other advisers about any information contained in this document. All mentioned returns in this document are estimates at current tax rates, and past performance is not an indication of future performance. All returns and referencing to investor(s) is with reference to an investor(s) who is in the highest tax bracket.

All reference to investor(s) assumes the investor(s) is a natural person with an income tax rate of 45%.

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