Page 524 - SAIT Compendium 2016 Volume2

IN 59 Income Tax acT: InTeRPReTaTIon noTes IN 59
In the Ryan case cited above the court found that the grant was undifferentiated, that is, the grant was not expressly appropriated either to a capital or a revenue purpose and, therefore, the grant was a revenue receipt.
In Poulter (H.M. Inspector of Taxes) v Gayjon Processes Ltd* the court had to consider whether payments received from the Department of Employment in order to enable a company to retain persons in employment were to be treated as capital or revenue. Walton J held that it did not matter whether the payment was expressly earmarked for a revenue purpose or whether it was to be paid to the taxpayer company for use in its business as an undifferentiated receipt; in either case it fell to be treated as a revenue payment.
In Pontypridd and Rhondda Joint Water Board v Ostime (H.M. Inspector of Taxes)† the salient facts were as follows:
• A water board was authorised by a local Act to supply water direct to consumers in the districts of its two constituent
authorities and to sell water in bulk to water undertakings in two more districts.
• In the event of an estimated de cit in its net revenue for any year the board was authorised to issue instructions to its
two constituent authorities calling for lump sums to be contributed to them, which they might pay either from their
respective district funds or by levying rates.
• If either authority defaulted in payment the board was empowered, by instruction, to raise the necessary amount by
levying a rate in place of the defaulting authority.
The issue was whether the sums received under the instructions to meet an estimated de ciency were trading receipts.
The court held that the amounts received by the Pontypridd and Rhondda Joint Water Board in terms of the instructions were paid in order to assist the board in meeting its trading obligations and, therefore, the amounts were trading receipts. Viscount Simon summarised the question at issue in the Pontypridd case in two propositions. First, payments in the nature of a subsidy from public funds to an undertaker to assist in carrying on its trade are trading receipts. Secondly, this is subject to the exception that if the undertaker is a rating authority, and the subsidy is the proceeds of rates levied by the undertaker itself, there is no question of pro ts arising from trade, because there is no identity of source with the recipient. The court found that the amounts received in terms of the instructions supplemented the board’s business trading
receipts so that it could maintain its trading solvency.
Example of a government grant that is revenue in nature
The Skills Development Act 97 of 1998 makes provision for refunds to employers that have provided training for their employees, through a registered provider. Employers can claim back a portion of their skills development levy paid to SARS. Regulations to the Skills Development Act, 1998 indicate that a company may claim back two grants, namely— • 15% of its levy by submitting a training plan to its Sector Education Training Authority (SETA); and
• 45% if it submits a training implementation report to its SETA.
Examples of whether the receipt of a government grant is a trading receipt or a capital receipt
Example 1 – Government grant paid to small business enterprises as incentives to incorporate
Facts:
Government grants are paid to small business enterprises operating as partnerships as incentives to incorporate, in order to increase the range and quality of services offered to the public. In terms of the programme the partnerships are encouraged to amalgamate and incorporate into a number of large private companies.
The purpose is to fund only those expenses that relate directly to—
•
•
•
Result:
The grant received is not a receipt that relates to the carrying on of a business, but rather to the termination of one business and the start of another. The grant received is a capital receipt.
investigations undertaken to explore the bene ts and disadvantages of amalgamation and incorporation; feasibility studies on amalgamation and incorporation; and
actual amalgamation of the enterprises.
Example 2 – Receipt of a government grant as a reward for services rendered
Facts:
A contractor tenders for a speci c contract with the Government of South Africa. The tender is successful and as a result the contractor receives a government grant, paid in advance of performance of the contract. Under the terms of this contract the person must provide written recommendations to the government on ways that government departments can reduce their energy consumption.
Result:
An amount was granted to the contractor for purposes of undertaking a speci c project. The grant is not a severable part of the contract. It is subject to the contractor meeting the performance terms provided for in the contract. The grant is money to which the contractor is entitled in terms of the contract as a reward for services rendered and is of a revenue nature.
3.2.4 Compensatory receipts
A compensatory receipt generally takes the form of the item it replaces. Accordingly, a payment made to reimburse or compensate a person for a revenue expense or loss will ordinarily be of a revenue nature and must be included in gross income.
The following are examples found in case law:
* (1985) STC 174.
† (1946) 1 ALL ER 668.
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