Page 525 - SAIT Compendium 2016 Volume2

IN 59 Income Tax acT: InTeRPReTaTIon noTes IN 59
• In ITC 1557* the issue was whether compensation received by a taxpayer from the Department of Transport as a result of the introduction of a railway service that resulted in the closure of a particular bus route of the taxpayer was of a capital or revenue nature.
The taxpayer’s main business was ‘the conveyance of persons or goods on a public road by means of a motor vehicle for reward’. A claim for compensation was made by the taxpayer under section 26A of the Road Transportation Act.† The taxpayer’s income-producing structure or machinery consisted among others of the routes along which it was authorised by permit to convey passengers for pro t.
It had relinquished the route in issue – part of its income-producing machinery – due to the introduction of a rail service on the route which had the effect of destroying the economic value of the said route. The court held that the compensation received by the taxpayer lled a hole in its capital assets and was of a capital nature and hence fell outside the de nition of the term ‘gross income’ in section 1.
• In Reckitt & Colman Pty Ltd v FC of T‡ the taxpayer manufactured a wide range of household, toiletry, pharmaceutical and food products and also maintained a laboratory to conduct programmes of research into and development of existing and new products to be produced by the company. The taxpayer received a grant under the Industrial Research and Development Grants Act, 1967 in order to assist it with the increased costs it had incurred in undertaking its research and development.
The Supreme Court of New South Wales held that the payments were income according to ordinary usages and concepts as they represented the reimbursement of expenditures of a revenue nature that were derived in the ordinary course of business.
• In KBI v Transvaalse Suikerkorporasie Bpk§ the taxpayer received from buyers of sugar railway charges in excess of the actual expenditure on railage (railway advantage moneys) in terms of a prevailing industry-wide agreement. Following a dispute with the SA Sugar Association, amongst other things, as to which body was entitled to the
railway advantage money, an agreement was entered into in which the taxpayer—
(a) waived its right to the retention in perpetuity of the railway advantage money generated in terms of the Industrial
Agreement,
(b) agreed to the amendment of the Sugar Industry Agreement by which this right was surrendered; and
(c) in consideration accepted R3,5 million.
The court held that the amount paid to the taxpayer was intended to compensate it for the permanent relinquishment of its ability to generate additional income by way of railage advantage money and was accordingly of a capital nature. 3.2.5 Government grants to assist or compensate a person in meeting costs of a capital nature
A government grant which is designated as being made towards the cost of speci ed capital expenditure is capital in nature because it is made in order to assist or compensate a person in meeting costs of a capital nature. The same principle will apply to a compensatory receipt for the loss of a capital asset. In certain circumstances the recoupment provisions of section 8(4)(a) may apply. These provisions are discussed in 3.4.
If a person uses the proceeds of a grant designated for capital purposes for other purposes, such as to fund its working capital, the grant would be regarded as revenue in nature, irrespective of whether the person is subsequently obliged to refund the grant because the conditions of the grant were not satis ed.
A government grant received for the purpose of acquiring land will be of a revenue nature in the hands of a person speculating in land but in the hands of a farmer it will be of a capital nature.
Further examples of compensatory grants of a capital or revenue nature
Example 3 – Compensatory receipt for a farmer’s pastoral lands
Facts:
A farmer’s pastoral lands suffer damage as a result of oods. The farmer receives a government grant to rehabilitate the property. For the purposes of this example it is assumed that the grant does not fall within paragraph (l) of the de nition of ‘gross income’.
Result:
The receipt is of a capital nature because the asset being reinstated is a capital asset in the hands of the recipient.
Example 4 – Receipt of a government grant by a public transport operator
Facts:
Government grants are paid to public transport operators to assist them with the purchase of new buses. The project is a result of public concern over the safety of buses. Operators are required to use the funds to purchase new buses for their bus routes.
Result:
The grants will only be taxable if they are a trading receipt. For a bus operator the following items are trading receipts:
• The receipt of a fare in return for a bus trip.
• Ongoing payments made to subsidise fares based, for example, on the number of passengers or on a ‘per
kilometre’ basis.
A bus is a capital asset in the hands of a bus operator. As a result any amount received by a bus operator in order to replace a bus will be a capital receipt.
* (1992) 55 SATC 218 (T).
† Act 74 of 1977.
‡ (1974) ATC 4185; 1974 (4) ATR 501. § (1987) (2) SA 213 (A), 49 SATC 11.
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