Page 526 - SAIT Compendium 2016 Volume2

IN 59 Income Tax acT: InTeRPReTaTIon noTes IN 59
Example 5 – Receipt of grant under the Provision of Land and Assistance Act, 126 of 1993
Facts:
A person obtains a land redistribution grant for agricultural development from the Department of Land Affairs in order to fund—
• the acquisition of a farm situated in the district of Rustenburg in the North West province for agricultural
production;
• the acquisition of certain capital assets for the development of the land; and
• expenditure for the improvement of the land.
Result:
The grant is a capital receipt because it is used to fund expenditure of a capital nature.
3.3 Conditional receipt
The mere fact that a grant has been received is not conclusive evidence that the conditions attached to the grant have been or will be ful lled. Also, the possibility that in certain circumstances a government grant may have to be repaid does not warrant the classi cation of the grant as a loan.
The decisions in Brookes Lemos Ltd v CIR* and Greases (SA) Ltd v CIR† support the view that an amount received as a taxpayer’s own must be included in gross income even if the contract provides that the amount is repayable under certain circumstances. However, if the terms of the grant stipulate that the funds must be held separately in a trust account until certain conditional requirements are ful lled, no amount is included in gross income until the conditions have been met.
In Lincolnshire Sugar Co Ltd (in Liquidation) v Smart (H.M. Inspector of Taxes)‡ the court held that subsidies received by a taxpayer were supplementary trade receipts despite being repayable in certain circumstances and that the obligation to make repayment might be considered a contingent liability.
In ITC 1557 (discussed in 3.2.4) the taxpayer received certain subsidies from the Department of Transport for season tickets sold to commuters on approved bus routes. The question was at what stage the subsidies accrued to the taxpayer. In terms of applicable legislation any payment of subsidies was discretionary and could be made subject to conditions and contingencies.
It was argued on behalf of the Commissioner that the subsidy accrued to the taxpayer the moment the passenger purchased a ticket to which the subsidy applied and that the auditor’s certi cate merely con rmed the accuracy of the claim for the subsidy and was not a precondition to establish a right to the subsidy.
However, the court held that the fact that all the conditions precedent were regarded as having been ful lled, was signi ed by the approval and payment of the appellant’s claim by the Department. For the amounts in question, this happened only in subsequent years of assessment and it was therefore in those years that the amounts fell to be taxed.
In most instances the unconditional receipt of a government grant in advance will have unfavourable tax consequences for the recipient who must use it in whole or in part to nance future expenses in performing the obligations associated with the grant. The money received n advance constitutes gross income upon receipt while the concomitant expenditure is only incurred in a subsequent year of assessment. Section 24C may provide relief in these circumstances.
Section 24C empowers the Commissioner to allow a taxpayer to deduct an allowance for future expenditure against the advance payment received. A deduction will be allowed of whatever allowance the Commissioner may determine for so much of the future expenditure as relates to the amount received in advance. The allowance may not exceed the amount received.§
3.4 Section 8 (4) (a) recoupment
Under section 8 (4) (a) there must be included in a taxpayer’s income all amounts allowed to be deducted or set off in the current or any previous year of assessment under sections 11 to 20, and sections 24D, 24F, 24G, 24I, 24J, 27 (2) (b) as well as 37B(2) but excluding sections 11 (k), (p) and (q), 11D (1), 12 (2) or 12 (2) as applied by section 13 (8) or 13bis (7) or 15 (a) or 15A that have been recovered or recouped during the current year of assessment.
The appellant in ITC 1435¶ acquired a machine at a cost of R26 222 during the 1980 year of assessment and claimed wear-and-tear allowances of R3 496 (1980) and R5 244 (1981) on the machine. During the 1981 year of assessment the appellant received a grant-in-aid of R18 000 for the purchase of the machine. The Commissioner conceded that the grant-in-aid should not reduce the ‘value’ on which the wear-and-tear allowances were to be calculated but included the amounts of R3 496 and R5 244 in the appellant’s income as a recoupment under section 8 (4) (a).
The court allowed the appeal, holding that—
• •
the grant-in-aid of R18 000 was a receipt of a capital nature that was not speci cally included in the de nition of the term ‘gross income’ in section 1 (unlike certain farming subsidies included in paragraph (l) of the de nition); and there could only be a recovery or recoupment under section 8 (4) (a) if the asset on which the wear-and-tear allowances were claimed was lost, sold or disposed of, or if the amount received represented a cash substitution for the asset itself.
Example 6 – Receipt of a government grant in order to scrap machinery
Facts:
A manufacturing company receives a government grant of R100 000 as compensation for scrapping an air-polluting machine. The original cost of the machine was R80 000, which had been fully claimed by way of wear-and-tear allowances in previous years of assessment.
* 1947 (2) SA 976 (A), 14 SATC 295.
† 1951 (3) SA 518 (A), 17 SATC 358.
‡ (1937) 1 All ER 413.
§ Section 24C (2) quali es the allowance with the words ‘not exceeding the said amount’. ¶ (1987) 50 SATC 117 (EC).
518 saIT comPendIum oF Tax LegIsLaTIon VoLume 2