With the current downturn in the South African economy, many small and medium-sized businesses will turn to government to provide them with some sort of relief. This relief would come through the granting of government grants.
These companies would then assume that the government grant they received will be exempt from normal tax, which is correct
However there are further tax consequences which the company needs to take into account.
Section 12P of the Income Tax Act (“the Act”) deals with these tax consequences and as follows:
“12P. Exemption of amounts received or accrued in respect of government grants.”
“(2) There must be exempt from normal tax any amount received by or accrued to a person as a beneficiary of a government grant if that government grant-
- Is listed in the Eleventh Schedule; or
- Is identified by the minister by notice in the Gazette for the purpose of exempting that government grant with effect from a date specified by the Minister in that notice (including any date that precedes the date of that notice), after having regard to-
- The implications of the exemption for the National Revenue Fund; and
- Whether the tax implications were taken into account in allocating the grant”
There are 33 different government grants listed in the eleventh schedule.
From the above we deduce that the government grant received may not be taxable if the criteria mentioned in Section 12P is met and the government grant received is listed in the eleventh schedule.
However that being said, if the government grant is used to fund certain expenditure which would be deductible under Section 11 of the Act, it will appear that the taxpayer is now taking a double exemption/deduction. Firstly the exemption of the government grant and secondly the deduction of the expenditure under Section 11(a) of the Act.
This is where subsection 6 of Section 12P comes in effect. Subsection 6 mentions:
“(6) (a) Where during any year of assessment-
- Any amount is received by or accrues to a person by way of a government grant as contemplated in Subsection (2), other than a government grant in kind; and
- Subsection (3), (4) or (5) does not apply to that amount, any amount allowed to be deducted from there person’s income in terms of section 11 for that year of assessment must be reduced to the extent of the amount of that government grant.
- To the extent that the amount received or accrued by way of a government grant exceeds the amount allowed to be deducted as contemplated in paragraph (a), that excess is deemed to be an amount received or accrued in respect of that government grant during the following year of assessment for the purposes of paragraph (a).”
To avoid double-dipping, SARS has brought in sub-section 6 of Section 12P.
Sub-section 6(a), in a nut shell, is stating that for the amount of the government grant received which is exempt from normal tax, the corresponding expenditure which would normally be deductible under Section 11(a) will now need to be added back for tax purposes.
For example, Company A receives a government grant amounting to R1 000 000.00. This income will be deducted for tax purposes as it is exempt from normal tax under Section 12P(2) of the Act, thus resulting in lower taxable income. However at the same time corresponding expenditure amounting to R1 000 000.00 will need to be added back for tax purposes.
Sub-section 6(b) differs from sub-section 6(a) whereby in sub-section 6(b) the expenditure that would be deductible under Section 11(a) which needs to be added back is less than the government grant received. Therefore the remaining amount of the government grant will be deemed to be received in the following year of assessment for tax purposes.
For example, Company A receives a government grant amounting to R1 000 000.00. In the same year Company A only has R800 000.00 of Section 11(a) deductible expenditure. Therefore only R800 000.00 of the R1 000 000.00 government grant received will be deducted in the current year and subsequently the R800 000.00 expenditure will be added back for tax purposes. The remaining R200 000.00 will be carried forward to the following year of assessment where there will be sufficient Section 11(a) expenditure to cover the R200 000.00.
Therefore although it would appear as though SARS is taxing the government grant by disallowing expenditure to the same value of the government grant received, the taxpayer is ultimately in a neutral position, which is the objective of Section 12P.
Many companies that have received government grants only take Section 12P(2) (exemption of normal tax for government grants received) into account when completing their tax returns. So they are taking the Section 11 deduction as well as the Section 12P exemption thus resulting in the “double-dipping”.
Therefore it is imperative for all companies receiving government grants to carefully consider Section 12P of the Act in order to avoid any queries from SARS.
Supervisor: Corporate Tax, Johannesburg