Section 12P of the Income Tax Act came into operation on 1 January 2013, in respect of years of assessment commencing on or after that date. This section is aimed at creating a unified system for exempting or taxing government grants, and regulating related allowances and deductions.
The intention of the section is to aid in exempting genuine grants as opposed to taxing these amounts. In order for section 12P to apply, a government grant (defined as a grant-in-aid, subsidy or contribution by the government of the Republic in the national or provincial sphere) must be paid to a taxpayer.
The amount received by way of a government grant must not be included in the taxable income of the taxpayer, to the extent that the amount is received for the purposes of the acquisition of an allowance asset or as reimbursement for expenditure incurred in respect of an allowance asset.
The government grant can be applied for the purposes of acquiring an allowance asset, a capital asset or trading stock. In determining the taxable income of the taxpayer, it is important to have regard to whether the government grant is either listed in the Eleventh Schedule or identified by the Minister by notice in the Gazette, with effect from a date specified by the Minister in that notice.
Specific anti-double dipping rules were introduced in this section. For example, if the allowance asset is held when that person receives the grant, the base cost of that allowance asset must be reduced to the extent of the amount of the government grant. If the government grant is awarded to the taxpayer and the grant is used to fund the acquisition, creation or improvement of a capital asset or to reimburse expenses so incurred, the base cost of the capital asset must be reduced by the amount of the grant.
National Treasury released the first batch of the draft Taxation Laws Amendment Bill on 22 July 2015. The Draft Bill includes proposed changes to section 12P of the Income Tax Act and aims to align the tax treatment of government grants provided for Public Private Partnerships (PPP.)
There is a separate provision in section 10(1)(zI) of the Income Tax Act, that regulates PPP grants and provides that a PPP grant is only eligible for an exemption to the extent that the PPP grant was expended by the recipient to fund improvements on land or to buildings. The position with all government grants is that exempt government grants should not be used to fund expenditure in respect of which a deduction can be claimed against other income of the government grant recipient. In this regard, the anti-double dipping rules contained in section 12P regulating the tax treatment of government grants should similarly apply to PPP grants.
The Draft Bill proposes that the exemption for PPP grants should be moved from section 10(1)(zI) and be included in section 12P of the Income Tax Act. As a result, PPP grants will be exempt from tax in terms of section 12P and will similarly be subject to the specific anti-double dipping provisions contained in the section.
The amendments will come into operation on 1 January 2016 and apply in respect of grants received or expenditure incurred on or after that date.