Tax implications of expenditure funded by government grants

Income protectionBy Christel du Preez, Senior Tax Manager, Grant Thornton Johannesburg

Section 12P was introduced into the Act to deal with government grants received by taxpayers and applies to years of assessment commencing on or 1 January 2013. As a result, taxpayers are now facing potentially complex rules that could have an adverse effect on their tax planning efforts.

Following the introduction of Section 12P, the Act no longer deals with:

  • grants or scrapped payments identified by the Minister of Finance;
  • amounts received by a registered exporter through a rebate or other assistance under an export incentive scheme; and
  • State subsidies received in terms of the Critical Infrastructure Programme (CIP), or the Small/Medium Manufacturing Development Programme.

What are the tax implications for taxpayers?
Taxpayers that receive government grants that are either listed in the Eleventh Schedule to the Act or identified by the Minister of Finance by notice in the Government Gazette, will be exempt for income tax purposes.

However, no tax deductions will be allowed against such exempt grants and a comprehensive set of so called “anti-double-dipping” rules will apply.

Examples of these rules are set out as follows.

Grants received to acquire, improve or reimburse expenses for trading stock
In such instances, the grant amount must be subtracted from the cost price of the trading stock. Any excess, i.e. if the grant exceeds the cost price of the trading stock, will result in a reduction of other tax deductible expenditure.

Grants received for the acquisition or improvement of an allowance asset or to fund expenditure in order to acquire or improve an allowance asset
The grant amount must be subtracted from the cost of the allowance asset. This means that the base cost of the asset will be reduced and as such, tax allowances claimed in respect of the asset will be limited to the reduced base cost.

Furthermore, should the entire amount of a government grant not be used to acquire an allowance asset, any excess will be deemed to be a recoupment for income tax purposes. It is important to note that the grant will first reduce the cost of the asset, and any excess will then be regarded as a recoupment.

Grants used to fund the acquisition, creation or improvement of a “non-allowance” capital asset

In these circumstances, the base cost of the asset will be reduced by the grant received, which will then affect the capital gain if the asset is disposed in the future. If the grant amount exceeds the cost of the asset, the base cost of the asset will be limited to zero.

If none of these rules apply, a taxpayer will be required to reduce its other tax deductible expenditure. Any excess in the current year will be carried forward to reduce tax deductible expenditure in the following years of assessment.

Taxpayers should therefore be cognisant of the adverse tax implications associated with expenditure funded by government grants. As these rules could become complex it is recommended to speak to a tax advisor.