Generally, government grants or subsidies under incentive programmes have always been exempt from income tax in the hands of the recipient. However, some subsidies or grants were indeed taxable and the tax legislation lacked overall policy direction. This often led to confusion about the nature of the receipt.
During 2012, tax legislation was amended to introduce a uniform set of rules to deal with the exemption of grants and subsidies. Tax legislation now contains a list, which will be updated annually, of all exempt grants or subsidies.
No more double-dipping
Previously, taxpayers who received tax-free grants and used these grants to pay for goods and services acquired in the course of its business, also claimed these costs as tax deductions. Consequently, they received a so-called double-dip benefit, i.e. the tax-free receipt as well as the deduction of the expenses paid with the tax-free income. The new legislation, which introduced a comprehensive set of anti-double-dipping rules, puts an end to the double-dip benefits. It applies to all grants received during tax years commencing after 31 December 2012.
Where an exempt grant is awarded to a taxpayer, the new rules will operate as follows:
•If the exempt grant is used to fund the purchase of trading stock or to reimburse expenses so incurred, the cost price of the trading stock must be reduced by the amount of the grant.
•If the grant is used to fund the acquisition or improvement of an allowance asset or to reimburse the cost previously incurred to acquire an allowance asset, the base cost of the allowance asset must be reduced by the amount of the grant. If the grant exceeds the base cost of the allowance asset, the base cost of that asset will be reduced to zero and the excess grant funding will reduce the taxpayer’s allowable deductions.
•If an exempt grant is awarded to fund the acquisition 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.
•If an exempt grant is awarded and the grant is not used to fund the acquisition of trading stock or an asset, the taxpayer must reduce section 11 deductions otherwise deductible from its income.
The new legislation introduces a significant shift from the way tax-free grants were treated previously and taxpayers will have to take great care in the way they report the receipt of the grants in their tax returns.