No “halfway-house” for Government Grants

By Esther van Schalkwyk, Senior Tax Consultant at BDO SA

In terms of a proposed amendment contained in the Draft Taxation Laws Amendment Bill of 2016 (‘Draft TLAB’), the taxation of government grants will likely change. National Treasury proposed a special inclusion in taxpayers’ “gross income” of “any amount received by or accrued to a person by way of a government grant as contemplated in section 12P”.

Due to the proposed inclusion of government grants in gross income, the question of whether a government grant is of a capital or revenue nature will likely become irrelevant. If the proposed amendment is enacted, all government grants, whether of a capital or revenue nature, should be included in a taxpayer’s gross income, except if they are specifically listed as exempt. Taxpayers who receive government grants are advised to take note of this significant change.

The Income Tax Act defines a “government grant” as “a grant-in-aid, subsidy or contribution by the government of the Republic in the national or provincial sphere”. The definition of government grant is very wide although the possibilities for exemption are limited. Government grants may be exempt from normal tax in the hands of the recipient only if that government grant is specifically listed in the Income Tax Act or published by the Minister in the Government Gazette.

The proposed inclusion of government grants in a taxpayer’s gross income is subject to some ambiguity. By referring to “a government grant as contemplated in section 12P”, the 2016 Draft TLAB creates the impression that only government grants that qualify for exemption should specifically be included in gross income. This may contradict the apparent purpose of the proposed inclusion, which seeks to include all government grants as defined in section 12P. This would have the effect of including government grants, in a wide sense, in gross income, with the limited possibility of an exemption if the grant is specifically listed.

For the time being, government grants may generally be excluded from gross income if that grant constitutes a receipt of a capital nature in the taxpayer’s hands. This was illustrated in a recent Eastern Cape Tax Court decision in ITC 13539/13673. In this case, the receipt of government grants in the motor industry were held to be of a revenue nature and therefore subject to income tax because the grant assisted the recipient taxpayer in carrying on its trading operations. The grants were made in the form of certificates that could only be used as a rebate against import duties on imported motor vehicles, therefore filling a so-called revenue hole in the taxpayer’s trading operations. However, if the grant had been found to be of a capital nature the implication is that the grant would not have been taxable.

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