Budget 2022 - No more double-dipping for an asset acquired as a government grant in kind

Section 12P of the Income Tax Act provides a tax exemption on government grants received or accrued under a programme or scheme listed in terms of the Eleventh Schedule or approved under the national annual budget process and gazetted by the Minister of Finance.

Furthermore, where a government grant is used to fund the purchase of trading stock or allowance assets, the expenditure incurred to purchase those assets must be reduced by the government grant received or accrued. This makes sense from a legislative and commercial perspective because the taxpayer would, in effect, not have incurred an expense where the purchase of those assets is funded by way of a government grant.

However, it has come to the Government's attention that the treatment of government grants has resulted in instances of “double-dipping” for those receiving government grants in kind, which are government grants in a form other than cash.

This is mainly due to the provisions of section 12P coupled with section 11(e) of the Income Tax Act which results in double-dipping in relation to the tax treatment of government grants in kind.

Section 11(e) provides for an allowance on the “value” of an asset and entitles a taxpayer to an allowance regardless of whether an expense was incurred by a taxpayer to acquire that asset, which would then effectively apply to a government grant in kind. This creates an anomaly because the requirement in section 12P to reduce the expenditure incurred to fund the purchase of trading stock or allowance assets with the government grant received or accrued only applies to cash government grants received and not to government grants in kind. This results in an exemption on the government grant received or accrued and the claiming of an allowance on the full value of an asset received.

Accordingly, Government is proposing legislative changes to align the tax treatment of an asset acquired as a government grant in kind with the treatment of assets acquired using a cash government grant, effectively bringing in ‘anti-double dipping’ provisions and ensuring the equitable treatment of taxpayers in these situations.