GOVERNMENT GRANTS – BEWARE OF “DOUBLE-DIPPING”

A lot of businesses have or will be receiving assistance from the government in the form of grants as relief from COVID 19, it is, therefore, important to visit the tax implications of these grants. It’s easy to assume that just because a grant is received from the government it is automatically exempt from tax, which is logical right? Well not really. That’s not how our tax laws work. A government grant is defined as any grant-in-aid, subsidy, or contribution made by the government of South Africa in the national or provincial sphere. To determine whether a grant is exempt or not, firstly you need to determine what it was received for.

Purpose of the Government Grant

Where the purpose of the grant is to assist you to fund your trading activities, then this grant is said to be of revenue nature and it is included in calculating your taxable income which means you will pay tax on it. Where the grant received was for the purpose of acquiring an asset, then the grant is of capital nature and exempt from normal tax, however, there are further tax consequences that need to be taken into account.
 

Section 12P

Section 12P of the Income Tax Act says “(2) There must be exempt from normal tax any amount received by or accrued to a person as a beneficiary of a government grant if that government grant-
1. Is listed in the Eleventh Schedule; or
2. Is identified by the minister by notice in the Gazette for the purpose of exempting that government grant with effect from a date specified by the Minister in that notice (including any date that precedes the date of that notice), after having regard to-
1. The implications of the exemption for the National Revenue Fund; and
2. Whether the tax implications were taken into account in allocating the grant”
There are 33 different government grants listed in the eleventh schedule.
Lots of jargon there, but what the above simply means that if the grant meets the criteria set out on Section 12P and it is listed on the 11th schedule, then it is not taxable.
 

Double-dipping

Do not get excited yet because if the government grant is not taxable, another subsection of S12P (subsection 6) comes into effect. This subsection says that if the grant is not taxable and the grant has been used to fund certain expenditures in the business, expenditure that you were going to deduct anyway (in terms of section 11), then you will be taking a double exemption/deduction.
So what this means in simpler terms is that, if you receive a government grant that is exempt from normal tax, the corresponding expenditure paid for from the grant cannot be deducted from your tax calculation. This expenditure must be added back for tax purposes.
The problem is that when businesses receive government grants, they apply Section 12P (exemption from normal tax) when completing their tax returns and they still taking Section 11 expenditure deductions as well, hence “double-dipping”.
What SARS is ultimately saying is that taxpayers must not use government grants to lower their tax payable. If your grant is taxable, just include it in your income and deduct all expenditure against. However, if your grant is not taxable, then don’t include it in your income but also do not deduct expenditure against a grant you have not been taxed for.
When receiving a government grant, please be cognisant of the tax implications associated with the expenditure. SARS will require you to submit supporting documents and calculations that have been prepared in the treatment of the government grant.
Please contact us here if you require assistance in this area.