BPR 368: Payments made pursuant to an agreement relating to a permission to occupy

The parties are:

-        The applicant: A resident company (“RCo”)

-        The trust: A resident trust (“Trust”)

Reference to “sections” are to sections in the Income Tax Act 58 of 1962.

Facts

The Trust holds certain land for the benefit of a community. Trustees granted Permissions to Occupy (PTOs) in respect of two properties to a third party financier (“Financier”) for purpose of developing and leasing out the properties to RCo.

The Financier let the properties to RCo in terms of a long-term lease. The parties also concluded a development agreement in terms of which RCo was appointed to develop the properties on the lessor’s behalf.

RCo carries on a business operation on each property. The Financier paid for the costs incurred by RCo to develop the properties out of funding which it obtained from a bank. RCo was to pay rentals during the first 10 years of the term of the lease agreement that were sufficient to enable the Financier to repay the bank loan together with interest thereon. Thereafter, rental was nominal.

RCo was also obliged to pay annual rental due in respect of the PTOs. The PTOs provided for the payment of a nominal annual rental and furthermore provided that the rental amount may be renegotiated every three years.

Representatives of the community requested RCo to adequately compensate the Trust, in accordance with the relevant clauses of the PTOs, for its use of the properties.

RCo agreed to make payment, consisting of a once-off initial lump sum payment and additional monthly payments for the remainder of the lease term.

In return, RCo could enjoy its rights under the lease agreement and its PTOs would remain valid and enforceable.

Ruling

1) The lump sum payment will be deductible under section 11(f).

2) The proposed monthly payments will be deductible under section 11(a), read with section 23(g).

3) Neither of the proposed payments will be regarded as a donation as defined in section 55(1) or a deemed donation under section 58(1).

Find a copy of BPR 368 here.

19/11/2021