BGR 60: Disqualification as a qualifying company under section 12R(4)(b

Background

An income tax incentive in the form of a reduced corporate income tax rate is available to qualifying companies located within a special economic zone (“SEZ”).

Although a company may be classified a “qualifying company” as defined in section 12R(1) of the Income Tax Act 58 of 1962 (“IT Act”), it may be disqualified from participating in the income tax incentive if it conducts an activity listed in either section 12R(4)(a) or an activity listed in the SIC Code (i.e. version 7 of the Standard Industrial Classification Code as issued by the Statistics South Africa) as gazetted by the Minister of Finance under section 12R(4)(b).

In this regard the Minister of Finance issued a Government Gazette listing the activities from the SIC Code that constitute a disqualifying activity by a qualifying company. The problem arises in that some of the activities listed in the Government Gazette may constitute ancillary activities to the main business of the qualifying company. Because the qualifying company may conduct these activities, it could be disqualified from participating in the income tax incentive.

Discussion

This binding general ruling (“BGR”) provides clarity on the interpretation and application of the excluded activities under section 12R(4)(b).

Both subsections 12R(4)(a) and (b) refer to “a company that conducts any activity” and “is not a qualifying company”.

Applying the same strict interpretation under both paragraphs, as is required following the judgement in Western Platinum Ltd v C:SARS, would result in a qualifying company being disqualified to participate in the income tax incentive as it is conducting a disqualified activity under section 12R(4)(b), which may only be an ancillary activity to the main trade of the qualifying company.

Such an interpretation creates an absurdity as some of the activities listed in the Government Gazette are required to be undertaken as part of most business processes. The proper approach to the interpretation of statues was decided in the case of Natal Joint Municipal Pension Fund v Endumeni Municipality in which the judgment confirmed that it is incorrect to simply apply a purposive interpretation if the ordinary meaning does not give rise to an absurd or ambiguous result. In the case of an absurd or ambiguous result, a sensible and businesslike interpretation taking into account the purpose of the legislation should be adopted.

Ruling

A qualifying company will be disqualified from the income tax incentive under section 12R for that year of assessment if it conducts any activity listed in the Government Gazette. However, where that activity is an integral part of the manufactured product to protect or transport the final product, it is accepted that it is not disqualified, provided the secondary product is not sold separately.

In conclusion, if an activity listed in the said Government Gazette is ancillary to the main activity undertaken by the qualifying company, then the qualifying company would not be disqualified from the incentive under section 12R(4)(b). If an activity under section 12R(4)(b) is a separate income-earning activity that is conducted on a continuous basis, then the activity would result in the disqualification of that company as a qualifying company.

Find a copy of BGR 60 here.

25/02/2022