Tax-exempt government grants

Government grants

Government grants may be provided in cash or in kind (e.g. assets). Key points to remember for grants in kind include:

• The value of the grant is the market value of the asset received; and
• Trading stock acquired through a grant in kind will be included in opening stock and closing stock at a cost price of zero.

Understanding the government grants exemption

Section 12P of the IT Act provides an income tax exemption for qualifying government grants. Its purpose is to empower businesses and individuals receiving these grants by exempting the grants from normal tax, allowing recipients to utilise the funds entirely for their intended purposes.

To qualify for exemption under section 12P, a government grant must be:

1. Listed in the Eleventh Schedule to the IT Act;
2. Identified by the Minister of Finance in a notice published in the Government Gazette; or
3. A grant received as part of fulfilling obligations under a Public-Private Partnership, to fund improvements to land or buildings owned by or under servitude to the government.

Accounting for exempt grants

Grants received to acquire, improve or reimburse expenses for trading stock.

The grant must be deducted from the cost price of trading stock. Any excess amount, i.e. if the grant exceeds the cost price of the trading stock, will result in a reduction of other tax-deductible expenditure.

Grants received for the acquisition or improvement of an allowance asset or to fund expenditure in order to acquire or improve an allowance asset.

The base cost of the asset will be reduced by the amount of the grant. Any tax allowances claimed will be on the original base cost of the asset and the tax allowance claimed will be limited to the reduced base cost. If the government grant exceeds the base cost of the asset (i.e. the base cost of the asset will be reduced to a nil base cost) then that excess must be used to reduce any allowable deductions in terms of section 11 of the IT Act for that year of assessment.

Any excess not utilised (after the allowable expenses for that year of assessment has been reduced) will be carried forward to the subsequent year of assessment until the excess has been fully utilised.

Grants used to fund the acquisition, creation or improvement of a capital asset.

Similar to allowance assets, the grant reduces the asset's base cost. Excess amounts will then reduce allowable deductions under section 11 of the IT Act, and any balance carried forward to the next year of assessment.

No double-dipping

Double-dipping occurs when a taxpayer claims a tax deduction or allowance on expenses funded by a tax-exempt government grant.

To prevent this, the taxpayer should take caution not to claim deductions on expenses where the grant was exempt. If an exempt government grant is received, the corresponding expenditure funded by that the grant cannot be claimed as an income tax deduction. This expenditure must be added back for tax purposes.

For example, a government grant that is exempt in terms of section 12P of the IT Act may disqualify the taxpayer from claiming the 150% research and development deduction under section 11D of the IT Act. The portion of the Research and Development costs for which the government grant is not utilised may qualify for the 150% accelerated deduction.

Taxpayers must ensure compliance with these provisions to avoid penalties and non-compliance risks.

The takeaway

Exempting qualifying government grants from normal tax is instrumental to promoting effective economic development. Taxpayers should carefully consider if a government grant qualifies for exemption, and that associated expenditure is not claimed as an income tax deduction.

Authors:

Mu’mina Moollagee, Consultant

Elmien Theron, Senior Manager