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Note from Deloitte?The income tax treatment of benefits arising from the Automotive Investment Scheme (“AIS”) and Automotive Production and Development Programme (“APDP”) is a complicated matter. It is correct that the new section 12P read with the Eleventh Schedule to the Income Tax Act, 1962 (the “Income Tax Act”) states that ‘government grants’ are exempt from income tax. This amendment is effective from 1 January 2013 and applicable in respect of years of assessment commencing on or after that date. By way of example, if a company’s year of assessment runs from 1 March to 28 February, this amendment will apply to all ‘government grants’ received or accrued on or after 1 March 2013.?The term ‘government grant’ is defined in section 12P of the Income Tax Act and means-?“ a grant-in-aid, subsidy, or contribution by the government of the Republic in the national or provincial sphere.’?Clearly, the cash grant paid in terms of the AIS falls within the definition of a ‘government grant’.? Less clear, however, is whether a Production Rebate Credit Certificate (“PRCC”) earned under the APDP is also included in this definition.?Following our request to the South African Revenue Service (the “SARS”) for clarification on this issue, the SARS advised us that although the PRCC does not constitute a cash grant, “it clearly does constitute a contribution made by the government of the Republic” and, therefore, a PRCC also constitutes a ‘government grant’??for purposes of section 12P of the Income Tax Act. Upon receipt or accrual, it will thus also be exempt from income tax. Section 12P of the Income Tax Act also provides that where a ‘government grant’ has been received reimbursement for expenditure incurred in respect of the acquisition, creation or improvement of trading stock or an ‘allowance asset’, the expenditure on the trading stock or base cost of the ‘allowance asset’ must be reduced to the extent of the ‘government grant’ for income tax purposes. An ‘allowance asset’ includes an asset on which a wear and tear allowance is claimed for income tax purposes. The effect of this reduction is that a lower income tax deduction will be claimed or, put differently, more income tax will be paid in the current and / or future tax years. Similar rules apply where the ‘government grant’ is used to reduce the amount of any other tax deductible expense.?So, in summary, the initial amount received or accrued under the AIS and APDP (PRCC) is exempt from income tax but income tax will eventually be paid on such amounts because the related tax deductible expenditure in the current and / or future tax years is reduced leading to higher income tax payments. At best, income tax on the AIS and APDP (PRCC) benefits might be deferred but not reduced completely.?Peter Maxwell

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