The applicant in this case is a company that owns and operates a wind farm that generates electricity. In terms of the applicant’s electricity generation agreement and licence entered into with the South African government and the relevant regulator, it must commit a specified percentage of its annual revenue to SED and ED expenditure. Failure to incur these expenses could result in the electricity generation agreement being terminated. In order to meet these obligations, the applicant established a trust to undertake specific SED and ED projects directly, or to provide funding to other organisations that are approved by SARS as public benefit organisations in terms of section 30(3) which will undertake such projects. The applicant made contributions to this trust to fund its SED and ED projects.
Expenditure and losses will qualify for the general income tax deduction in section 11(a) and read with section 23(g) of the Income Tax Act[2] to the extent that it is actually incurred in the production of the income, laid out or expensed for purposes of the taxpayer’s trade and such expenditure and losses are not of a capital nature. It is furthermore important to note that a donation for Donations Tax purposes include any gratuitous disposal of property including any gratuitous waiver or renunciation of a right (section 55(1) of the Income Tax Act). Any disposal of property for a consideration which, in the opinion of the Commissioner for SARS, is not an adequate consideration, is also deemed to be a donation (section 58 of the Income Tax Act).
Based on the facts set out above, SARS confirmed in the ruling that the contributions to the trust by the applicant in respect of the SED and ED commitments will be deductible under section 11(a) read with section 23(g). The income tax deduction in each year of assessment will be equal to the specified percentage of the applicant’s revenue (as defined in the agreement) earned in that year of assessment. The ruling also states that the contributions to the trust will not be a donation as defined in section 55(1) nor a deemed donation, as contemplated in section 58.
While binding private rulings are not binding on other taxpayers, it does however clarify how SARS would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.
The take away is that taxpayers should consider the potential income tax deductibility of SED and ED expenses carefully, especially in instances where they are obliged in terms of an agreement to incur these costs.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or ommissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.