Make the most of government grants

There are many ways in which the government assists businesses. The most effective means in terms of taxation is through the provision of government grants.

When a taxpayer receives a grant from the government, provided that certain requirements are met, it is exempt from taxation.

This means the full amount received may be used for the purpose for which it was given.

It would be a good idea to search for government grants that are available – these can be a useful tax-free source of income for your business.

Note, however, that not all government grants are exempt from taxation.

The Income Tax Act lists the grants exempt from taxation. Examples are:

● Automotive Investment Scheme received from the Department of Trade and Industry (DTI);

● Export Marketing and Investment Assistance received from the DTI; and

● Jobs Fund received from the National Treasury.

The full list provided comprises some 33 grants from various government departments, including Human Settlements, Science and Technology, and Energy.

If the government grant is not listed in the Income Tax Act and has not been identified by the minister of finance in the Government Gazette, then it may be subject to taxation.

It is worth looking at the Export Marketing and Investment Assistance grant in more detail.

This grant assists the taxpayer in developing export markets by providing funds for exhibiting products at recognised exhibitions in foreign countries and for developing new export markets in a foreign country.

A taxpayer may, therefore, receive a tax-free grant that will pay for economy class airfares, a subsistence allowance and the transportation of samples.

This grant is open to South African manufacturers who export their products and certain South African export trading houses.

Note that the business must have operated for more than one financial year to qualify for this grant (among other requirements).

If your company has received a grant that is not from the government, then different considerations will apply.

If the grant received is not specifically exempted from taxation (certain private grants will be exempted from tax) then the purpose of the grant money and how it is used will determine how the grant is taxed.

For example, if a private grant is received for assisting with the day-to-day operations of a business then it will be taxable.

However, if the grant is given for the purpose of helping to produce a sustainable business, meaning it adds to the income-earning structure of the business and creates an enduring benefit, then it should not be subject to taxation.

Please note that this article does not cover all the tax implications of receiving a grant.