Tax Concessions For Industrial Projects
26 November 2010
Posted by: TaxFind™
Tax Concessions For Industrial Projects
The ins and outs…
The regulations under Section 12 I of the Income Tax Act were gazetted on 23 July 2010, opening the door to additional investment and training allowances for qualifying industrial projects. The provisions of Section 12I were promulgated more than a year ago.However, the application and project adjudication criteria are governed by the Regulations and, in their absence, potentially qualifying projects have been unable to apply for approval.
The benefits afforded by Section 12 I
Typically, plant and machinery used in a process of manufacture will qualify for an allowance under Section 12C of the Income Tax Act. Where the plant is new and unused Section 12C provides for an accelerated allowance over a four year period in the ratio: 40%; 20%;20%; 20%.
Manufacturing buildings qualify for allowances under Section 13 at a rate of 5% per annum. Section 12I provides for a once off additional investment allowance over and above the Sections 12C and 13 allowances. The additional investment allowance is either 35%or 55% (in the case of projects with preferred status) of the cost of the manufacturing assets. The allowance may be claimed in full in the year in which the manufacturing assets are commissioned, i.e. total allowances in respect of approved projects will be 135% (or 155% in the case of projects with preferred status) of the cost of the manufacturing assets.
A further advantage of the additional investment allowance is that any assessed loss that arises to the extent of the allowance is increased on an annual basis for a period of 4 years from the date of approval of the project, so as to preserve the value of the tax incentive.
In addition to the once-off additional investment allowance, Section 12 I also provides for an additional training allowance. Training costs may be deducted under Section 11(a) of the Income Tax Act. However, where the training costs satisfy the provisions of Section 12H (learnership agreement s), an additional deduction may be claimed under that section. Section 12 I incentivises the provision of training even further by providing an additional training allowance in respect of qualifying industrial projects, in addition to the other deductions.
Pre-requisites for approval The pre-requisites for a project to qualify for approval, in addition to the project spend requirements, are energy efficiency and skills development. These are the over arching requirements of the industrial policy programme, and the Regulations detail specific targets which must be met before a project can claim to have met these requirements.
Project spend requirements
Minimum spend thresholds apply. In the case of greenfield projects, a minimum spend on manufacturing assets of R200 million must be incurred in order to qualify. In the case of brownfield projects the minimum spend is the lesser of R200 million and 25% of the expenditure incurred on existing assets, with a floor of R30 million.
An important requirement of the section is that approval must be obtained from the Minister of Trade and Industry through the adjudication process before the manufacturing assets are contracted for. The Department of Trade and Industry (DTI) has stipulated that, not withstanding the period between the promulgation of the provisions of Section 12 I and the gazetting of the Regulations, they will only consider projects where the manufacturing assets have yet to be contracted for. They will, however, consider projects which have already been adopted, but which are to be implemented in phases, provided the manufacturing assets in respect of future phases have not been contracted for.
Balanced scorecard approach
In addition to the pre-requisites and minimum spend requirements above, a number of other requirements are detailed in the Regulations. In order to meet approval, a project must achieve a minimum of five points (eight in order to achieve preferred status) out of a maximum of ten against a score card that covers:
• Innovation within the manufacturing processes employed;
• Energy efficiency;
• General business linkages;
• Procurement of goods and services from small, medium or micro enterprises;
• Direct job creation; and
• Skills development.
Although a minimum of 5 points must be achieved to obtain approval (8 in the case of projects seeking preferred status), a minimum of 2 points must be achieved out of a possible 4 for direct job creation and skills development.
Disqualified industrial projects
Any project which falls outside of Major Division 3 of the Standard Industrial Classification Code will not be considered for approval. In addition, the following manufacturing projects are excluded: the manufacture of alcoholic beverages, tobacco products, arms and ammunition, and bio-fuels which impact negatively on food security.
Further, any project which receives certain concurrent benefits maybe denied approval. Concurrent benefits include any benefit received in terms of the Automotive Production and Development Programme (excluding automotive component manufacturers), the Small Medium Manufacturing Development Programme, the Productivity Asset Allowance, the Small Medium Enterprise Development Programme, the Enterprise Investment Programme or any other programme of any national sphere of Government which provides grants, subsidies, rebates or interest-free loans, unless these are immaterial.
Applications are to be submitted to The Enterprise Organisation (TEO) within the DTI. Projects are presented to a monthly meeting of the Adjudication Committee, administered by TEO, comprising representatives of the DTI, National Treasury, and SARS, which is responsible for making recommendations to accept or reject the status of approved projects. The final decision lies with the Minister of Trade and Industry.
Under Section 12 I, taxpayers have until 31 December 2014 to apply. However, it is possible that the benefits set aside (R 20 billion) will be allocated before the legislative window closes. For this reason, taxpayers should consider their pipeline of projects over the next four-year period, and give consideration to applying for approval as soon as possible where their projects potentially satisfy the criteria above.
Source: By PricewaterhouseCoopers (Taxbreaks)