Many businesses resumed operations on 1 June 2020, subject to compliance with the regulations issued under the Disaster Management Act. A number of specific tax relief measures have been announced by the government. These have been well covered by commentators. This article highlights some more general tax considerations that may be relevant to the measures that businesses need to implement to comply with the Alert Level 3 regulations.
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Many businesses in South Africa resumed operations on 1 June 2020 when the country moved to Alert Level 3. It is however not business as usual. The regulations to the Disaster Management Act impose a number of requirements that must be complied with when carrying on business. This article highlights a few tax considerations, other than those provided for in the specific tax relief measures, that businesses should be aware of when resuming their activities under these circumstances.
Compliance with directions set out in the regulations
The regulations require that businesses adhere to various directions, including directions relating to health protocols and social distancing measures. Businesses may incur significant costs to comply with these directives.
The deductibility of these costs is governed by, amongst other, the general deduction rule. It allows a deduction for expenditure actually incurred by a taxpayer for purposes of its trade and in the production of income, provided that it is not of a capital nature.
Expenditure does not need to directly produce income in order for it to be incurred in the production of a taxpayer’s income and for purposes of its trade. Rather, as was indicated by Watermeyer AJP in Port Elizabeth Electric Tramway Company Ltd v CIR:
"income is produced by the performance of a series of acts, and attendant upon them are expenses. Such expenses are deductible expenses, provided they are so closely linked to such acts as to be regarded as part of the cost of performing them”
Expenditure necessarily attached to or incurred for the bona fide purpose of carrying on these acts are sufficiently closely linked to the operations. In principle, expenditure incurred for purposes of complying with directives issued under the Disaster Management Act should arguably be sufficiently closely connected to a taxpayer’s trade and its income-earning activities.
Over the years the courts have laid down various guidelines when expenditure would be of a capital nature. Expenditure to acquire or improve capital assets used to carry on business is generally capital in nature, while costs incidental to performing the income-producing operations are not. Another test that is often applied to determine whether an expense is of capital nature is to ascertain whether it brings into existence an asset or provides the taxpayer with an enduring benefit. Expenditure that relate to the installation or alteration of more permanent fixtures to comply with the regulations may be capital in nature. This does not necessarily mean that these costs are not deductible at all. It may qualify for wear-and-tear or other capital allowances, in which case it could be deductible over a period of time.
Employer provided transport
Certain businesses are required to make arrangements to provide, or arrange for, transport to their employees. Although this may be a fringe benefit, a nil value is placed on “any transport service rendered by any employer to his employees in general for the conveyance of such employees from their homes to the place of their employment and vice versa”. Binding General Ruling 42 provides further clarity on the circumstances in which the nil value applies to such transport services.
Minimising the number of employees at the workplace
The regulations indicate that although employees are allowed to return to work persons who are able to work from home must do so. Businesses are likely to, in the longer-term, incur certain costs to enable employees to work efficiently from their homes. Since employees enjoy these benefits at their homes, the line between use for business and private or domestic purposes may be blurred. The risk exists that some of these benefits, or allowances paid to employees to assist them to acquire these benefits, may represent taxable fringe benefits or allowances in respect of which the employer should withheld employees’ tax.
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