Category: Section 12E (ITA) – Deductions in respect of small business corporations

Section 12E

 

  1. Heading substituted by section 31 of Act 45 of 2003.

 

  1. Words preceding paragraph (1)(a) substituted by section 35 of Act 31 of 2013 effective on 12 December 2013.

 

  1. Subsection (1) amended by section 21 of Act 31 of 2005.

 

  1. Subsection (1A) inserted by section 9 of Act 9 of 2005 and substituted by section 13 of Act 3 of 2008.

 

  1. Subsection (2) substituted by section 21 of Act 31 of 2005.

 

  1. Subsection (3) substituted by section 9 of Act 9 of 2005.

 

  1. Subsection (3A) inserted by section 31 of Act 45 of 2003 and deleted by section 9 of Act 9 of 2005.

 

  1. Words preceding subparagraph (4)(a)(i) substituted by section 23 of Act 7 of 2010 effective on 1 January 2011 and section 35 of Act 31 of 2013 effective on 12 Decemebr 2013.

 

  1. Subparagraph (4)(a)(i) amended by section 17 of Act 30 of 2002, section 37 of Act 12 of 2003, section 9 of Act 9 of 2005 and section 24 of Act 9 of 2006, substituted by section 15 of Act 8 of 2007, amended by section 1 of Act 3 of 2008 and substituted by section 23 of Act 7 of 2010 effective on the commencement of years of assessment ending on or after 1 January 2009 and section 7 of Act 23 of 2013 effective on 1 April 2013.

 

  1. Item (bb) amended by section 23 of Act 60 of 2008.

 

  1. Item (4)(a)(ii)(cc) amended by section 23 of Act 60 of 2008 and section 23 of Act 7 of 2010 effective on the commencement of years of assessment ending on or after 1 January 2009.

 

  1. Item (4)(a)(ii)(dd) inserted by section 14 of Act 20 of 2006 and substituted by section 25 of Act 35 of 2007.

 

  1. Item (4)(a)(ii)(ee) inserted by section 14 of Act 20 of 2006 and amended by section 25 of Act 35 of 2007 and section 23 of Act 60 of 2008.

 

  1. Subitem (4)(a)(ii)(ff)(B) amended by section 23 of Act 7 of 2010 effective on 1 January 2011.

 

  1. Item (4)(a)(ii)(ff) added by section 25 of Act 35 of 2007 and amended by section 23 of Act 60 of 2008.

 

  1. Item (4)(a)(ii)(gg) added by section 23 of Act 60 of 2008 effective on 1 July 2009.

 

  1. Subitem (4)(a)(ii)(hh)(B) amended by section 23 of Act 7 of 2010 effective on 1 January 2011.

 

  1. Item (hh) added by section 21 of Act 17 of 2009.

 

  1. Item (4)(a)(ii)(ii) added by section 23 of Act 7 of 2010 effective on 1 January 2011 and substituted by section 25 of Act 22 of 2012 effective on 1 Jauary 2013.

 

  1. Subparagraph (4)(a)(ii) substituted by section 21 of Act 74 of 2002 and section 31 of Act 45 of 2003 and amended by section 25 of Act 35 of 2007.

 

  1. Subparagraph (4)(a)(iii) substituted by section 31 of Act 45 of 2003 and section 25 of Act 35 of 2007.

 

  1. Subparagraph (4)(a)(iv) substituted by section 23 of Act 60 of 2008 effective on 1 March 2009.

 

  1. Paragraph (4)(a) amended by section 14 of Act 20 of 2006.

 

  1. Paragraph (4)(b) deleted by section 23 of Act 60 of 2008 effective on 1 March 2009.

 

  1. Subparagraph (4)(c)(i) substituted by section 14 of Act 20 of 2006 and section 34 of Act 24 of 2011 effective on 1 April 2012.

 

  1. Subparagraph (4)(c)(ii) substituted by section 25 of Act 35 of 2007.

 

  1. Subparagraph (4)(d)(ii) substituted by section 35 of Act 31 of 2013 effective on 12 December 2013.

 

  1. Paragraph (4)(d) substituted by section 9 of Act 9 of 2005, amended by section 14 of Act 20 of 2006, and section 23 of Act 7 of 2010 effective on 1 January 2011 and substituted by section 34 of Act 24 of 2011 effective on 10 January 2012.

 

  1. Section 12E inserted by section 12 of Act 19 of 2001.

Section 12E (ITA) – Deduction in respect of small business corporations

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12E.     Deductions in respect of small business corporations

(1)     Where any plant or machinery (hereinafter referred to as an asset) owned by a taxpayer which qualifies as a small business corporation or acquired by such a taxpayer as purchaser in terms of an agreement contemplated in paragraph (a) of the definition of ‘instalment credit agreement’ in section 1 of the Value-Added Tax Act-

[Words preceding paragraph (a) substituted by section 35 of Act 31 of 2013 effective 12 December 2013]

(a)     is brought into use for the first time by that taxpayer on or after 1 April 2001 for the purpose of that taxpayer’s trade (other than mining or farming); and

(b)     is used by that taxpayer directly in a process of manufacture (or any other process which is of a similar nature) carried on by that taxpayer, a deduction equal to the cost of such asset shall be allowed in the year that such asset is so brought into use.

[Subsection (1) amended by section 21 of Act 31 of 2005 and substituted by section 21 of Act 25 of 2015 effective on 8 January 2016]

(1A)  Subject to subsection (1). where any machinery, plant, implement, utensil, article, aircraft or ship in respect of which a deduction is allowable under section 11(e) (‘the asset’) is acquired by a small business corporation under an agreement formally and finally signed by every party to the agreement on or after 1 April 2005, the amount allowed to be deducted in respect of the asset must, at the election of the small business corporation and subject to the provisions of that section, be either-

(a)     the amount allowable in terms of and subject to that section; or

(b)     an amount equal to 50 per cent of the cost of the asset in the year of assessment during which it was first brought into use, 30 per cent in the first succeeding year and 20 per cent in the second succeeding year.

(2)     For purposes of this section the cost to a taxpayer of any asset shall be deemed to be the lesser of the actual cost to the taxpayer to acquire that asset or the cost which a person would, if he had acquired the said asset under a cash transaction concluded at arm’s length on the date on which the transaction for the acquisition of the asset was in fact concluded, have incurred in respect of the direct cost of acquisition of the asset, including the direct cost of the installation or erection thereof.

[Subsection (2) substituted by section 21 of Act 31 of 2005 and section 26 of Act 17 of 2017 effective on 18 December 2017]

(3)     Any expenditure (other than expenditure referred to in section 11(a)) incurred by a taxpayer during any year of assessment in moving an asset in respect of which a deduction was allowed or is allowable under this section from one location to another must –

(a)     where the taxpayer is or was entitled to a deduction in respect of that asset under subsection (1A) in that year and one or more succeeding years, be allowed to be deducted from his or her income in equal instalments in that year and each succeeding year in which that deduction is allowable; or

(b)     in any other case, be allowed to be deducted from that taxpayer’s income in that year.

(3B)   No deduction shall be allowed under this section in respect of any asset in respect of which an allowance has been granted to the taxpayer under section 12BA.

[Subsection (3B) inserted by section 17(1) of Act 17 of 2023 effective on 1 March, 2023 and applicable in respect of assets brought into use on or after that date]

“Small business corporation” definition of section 12E of ITA

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(4)     For the purposes of this section-

(a)     ‘small business corporation’ means any close corporation or co-operative or any private company as defined in section 1 of the Companies Act or a personal liability company as contemplated in section 8(2)(c) of the Companies Act if at all times during the year of assessment all the holders of shares in that company, co-operative, close corporation or personal liability company are natural persons, where-

[Words preceding subparagraph (i) substituted by section 23 of Act 7 of 2010, section 35 of Act 31 of 2013 and section 29 of Act 15 of 2016 effective on 1 May 2011, applies in respect of years of assessment ending on or after that date]

(i)      the gross income for the year of assessment does not exceed and amount equal to R20 million: Provided that where the close corporation, co-operative or company during the relevant year of assessment carries on any trade, for a period which is less than 12 months, that amount shall be reduced to an amount which bears to that amount, the same ratio as the number of months (in the determination of which a part of a month shall be reckoned as a full month), during which that company, co-operative or close corporation carried on that trade bears to 12 months;

[Proviso to paragraph (i) substituted by section 26 of Act 17 of 2017 effective on 18 December 2017]

(ii)     at any time during the year of assessment, no holder of shares in the company or member of the close corporation or co-operative holds any shares or has any interest in the equity of any other company as defined in section 1, other than-

[Words preceding item (aa) substituted by section 20 of Act 43 of 2014 effective on 20 January 2015]

(aa)    a company contemplated in paragraph (a) of the definition of ‘listed company’;

(bb)   any portfolio in a collective investment scheme contemplated in paragraph (e) of the definition of ‘company’;

(cc)    a company contemplated in section 10(1)(e)(i)(aa), (bb) or (cc);

(dd)   less than 5 per cent of the interest in a social or consumer co-operative or a co-operative burial society as defined in section 1 of the Co-operatives Act, 2005 (Act No. 14 of 2005), or any other similar co-operative if all of the income derived from the trade of that co-operative during any year of assessment is solely derived from its members;

(ee)   any friendly society as defined in section 1 of the Friendly Societies Act, 1956 (Act No. 25 of 1956);

(ff)     less than 5 per cent of the interest in a primary savings co-operative bank or a primary savings and loans co-operative bank as defined in the Co-operative Banks Act, 2007, that may provide, participate in or undertake only the following –

(A)    in the case of a primary savings co-operative bank, banking services contemplated in section 14(1)(a) to (d) of that Act; and

(B)     in the case of a primary savings and loans co-operative bank, banking services contemplated in section 14(2)(a) or (b) of that Act;

(gg)   a venture capital company as defined in section 12J;

(hh)   any company, close corporation or co-operative if the company, close corporation or co-operative –

(A)     has not during any year of assessment carried on any trade; and

(B)     has not during any year of assessment owned assets, the total market value of which exceeds R5 000; or

(ii)     any company, co-operative or close corporation if the company, co-operative or close corporation has taken the steps contemplated in section 41(4) to liquidate, wind up or deregister: Provided that this item ceases to apply if the company, co-operative or close corporation has at any stage withdrawn any step so taken or does anything to invalidate any step so taken, with the result that the company, co-operative or close corporation will not be liquidated, wound up or deregistered;

(iii)    not more than 20 per cent of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains of the company, close corporation or co-operative consists collectively of investment income and income from the rendering of a personal service; and

(iv)    such company is not a personal service provider as defined in the Fourth Schedule;

“Investment income” definition of section 12E of ITA

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(b)     ‘investment income’ means-

(i)      any income in the form of dividends, foreign dividends, royalties, rental derived in respect of immovable property, annuities or income of a similar nature;

(ii)     any interest as contemplated in section 24J (other than any interest received by or accrued to any co-operative bank as contemplated in paragraph (a)(ii)(ff)), any amount contemplated in section 24K and any other income which, by the laws of the Republic administered by the Commissioner, is subject to the same treatment as income from money lent; and

(iii)    any proceeds derived from investment or trading in financial instruments (including futures, options and other derivatives), marketable securities or immovable property;

(c)     ………

“Personal service” definition of section 12E of ITA

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(d)     “personal service” in relation to a company, co-operative or close corporation, means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary

(i)      that service is performed personally by any person who holds an interest in that company, co-operative or close corporation or by any person that is a connected person in relation to any person holding such an interest; and

[Subparagraph (i) substituted by section 26 of Act 17 of 2017 effective on 18 December 2017]

(ii)     that company, co-operative or close corporation does not throughout the year of assessment employ three or more full-time employees (other than any employee who is a holder of a share in the company or a member of the co-operative or close corporation, as the case may be, or who is a connected person in relation to a holder of a share in the company or a member), who are on a full-time basis engaged in the business of that company, co-operative or close corporation of rendering that service.