Formulation of guidance on the South African income tax consequences of expenditure incurred in a tender process

Johnson, E. (2016-03)

Thesis (MAcc)--Stellenbosch University, 2016.

Thesis

ENGLISH ABSTRACT: The government and private practice utilise tenders in order to acquire goods and services at the most competitive price. The goods and services which are acquired through government spending represent not only a substantial amount of public resources spent, but also a source of income for the service providers. There is a standard tender process which is followed which includes a number of phases during which both the bidder and the party offering the tender have certain duties to fulfil. During this tender process the bid is awarded to one of the bidders, this point in the tender process is referred to as the deciding event. Prior to the deciding event the bidders incur expenditure, some of these are necessary and others in order to enhance their chances of successfully being awarded the tender. As the expenditure can be significant it is necessary to determine the tax consequences thereof for the bidder. It should be determined whether the expenditure incurred is deductible in terms of the general deduction formula in section 11(a) of the Income Tax Act 58 of 1962. Should it be held that the expenditure is capital in nature, therefore not deductible in terms of section 11(a), the possible Capital Gains Tax (‘CGT’) in terms of the Eighth Schedule should be investigated. In determining the tax consequences of expenditure incurred during the tender process, it is necessary to consider the tender process as well as the form of the bidder. The form of the bidder affects when a ‘person’ will exist which could be a taxpayer in determining the applicability of section 11(a). The tender process and specifically the deciding event affects whether the bidder could be found to be carrying on a ‘trade’ for purposes of section 11(a). Furthermore, if any right is conveyed as result of the deciding event such right could also result in CGT being applicable on a subsequent disposal of such right. Based on the extended literature review performed, it is found that the deciding event would also be decisive in determining the nature of expenditure. If the tender is awarded successfully to the bidder expenditure incurred in the tender process is submitted as capital in nature as a right to earn future income is established for the bidder (therefore not deductible in terms of section 11(a) but subjected to CGT if the right is disposed of). If the tender is not awarded to the bidder expenditure incurred in the tender process is submitted as not capital in nature therefore deductible in terms of section 11(a).

AFRIKAANSE OPSOMMING: Die regering en die privaat sektor maak gebruik van tenders om goedere en dienste teen die mees mededingende prys te bekom. Die goedere en dienste wat verkry word verteenwoordig nie net 'n aansienlike bedrag van openbare hulpbronne bestee nie, maar ook 'n bron van inkomste vir die diensverskaffers. Daar is 'n standaard tenderproses wat gevolg word, wat 'n aantal fases insluit waartydens beide die bieër en die party wat die tender geplaas het sekere pligte vervul. Gedurende hierdie proses word die tender toegeken aan een van die bieërs, waarna verwys word as die beslissende gebeurtenis. Voor die beslissende gebeurtenis sal die bieërs uitgawes aangaan, sommige van hierdie is noodsaaklik terwyl ander uitgawes bloot aangegaan word om hul kanse te verbeter om die tender te wen. Aangesien die uitgawes beduidende kan wees, is dit nodig om die belasting-gevolge daarvan vir die bieër vas te stel. Daar sal bepaal moet word of die uitgawes aangegaan ingevolge die algemene aftrekkingsformule in artikel 11(a) van die Inkomstebelastingwet 58 van 1962 aftrekbaar is. Indien die uitgawes as kapitaal van aard gevind word, dus nie aftrekbaar ingevolge artikel 11(a) nie, moet die moontlike Kapitaalwinsbelasting (‘KWB’) ingevolge die Agtste Bylae ondersoek word. Om te bepaal wat die belasting-gevolge van uitgawes aangegaan gedurende die tenderproses is, is dit nodig om die tenderproses sowel as die regsvorm van die bieër te oorweeg. Die regsvorm van die bieër affekteer wanneer 'n ‘persoon’ sal bestaan alvorens belastingbetaler ter sprake kan wees in die bepaling van die toepaslikheid van artikel 11(a). Die tenderproses en spesifiek die beslissende gebeurtenis affekteer wanneer die bieër ‘bedryf’ beoefen vir doeleindes van artikel 11(a). Daarenbowe, indien enige regte geskep word as gevolg van die beslissende gebeurtenis kan KWB moontlik van toepassing wees indien die reg oor beskik word. Gebaseer op die uitgebreide literatuurstudie uitgevoer, is daar gevind dat die beslissende gebeurtenis ook beslissend in die vasstelling van die aard van uitgawes is. Indien die tender suksesvol aan bieër toegeken is, word aangevoer dat die uitgawes deur die bieër aangegaan in die tenderproses kapitaal van aard is omrede reg geskep word vir die bieër om inkomste te kan genereer (dus nie aftrekbaar ingevolge artikel 11(a) is nie maar aan KWB onderhewig indien die reg oor beskik word). Indien die tender nie die bieër toegeken is nie, word aangevoer dat die uitgawes aangegaan nie kapitaal van aard is nie en wel aftrekbaar ingevolge artikel 11(a) is.

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