Regulation 1989 of 1996

INCOME TAX ACT, 1962 (ACT No. 58 OF 1962): REGULATIONS

GOVERNMENT NOTICE

DEPARTMENT OF TRADE AND INDUSTRY

No. R. 1989, 29 November 1996

INCOME TAX ACT, 1962 (ACT NO. 58 OF 1962): REGULATIONS

The Minister of Trade and Industry has, under section 37H (14) of the Income Tax Act, 1962 (Act No. 58 of 1962), and in consultation with the Minister of Finance, made the regulations in the Schedule.

SCHEDULE

Definitions

1. In these regulations any word or expression to which a meaning has been assigned in the Act bears the meaning so assigned and, unless the context otherwise indicates-

"auditor" means an auditor qualified to act as such under the Public Accountants' and Auditors Act, 1991 (Act No. 80 of 1991).

"commencement of the carrying on of a project" means the commissioning of machinery and plant after the commencement date;

"GAAP" means general accounting practices which are in accordance with statements of Generally Accepted Accounting Practice or, in the absence of any statement, accounting practices which are generally accepted in South Africa;

"machinery and plant" means machinery, plant, implements, utensils or articles, excluding any office furniture and equipment and any motor vehicle (excluding any vehicle constructed for a special purpose other than the carriage of persons and having no accommodation for carrying persons other than such as is incidental to that purpose), of a kind normally used on public roads which has two or more wheels and is constructed or adapted wholly or mainly for the carriage of passengers, which are to be brought into use by a company and are to be used directly in a qualifying project;

"magisterial district" means a district created in terms of section 2 of the Magistrates' Courts Act, 1944 (Act No. 32 of 1944);

"SAICA" means the South African Institute of Chartered Accountants;

"the Act" means the Income Tax Act, 1962 (Act No. 58 of 1962);

"TLC" means a Transitional Local Council as defined in the Transitional Local Government Act, 1993 (Act No. 209 of 1993);

"TMC" means a Transitional Metropolitan Council as defined in the Transitional Local Government Act, 1993 (Act No. 209 of 1993);

"TMS" means a Transitional Metropolitan Substructure as defined in the Transitional Local Government Act, 1993 (Act No. 209 of 1993);

"TREPC" means a Transitional Representative Council as defined in the Transitional Local Government Act, 1993 (Act No. 209 of 1993).

Investment requirements

2. (1) The amount of capital invested in-

(a) land where on and buildings wherein the process of manufacture is to be carried on; and

(b) machinery and plant to be used directly in the process of manufacture, must exceed R3 million.

(2) The amount of capital invested in land and buildings is calculated by adding-

(a) the cost of land and buildings owned or to be owned by a company; and

(b) the capitalised value of land and buildings leased or to be leased, capitalised by that company at 15 percent per annum.

(3) The amount of capital invested in machinery and plant is calculated by adding-

(a) the cost of machinery and plant owned or to be owned by a company; and

(b) the capitalised value of machinery and plant leased or to be leased to be reflected in the balance sheet of that company.

Locations for spatial component

3. The following locations have been demarcated as locations qualifying for purposes of the spatial component:

(1) Eastern Cape

The following TLC areas:

(a) Butterworth;

(b) Despatch;

(d) King William's Town;

(e) Port Elizabeth;

(f) Queenstown; and

(g) Uitenhage.

(2) Free State

The following TLC areas:

(a) Bloemfontein;

(b) Botshabelo;

(d) Phuthaditjhaba;

(e) Sasolburg;

(f) Thaba Nchu; and

(g) Welkom.

(3) Gauteng

The following TLC areas:

(a) Alberton;

(b) Germiston;

(d) Springs;

The following TMC area:

(a) Lekoa/Vaal;

and the following TMS areas:

(a) Northern Pretoria; and

(b) Southern substructure of Johannesburg TMC.

(4) KwaZulu-Natal

The following TLC areas:

(a) Empangeni/Ngwelezane;

(b) Mandini;

(d) Newcastle;

(e) Pietermaritzburg/Msunduzi;

(f) Richards Bay;

and the following TMS areas of the Durban TMC:

(a) Outer West;

(b) Northern; and

(5) Mpumalanga

The following TLC areas:

(a) Ekangala;

(b) Highveld Ridge;

(d) Nelspruit; and

(e) Witbank.

(6) Northern Cape

The following TLC areas:

(a) Kimberley; and

(b) Upington.

(7) Northern Province

(a) Phalaborwa;

(b) Pietersburg;

(d) Tzaneen.

(8) North West

The following TLC areas:

(a) Brits;

(b) Klerksdorp;

(d) Rosslyn;

(e) Rustenburg;

and the following TREPC areas:

(a) Babelegi;

(b) Ga-Rankuwa; and

(9) Western Cape

The following TLC areas:

(a) George;

(b) Malmesbury;

(d) Oudtshoorn;

(e) West Coast Peninsula;

(f) Worcester;

The following magisterial district:

(a) Mitchells Plain; extended westwards to include the portion of land bounded by Prince George Drive in the west, Baden Powell Drive in the south and the False Bay Coastal Arterials in the north; and Atlantis Local Area as defined in Proclamation No. 116 of 1977 as published in Official Gazette No. 3940 of the Province of the Cape of Good Hope of 29 April 1977 and in Proclamation No. 11 of 1991 as published in Official Gazette No. 4683 of the Province of the Cape of Good Hope of 22 February 1991.

Qualifying industries

4. The qualifying industries are limited to the following groups (4 digit division) which forms part of "Major Division 3" of the Standard Industrial Classification of all Economic Activities (Fifth Edition) issued by the Central Statistical Service in January 1993, and which have been identified as qualifying industries for purposes of the industry component:

SIC-code Industry description

3013 Processing and preserving of fruit and vegetables.

3020 Manufacture of dairy products.

3041 Manufacture of bakery products.

3044 Manufacture of macaroni, noodles, couscous and similar farinaceous products.

3051 Distilling, rectifying and blending of spirits; ethyl alcohol production from fermented materials; manufacture of wine.

3052 Manufacture of beer and other malt liquors and malt.

3111 Preparation and spinning of textile fibres; weaving of textiles.

3112 Finishing of textiles.

3121 Manufacture of made-up textile articles, except apparel.

3122 Manufacture of carpets, rugs and mats.

3123 Manufacture of cordage, rope, twine and netting.

3129 Manufacture of other textiles not elsewhere classified.

3130 Manufacture of knitted and crocheted fabrics and articles.

3140 Manufacture of wearing apparel, except fur apparel.

3150 Dressing and dyeing of fur; manufacture of articles of fur.

3161 Tanning and dressing of leather.

3162 Manufacture of luggage, handbags and the like, saddlery and harness.

3170 Manufacture of footwear.

3210 Sawmilling and planing of wood.

3221 Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board and other panels and boards.

3222 Manufacture of builders' carpentry and joinery.

3223 Manufacture of wooden containers.

3229 Manufacture of other products of wood; manufacture of articles of cork, straw and plaiting materials.

3231 Manufacture of pulp, paper and paperboard.

3232 Manufacture of corrugated paper and paperboard and of containers of paper and paperboard.

3239 Manufacture of other articles of paper and paperboard.

3241 Publishing of books, brochures, musical books and other publications.

3242 Publishing of newspapers, journals and periodicals.

3249 Other publishing.

3251 Printing.

3252 Service activities related to printing.

3260 Reproduction of recorded media.

3352 Manufacture of paints, varnishes and similar coatings, printing ink and mastics.

3353 Manufacture of pharmaceuticals, medicinal chemicals and botanical products.

3354 Manufacture of soap and detergents, cleaning and polishing preparations, perfumes and toilet preparations.

3359 Manufacture of other chemical products not elsewhere classified.

3371 Manufacture of rubber tyres and tubes; retreading and rebuilding of rubber tyres.

3379 Manufacture of other rubber products.

3380 Manufacture of plastic products.

3421 Manufacture of non-structural non-refactory ceramicware.

3422 Manufacture of refactory ceramic products.

3423 Manufacture of structural non-refactory clay and ceramic products.

3424 Manufacture of cement, lime and plaster.

3425 Manufacture of articles of concrete, cement and plaster.

3426 Cutting, shaping and finishing of stone.

3429 Manufacture of other non-metallic mineral products not elsewhere classified.

3541 Manufacture of structural metal products.

3542 Manufacture of tanks, reservoirs and similar containers of metal.

3543 Manufacture of steam generators, except central heating hot water boilers.

3553 Manufacture of cutlery, hand tools and general hardware.

3559 Manufacture of other fabricated metal products not elsewhere classified.

3561 Manufacture of engines and turbines, except aircraft, vehicle and motor cycle engines.

3562 Manufacture of pumps, compressors, taps and valves.

3563 Manufacture of bearings, gears, gearing and driving elements.

3564 Manufacture of ovens, furnaces and furnace burners.

3565 Manufacture of lifting and handling equipment.

3569 Manufacture of other general purpose machinery.

3571 Manufacture of agricultural and forestry machinery.

3572 Manufacture of machine-tools.

3573 Manufacture of machinery for metallurgy.

3574 Manufacture of machinery for mining, quarrying and construction.

3575 Manufacture of machinery for food, beverage and tobacco processing.

3576 Manufacture of machinery for textile, apparel and leather production.

3579 Manufacture of other special purpose machinery.

3580 Manufacture of household appliance not elsewhere classified.

3590 Manufacture of office, accounting and computing machinery.

3610 Manufacture of electric motors, generators and transformers.

3620 Manufacture of electricity distribution and control apparatus.

3630 Manufacture of insulated wire and cable.

3640 Manufacture of accumulators, primary cells and primary batteries.

3650 Manufacture of electric lamps and lighting equipment.

3660 Manufacture of other electrical equipment not elsewhere classified.

3710 Manufacture of electronic valves and tubes and other electronic components.

3720 Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy.

3730 Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods.

3741 Manufacture of medical and surgical equipment and orthopaedic appliances.

3742 Manufacture of instruments and appliances for measuring, checking, testing, navigating and for other purposes, except industrial process control equipment.

3743 Manufacture of industrial process control equipment.

3750 Manufacture of optical instruments and photographic equipment.

3760 Manufacture of watches and clocks.

3810 Manufacture of motor vehicles.

3820 Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers.

3830 Manufacture of parts and accessories for motor vehicles and their engines.

3841 Building and repairing of ships.

3842 Building and repairing of pleasure and sporting boats.

3850 Manufacture of railway and tramway locomotives and rolling stock.

3860 Manufacture of aircraft and spacecraft.

3871 Manufacture of motor cycles.

3872 Manufacture of bicycles and invalid carriages.

3879 Manufacture of other transport equipment not elsewhere classified.

3910 Manufacture of furniture.

3921 Manufacture of jewellery and related articles.

3922 Manufacture of musical instruments.

3923 Manufacture of sports goods.

3924 Manufacture of games and toys.

3929 Other manufacturing not elsewhere classified.

Ratio of human resource remuneration to value added

5. (1) The ratio of human resource remuneration to value added shall be determined in accordance with the following formula:

B V= _____________ x100 A + B

in which formula-

(a) "V" is the percentage to be determined;

(b) "A" is the gross operating surplus determined in accordance with Part A of Table 1; and

(2) To qualify for purposes of the human resource component, such percentage shall exceed 55 per cent and be reflected in the application.

(3) Where the project consists of more than one component, one of which is the human resource component-

(a) such percentage shall be maintained for a period of two years during the tax holiday status attributable to the certification by the Board of the other component of the qualifying project of a qualifying company; or

(b) such percentage shall be maintained for a period of four years during the tax holiday status attributable to the certification by the Board of the other two components of the qualifying project of a qualifying company.

Project deemed not to be substantially the same

6. A project is deemed not to be substantially the same manufacturing concern, where machinery and plant has been-

(a) taken over by an company from an existing manufacturing concern, it-

(i) an equivalent investment at cost in other machinery or plant is made; and

(ii) the machinery or plant has not been acquired, whether directly or indirectly, from a connected person in relation to such company;

(b) acquired by any company from various existing manufacturing concerns, if not more than 50 per cent of the machinery or plant has been acquired at cost from any one existing manufacturing concern; or

(c) acquired by any company at any liquidation sale or from any dealer in machinery or plant, if none of the shareholders of such company are connected persons in relation to any previous owner of such plant or machinery.

Evaluation criteria

7. (1) To determine the financial viability of a project the board will compare the-

(a) asset management ratios;

(b) debt management ratios;

(d) profitability ratios, calculated from the pro forma financial statements submitted with the application, with the ratios of successful projects in the same industrial sector, or, in the absence of such ratios, the ratios which are generally accepted by financial institutions as fair ratios to operate such a project successfully.

(2) To determine the effect on national competitiveness of a project the board will have regard to-

(a) where a product to be produced by a project is to be used mainly as an intermediary product (a product which will be used as an input into a final product), the effect which the cost of that intermediary product will have on the competitiveness of that final product on the national or international markets; and

(b) where the product to be produced by a project is a product which has already been successfully manufactured in South Africa, the impact which that product will have on the local market share of existing businesses and their employees.

(3) The utilisation of resources will be determined by the board by having regard to the manner and efficiency in which the project intends using raw materials (including components), human resources and funding and the effect the project may have on the environment.

(4) Utilisation of competitive technology will be determined by the board by having regard to the extent to which the intended technology to be employed may enhance the competitiveness of the project.

(5) The commitment to the upgrading and training of local skills will be determined by the board by having regard to the manner in which the management of the project intends providing and utilising facilities to improve the skills and abilities of their human resources as demonstrated in the training plan submitted as part of the application.

Evaluation, approval and monitoring

8. (1) Only applications from companies that have not yet commissioned machinery and plant at the time of receipt of the application will be considered for the tax holiday scheme.

(2) A company that applies for tax holiday status shall provide the board, on application, with a pro forma income statement and pro forma balance sheet prepared in terms of GAAP, wherein all financial information is projected for three years.

(3) A qualifying company must submit annually to the board-

(a) audited financial statements;

(b) a certificate, in accordance with Table 2, wherein the auditor certifies that the qualifying company is still carrying on the approved project at the approved locality and is manufacturing the approved products; and

(c) written confirmation from the qualifying company's auditor that the human resource remuneration to value added ratio has been calculated in accordance with Table 1 as required in regulation 5 (1) (b), (c) and (3).

(4) The documents required in regulation 8 (3) must be prepared in terms of GAAP and certified by the same auditor contemplated therein.

Short title

9. These regulations shall be called the Tax Holiday Regulations.