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Income Tax Act, 1962 (Act 58 of 1962)

Regulations made under Section 12G(7) of the Income Tax Act, 1962 (Act No. 58 of 1962)

2. Criteria for Strategic Industrial Project

 

 

Increase in production and displacement

1) In determining whether an industrial project will increase production of a South African industrial sector after taking into account any displacement within that industry sector, as contemplated in section 12G(4)(b), the Minister must be satisfied that-
a) the project will not result in a net reduction in jobs in the sector in which the project is classified; and
b) the expected loss in production for other South African businesses within the same industry sector does not exceed 40 per cent of the production expected from that industrial project, and for this purpose-
i) the 40 per cent limit must be complied with during each year of the specified period;
ii) an industry sector to be measured is the lowest available sic-code major grouping, grouping or sub-grouping associated with the project as issued by Statistics South Africa;
iii) production will be measured in units (or in gross sales if units are not available or do not provide an appropriately similar comparison); and
iv) an applicant may prove that the industrial project will not exceed the 40 per cent limit for each year of the specified period by-
(aa) demonstrating that the total existing level of South African production does not exceed 40 per cent of the total production that is consumed by the relevant market and for this purpose, displacement of South African and other production will be deemed to take place in proportion to their relative percentages of the total market involved, as measured at the time of the application for approval as a qualifying strategic industrial project; or
bb) demonstrating that the strategic industrial project will achieve a level of production of at least 250 per cent of the total existing level of South African production, as measured at the time of application for approval as a qualifying strategic industrial project; or
cc) providing facts and circumstances that demonstrate that the displacement caused by the industrial project will not otherwise exceed 40 per cent of the total level of South African production which existed at the time of the application for approval as a qualifying strategic industrial project.

 

Expansion of existing industrial project

2) In determining whether an expansion of an existing industrial project will significantly increase production as compared to that of the existing industrial project, as contemplated in section 12G(4)(c), the production expected from the expansion and the existing industrial project must equal at least 135 per cent of the production generated from the existing industrial project operating at full capacity, and for this purpose-
a) production will be measured in units (or in gross sales if units are unavailable or do not provide an appropriately similar comparison); and
b) the 135 per cent threshold must be achieved and then maintained during the specified period.

 

Concurrent benefits

3) For the purposes of section 12G(4)(d)-
a) a company will be regarded as receiving a concurrent benefit under-
i) section 37E of the Income Tax Act, 1962, if that company becomes entitled to any deduction as contemplated in that section after the date of approval of a project carried on by that company as a qualifying strategic industrial project in terms of section 12G(5); or
ii) section 37H of the Income Tax Act, 1962, if the company carrying on the industrial project will enjoy tax holiday status after the date of approval of that project as a qualifying strategic industrial project in terms of section 12G(5); and
b) an industrial project will receive a concurrent investment incentive provided by the national sphere of government if that project, during any year in which the company carrying on the industrial project may be entitled to any additional industrial investment allowance in terms of section 12G(2), receives concurrent benefits under-
i) the Regional Industrial Development Programme, which came into operation on 1 May 1991;
ii) the Simplified Regional Industrial Development Programme, which came into operation on 1 October 1993;
iii) the Motor Industry Development Programme, which initially came into operation on 1 September 1995;
iv) the Small Medium Manufacturing Development Programme, which came into operation on 1 October 1996;
v) the Productivity Asset Allowance, which came into operation in July 2000; or
vi) the Small Medium Enterprise Development Programme, which came into operation on 1 September 2000;
c) previously allowed deductions or mere enjoyment of tax holiday status during any period before approval in terms of section 12G(5), must not be regarded as a concurrent benefit.

 

Industrial participation project

4) For the purposes of section 12G(4)(e) an industrial project will constitute an industrial participation project if that project or any company involved or associated with this project, during any year in which the company carrying on the industrial project may be entitled to any additional industrial investment allowance in terms of section 12G(2), claims any credits or benefits for this project under the National Industry Participation Program or Defense Industrial Participation Programme.

 

Long-term commercial viability

5) For the purposes of section 12G(4)(f), an industrial project must demonstrate long-term commercial viability by providing sufficient information to prove that the project’s estimated pre-tax earnings to sales ratio equals or exceeds the domestic or international industry average for businesses within the lowest available sic-code major grouping, grouping, or sub-grouping associated with the project, as issued by Statistics South Africa, and for this purpose-
a) a pre-tax earnings to sales ratio is measured as the ratio of net income to sales turnover;
b) the viability determination must be achieved within five years from the date of commercial production.