SARS Interpretation Note 109 Issue 2: Lease premiums (source: https://www.sars.gov.za/legal-intr-in-109-lease-premiums/)
INTERPRETATION NOTE 109 (issue 2)
DATE: 16 August 2023
ACT : INCOME TAX ACT 58 OF 1962
SECTION : PARAGRAPH (g) OF THE DEFINITION OF “GROSS INCOME” AND
SECTION 11(f) AND (h)
SUBJECT : LEASE PREMIUMS
Contents
Preamble ................................................................................................................................. 2
1. Purpose ....................................................................................................................... 2
2. Background ................................................................................................................. 2
3. The law and its application .......................................................................................... 3
3.1 Position of the lessor [paragraph (g) of the definition of “gross income” in
section 1(1)] ................................................................................................................ 3
3.1.1 The meaning of “premium or consideration in the nature of a premium” .................... 4
3.1.2 The meaning of “use or occupation or the right of use or occupation” ........................ 8
3.2 Position of the lessee [section 11(f)] ........................................................................... 9
3.2.1 Deduction of a lease premium .................................................................................. 11
3.2.2 Actually paid by the lessee ........................................................................................ 11
3.2.3 The meaning of “the right of use or occupation” ....................................................... 12
3.2.4 Used or occupied for the production of income or income is derived from it............. 12
3.2.5 Amount of the allowance - maximum annual allowance ........................................... 12
3.2.6 Amount of the allowance - maximum annual allowance (linked to know-how) ......... 16
3.2.7 Exclusion from deduction .......................................................................................... 17
3.2.8 Recoupment of the allowances granted .................................................................... 18
3.3 A lessor’s special allowance [section 11(h)] .............................................................. 18
3.3.1 Special circumstances .............................................................................................. 19
3.3.2 Recoupment of the allowance granted ...................................................................... 19
4. Conclusion ................................................................................................................ 19
Preamble
In this Note unless the context indicates otherwise –
• “paragraph” means a paragraph of the definition of “gross income” in
section 1(1);
• “section” means a section of the Act;
• “the Act” means the Income Tax Act 58 of 1962; and
• any other word or expression bears the meaning ascribed to it in the Act.
All guides, interpretation notes and rulings referred to in this Note are available on the
these documents should be consulted.
1. Purpose
This Note provides guidance on the application of paragraph (g) and the related
deductions under section 11(f) and (h).
A number of the court cases that considered whether an amount fell within the scope
of the above-mentioned paragraph and sections dealt with leases of land and buildings.
The use of the words “rent”, “lease”, “lease period”, “lease premium”, “lessor” and
“lessee”, and “sub-lessor” and “sub-lessee” is therefore common in this Note. The use
of these words is not intended to imply that the scope of the above-mentioned
paragraph and sections is always limited to situations involving the use or occupation
or right of use or occupation of land and buildings. The above-mentioned paragraph
and sections are wider than land and buildings and cover other property, for example,
machinery, motion picture films, patents and trademarks. The specific paragraph or
section must be referred to in order to determine the specific property covered.
Although other terminology may be used in the context of the other types of property,
if the same principles apply, the requirements of the above-mentioned paragraph and
sections may be met and hence require an inclusion in gross income or entitle the
taxpayer to a deduction. For example, under an agreement of use a licensee may pay
a patent owner a monthly royalty for the use of the patent as well as an up-front lump
sum for entering into the agreement of use. The up-front lump sum is an amount that
is paid for the use of the patent and it is distinct from and in addition to the royalty
(see 3.1.1). It therefore falls within the scope of a premium for the right of use of a
patent under paragraph (g)(iii) and requires a full inclusion in gross income.
The capital gains tax consequences of lease premiums are not dealt with in this Note.
See the Comprehensive Guide to Capital Gains Tax for detail in this regard.
2. Background
A lessee that incurred rent as an expense for the use of an asset will be entitled to
claim a deduction for income tax purposes under section 11(a) provided the
expenditure meets the requirements of that section. The lessor, on the other hand,
who receives the rent or to whom it accrues must declare the rent as gross income.
The parties to a lease agreement may agree that the lessee must pay an amount in
addition to or in lieu of the rent, known as a lease premium. This expense, in the case
of the lessee, and the receipt or accrual, in the case of the lessor, are subject to specific
provisions in the Act which are considered in this Note.
3. The law and its application
3.1 Position of the lessor [paragraph (g) of the definition of “gross income” in
section 1(1)]
Paragraph (g) reads as follows:
“gross income”, in relation to any year or period of assessment, means—
(i) in the case of any resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such person from a source
within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature,
but including, without in any way limiting the scope of this definition, such amounts (whether of
a capital nature or not) so received or accrued as are described hereunder, namely—
.....
(g) any amount received or accrued from another person, as a premium or
consideration in the nature of a premium—
(i) for the use or occupation or the right of use or occupation of land or
buildings; or
(ii) for the use or the right of use of plant or machinery; or
(ii)bis for the use or the right of use of any motion picture film or any film or video
tape or disc for use in connection with television or any sound recording or
advertising matter connected with such motion picture film, film or video
tape or disc; or
(iii) for the use or right of use of any patent as defined in the Patents Act or any
design as defined in the Designs Act or any trade mark as defined in the
Trade Marks Act or any copyright as defined in the Copyright Act or any
model, pattern, plan, formula or process or any other property or right of a
similar nature;
Paragraph (g) requires a lessor to include the full amount of a lease premium in gross
income in the earlier of the year of assessment in which it is received by or accrues to
the lessor. 1 The inclusion of the lease premium in gross income may not be spread
over the period of the lease. However, in special circumstances the Commissioner may
allow the lessor a deduction in the form of an allowance under section 11(h) (see 3.3).
Paragraph (g) was introduced to prevent taxpayers from trying to avoid paying income
tax by artificially labelling rental income a premium, claiming it was of a capital nature
and thus excluding it from gross income. The introduction of paragraph (g) eliminated
the argument that the payment of a premium is of a capital nature and therefore falls
outside the definition of “gross income” 2 because the items in the various paragraphs
are included in gross income irrespective of whether the amount is of a capital or
revenue nature. Central to the application of paragraph (g) is the meaning of “premium
or consideration in the nature of a premium” and the “use or occupation or right of use
or occupation”. These concepts are considered below.
See SIR v Silverglen Investments (Pty) Ltd (1969) (1) SA 365 (A), 30 SATC 199.
D Davis et al Juta’s Tax Library [online] (Jutastat e-publications:June 2023) in Commentary on
Income Tax – ‘gross income’ paragraph (g).
3.1.1 The meaning of “premium or consideration in the nature of a premium”
The words “premium or like consideration” were replaced by “premium or consideration
in the nature of a premium” with effect from 1 April 2012 in order to bring paragraph (h)
in line with the wording used in section 11(f). It is a technical correction and does not
result in the increase or decrease in the ambit of lease premium inclusions in gross
income. It is considered that the meaning of the words “premium or consideration in
the nature of a premium” will generally have the same meaning when used under
paragraph (g) and section 11(f).
This view received judicial support in Turnbull v CIR 3 where Centlivres CJ stated the
following:
“The words ‘premium or like consideration’ in section 7(d) 4 have prima facie the same
meaning as the word “premium or consideration in the nature of a premium” in
section 11(2)(e) … In the present case, however, I can see no reason for giving one
meaning to the word “premium” in section 7(d) and another meaning to the same word
in section 11(2)(e).”
This means that court cases which considered the meaning of “premium or like
consideration” for gross income purposes and cases which considered the meaning of
“premium or consideration in the nature of a premium” for expenditure purposes are
both relevant in determining whether a particular amount constitutes a premium or
consideration in the nature of a premium for purposes of paragraph (g). In addition,
when determining whether an amount constitutes a premium for purposes of
section 11(f) (see 3.2) the cases considered in this section of the Note are relevant.
The words “premium or consideration in the nature of a premium” are not defined in
the Act. The meaning of “premium or like consideration” was interpreted in the context
of relations between a lessor and lessee by the court in CIR v Butcher Brothers (Pty)
Ltd as follows: 5
“‘Consideration passing from a lessee to a lessor, whether in cash or otherwise, distinct
from and in addition to, or in lieu of, rent.’
… I would insert ‘having an ascertainable money value’ after the word ‘consideration’
in the above suggested definition. …
Certain obligations frequently accepted by a lessee in respect of matters normally
incidental to relations between landlord and tenant such as undertakings to pay all rates
and taxes imposed on or in respect of property leased, to maintain buildings in good
repair, and to insure buildings …should not be so regarded, and that such consideration
should be excluded from the suggested definition.”
In Rex Tea Room Cinema (Pty) Ltd v CIR the court adopted the finding in the Butcher
Bros case and stated that: 6
“The Appellate Division held that the words ‘premium or like consideration’ in
sec 7(1)(d) of Act 40 of 1925, in so far as they refer to relations between lessor and
lessee[,] mean consideration having an ascertainable money value passing from a
lessee to a lessor, whether in cash or otherwise distinct from and in addition to or in
1953 (2) SA 573 (A), 18 SATC 336 at 343.
Section 7(d) of Act 31 of 1941 is similar to paragraph (g) and section 11(2)(e) of that Act is similar
to section 11(f).
1945 AD 301, 13 SATC 21 at 34.
1946 TPD 338, 14 SATC 76 at 81 and 82.
lieu [of] rent, excluding any obligation accepted by a lessee in respect of matter[s]
normally incidental to leases such as undertakings to pay rates and maintain buildings.”
Therefore, in summary, a lease premium is consideration having an ascertainable
money value paid by a lessee to a lessor for the use or occupation or right of use or
occupation of, amongst others, land and buildings but which is distinct from and in
addition to or instead of rent. A lease premium is usually, but not necessarily, received
as a cash lump sum at the commencement of the lease and is not refundable.
A lease premium must be distinguished from a rental deposit and an up-front rental
which may be received by or accrue to the lessor. 7 A rental deposit is generally also
received up front, but its purpose is to cover potential damages which may occur during
the period of the lease and as such it is not for the use or occupation or the right of use
or occupation. In addition, to the extent it is not required to cover damages or the costs
specified in the lease agreement, it is normally refundable to a lessee at the end of the
lease period. In contrast, an upfront rental receipt, often called a bullet rental, is for the
use or occupation or right of use or occupation but it is not in addition to or in lieu of
rent, it remains rent in nature. A rental deposit or upfront rental with these features is
not a lease premium or consideration in the nature of a premium.
No hard and fast rule can be formulated to determine whether the receipt of an amount
constitutes a lease premium, a rental deposit or an up-front rental. All the facts and
circumstances of a particular case must be considered in making that determination.
Example 1 – Lease premiums and rental deposits
Facts:
A (Pty) Ltd agreed to let B (Pty) Ltd a building it owned in the Western Cape for a
period of 24 months with an option to extend by 12 months. Under the lease agreement
B (Pty) Ltd was required to pay A (Pty) Ltd the following amounts:
• An up-front lump sum payable on signature of the lease agreement.
• A monthly rental of R15 000 per month payable on or before the 5th of each
month.
• A deposit of R30 000 payable before taking occupation to cover possible
damages arising during the period the building is occupied by B (Pty) Ltd.
The agreement was concluded on 1 July year 1. B (Pty) Ltd paid the up-front lump sum
and the deposit and took occupation on 1 July year 1. The deposit is held in a trust
account.
A (Pty) Ltd has a December year end.
Special Board Decision 74 (2 SASBDR 93) held that the initial rental was fully deductible as it could
not otherwise be described as an incentive to the initiation of the relationship between lessee and
lessor. See also TC 14189 (J) (20 December 2018).
Result:
The up-front lump sum is an amount that is payable for the use of the building but
which is distinct from and in addition to the monthly rental of R15 000. It therefore
constitutes a premium that is payable for the right of use or occupation of the building
under paragraph (g) and A (Pty) Ltd must include it in gross income for the year of
assessment ending 31 December year 1. In addition, A (Pty) Ltd must include the
monthly rental of R90 000 (R15 000 × 6) in gross income for the year of assessment
ending 31 December year 1.
The deposit of R30 000 does not constitute a premium under paragraph (g) because
it was paid to cover damages which may arise during the lease and was not paid for
the right of use or occupation of the building. Therefore, even though it is distinct from
and in addition to the rent, it does not fall within the ambit of paragraph (g). In addition,
it does not meet the other requirements of gross income because it is held in a trust
account and has not been “received by or accrued to or in favour of” A (Pty) Ltd. It is
not included in gross income for the year of assessment ending 31 December year 1.
Example 2 – Up-front rentals
Facts:
A (Pty) Ltd agreed to lease B (Pty) Ltd a building it owned in the Western Cape for a
period of 36 months with an option to extend by 3 months. Under the lease agreement
B (Pty) Ltd was required to pay A (Pty) Ltd the rental of R10 000 per month for the 36-
month period before taking occupation.
The agreement was concluded on 1 July year 1 and B (Pty) Ltd paid A (Pty) Ltd
R360 000 on the same day.
A (Pty) Ltd has a December year end.
Result:
Although the upfront receipt of R360 000 is an amount for the use of the building, it is
not a premium that falls within the ambit of paragraph (g) because it is not an amount
which is distinct from and in addition to rent. The R360 000 is rent which is paid in
advance. The amount is of a revenue nature and must be included in A (Pty) Ltd’s
gross income for the year of assessment ending 31 December year 1.
Paragraph (g) refers to a “premium or consideration in the nature of a premium … for
the use or occupation or right of use or occupation of land and buildings …” and as
such includes a payment by a lessee to a lessor which meets those requirements.
Paragraph (g) is not, however, limited to payments by lessees to lessors and provided
those requirements are met, also applies, for example, to a premium paid by a sub-
lessee to a sub-lessor. In addition, although a payment between a lessee and lessor
will often meet the requirements of being a premium under paragraph (g), this is not
necessarily always the case. The detailed facts of each case must be considered in
assessing a particular payment.
An amount paid by a lessor to a lessee for the premature vacation of business
premises has been held by the court not to be a premium or consideration in the nature
of a premium, which is in the nature of rent passing from a lessee to a lessor. 8 Although
this case considered whether the expenditure constituted a lease premium from the
lessor’s perspective, as noted above, the same principles are relevant in assessing
whether the receipt would constitute a lease premium from the lessee’s perspective.
In ITC 670 9 a lessor agreed to make alterations to the leased property on behalf of the
lessee and the lessee agreed to reimburse the lessor for the cost of the alterations in
monthly instalments added to the rent. The court held that the monthly instalments
were a reimbursement of the expenditure incurred on the lessee’s behalf and were not
a payment of rent or an additional payment over and above rent for the right of use or
occupation of the property concerned. As such, the monthly instalments did not
constitute a premium or like consideration.
In order to constitute a “premium or consideration in the nature of a premium” the
amount must be in the nature of rent and in addition to or instead of rent. It must,
therefore, be paid to the person granting the right of use or occupation. In ITC 731 10
the payment of commission to an auctioneer on the acquisition of the lease of a farm
was not regarded as a lease premium or consideration in the nature of a premium paid
for the right of use or occupation of land or buildings because it was not made to the
person granting the right of use or occupation, but another.
A premium under paragraph (g) does not include an amount received by or accrued to
a cedent from a cessionary for the cession of rights held under a lease. The amount
received or accrued is not a premium as it is not received, in the case of lease rights,
in addition to or instead of rent, it is simply the purchase price for the right of use. 11
After the cession the cedent no longer holds the right under the lease and is not entitled
to any rent.
Similarly, the amount received or accrued for the sale of an asset (that is, all the rights
associated with ownership of the asset) does not fall within the ambit of
paragraph (g). 12 The purchase price does not constitute a premium because it is not
received or accrued in addition to or instead of rent, it is simply the purchase price for
the asset. After the sale, the seller no longer holds any rights in respect of the asset
and is not entitled to rent. The nature of the receipt or accrual (whether it is revenue or
capital) will depend on the facts of the case.
In ITC 1916 13 the appellant concluded agreements of lease including a cession and
assignment of lease whereby it let immovable property on certain terms and conditions
and received an amount of R125 million as a lease premium in consideration therefor.
The appellant failed to include the amount of R125 million in its income tax return as
gross income under para (g) and contended that the payment was of a capital nature,
being proceeds relating to the disposal by the appellant of an asset, that is, its rights,
title and interest in the lease agreement and therefore did not fall within its gross
income. The Court held that it was apparent that the intention of the appellant was
always to enter into a rental agreement, knowing fully that the receipt flowing therefrom
ITC 819 (1955) 21 SATC 71 (C).
(1948) 16 SATC 220 (U).
10 (1951) 18 SATC 106 (C).
CIR v Myerson 1947 (2) SA 1243 (A), 14 SATC 300.
ITC 1916 (2018) 81 SATC 228 (J).
(2018) 81 SATC 228 (J).
was of a revenue nature. The Court held further that the cession agreement could not
be viewed as a sale of assets as it was intended by the parties that appellant would
derive a lease premium therefrom. The receipt of R125 million by the appellant was
thus of a revenue nature and therefore taxable under paragraph (g).
Although the discussion above focussed on leases of land and buildings, the principals
apply to other types of property listed in paragraph (g)(ii) to (iii). For example, in the
case of royalties, a premium or consideration in the nature of a premium will include a
consideration passing from the grantee to the grantor of the right of use of a patent,
trade mark or other such item, which is distinct from and in addition to the royalty that
is payable.
3.1.2 The meaning of “use or occupation or the right of use or occupation”
Paragraph (g) applies only to lease premiums in respect of –
• the use or occupation or the right of use or occupation of land or buildings;
• the use or the right of use of plant or machinery;
• the use or the right of use of any motion picture film or any film or video tape or
disc for use in connection with television or any sound recording or advertising
matter connected with such motion picture film, film or video tape or disc; or
• the use or right of use of any patent as defined in the Patents Act, or any design
as defined in the Designs Act, or any trade mark as defined in the Trade Marks
Act, or any model, pattern, plan, formula or process or any other property or
right of a similar nature.
An amount received by or accrued to a lessor from a lessee in consideration for the
cancellation of a lease is paid to terminate the right of use earlier than previously
agreed. It is not paid for the right of use or occupation of the property. Therefore, it
does not fall within the ambit of paragraph (g). However, it must still be included in the
lessor’s gross income as it will meet the general requirements of gross income. 14
In ITC 745 15 a business was sold as a going concern and the buyer leased the
premises from the seller. The parties agreed that part of the purchase price would
represent consideration for the goodwill of the business. The Commissioner was of the
opinion that approximately 73% of the purchase price for the business, which included
the goodwill, represented a premium for the right to use and occupy the business
premises. The court held that the amount payable for goodwill was not a disguised
payment for the use or occupation of the business premises and evidence of this fact
was that a very high rental in excess of an estimated fair rental was payable under the
lease agreement. Therefore, no portion of the goodwill could be regarded as a
disguised payment for the right of use or occupation of the business premises.
Accordingly, the payment for goodwill did not constitute an additional payment for the
right of use of the business premises and did not fall within the ambit of a premium
under paragraph (g). If the facts had been different such that the amount allocated to
goodwill had represented the value of the goodwill of the business as a going concern
and a premium for the right of use of the premises subsequently leased by the buyer,
a portion of the goodwill would have constituted a premium for the right of use of the
premises.
ITC 312 (1934) 8 SATC 154 (U).
(1952) 18 SATC 307 (T).
In ITC1231 16 the taxpayer relocated its business to a new location and sub-let its
previous premises to the sub-lessee for a monthly rental and a lump sum amount for
goodwill and for vacating the premises. The sub-lessor claimed the lump sum was of
a capital nature. Evidence revealed that the lump sum represented the consideration
that was required from the sub-lessee for the occupation of the premises. As such,
despite being described as goodwill, the lump sum constituted a premium paid for the
use and occupation of land and buildings.
These cases demonstrate that it is important to look behind a label given to an amount
in order to determine whether it is in truth in respect of a right of use or occupation
being granted or something else.
The question whether an amount paid for the right to mine (that is, to extract, remove
and dispose of the minerals) can fall within the ambit of a premium for “the use or
occupation or the right of use or occupation”, has been considered by the court. 17 The
court held that, in the context of the section dealing with lease premiums, an amount
for the right to dig for diamonds which, if sold, would constitute income, was different
to and did not constitute a payment for the right of use or occupation. If the holder of a
right to mine, who is not the owner of the land, allows another person the “use” of that
right in return for a premium, it is submitted that it would constitute a right of use and
paragraph (g) would apply. 18
3.2 Position of the lessee [section 11(f)]
Section 11(f) reads as follows:
11. General deductions allowed in determination of taxable income.—For the
purpose of determining the taxable income derived by any person from carrying on any trade,
there shall be allowed as deductions from the income of such person so derived—
(f) an allowance in respect of any premium or consideration in the nature of a
premium paid by a taxpayer for—
(i) the right of use or occupation of land or buildings used or occupied for the
production of income or from which income is derived; or
(ii) the right of use of any plant or machinery used for the production of income
or from which income is derived; or
(ii)bis the right of use of any motion picture film or any sound recording or
advertising matter connected with such film, if such film, sound recording
or advertising matter is used for the production of income or income is
derived therefrom; or
(iii) the right of use of any patent as defined in the Patents Act or any design
as defined in the Designs Act or any trade mark as defined in the Trade
Marks Act or any copyright as defined in the Copyright Act or of any other
property which is of a similar nature, if such patent, design, trade mark,
copyright or other property is used for the production of income or income
is derived therefrom; or
(1975) 37 SATC 141(R).
ITC 990 (1962) 25 SATC 125 (T).
D Clegg & R Stretch Income Tax in South Africa [online] (My LexisNexis: February 2023) in
Chapter 6.7 and AP de Koker & RC Williams Silke on South African Income Tax [online] (My
LexisNexis: March 2023) in § 4.56.
(iv) the imparting of or the undertaking to impart any knowledge directly or
indirectly connected with the use of such film, sound recording, advertising
matter, patent, design, trade mark, copyright or other property as aforesaid;
or
(v) the right of use of any pipeline, transmission line or cable or railway line
contemplated in the definition of “affected asset” in section 12D, other than
an asset contemplated in paragraph (c) of that definition; 19
(vi) the right of use of any line or cable used for the transmission of electronic
communications contemplated in paragraph (c) of the definition of “affected
asset” in section 12D: 20
Provided that—
(aa) the allowance under sub-paragraph (i), (ii), (ii)bis, (iii) or (v) shall not
exceed for any one year such portion of the amount of the premium or
consideration so paid as is equal to the said amount divided by the
number of years for which the taxpayer is entitled to the use or
occupation, or one twenty-fifth of the said amount, whichever is the
greater;
(bb) if the taxpayer is entitled to such use or occupation for an indefinite
period, or if, in the case of any such right of use or occupation granted
under an agreement concluded on or after 1 July 1983, the taxpayer or
the person by whom such right of use or occupation was granted holds
a right or option to extend or renew the original period of such use or
occupation, he shall be deemed, for the purposes of this paragraph, to
be entitled to such use or occupation for the period of the probable
duration of such use or occupation; and
(cc) the allowance under sub-paragraph (iv) shall not exceed for any one
year such portion (not being less than one twenty-fifth) of the amount of
the premium or consideration so paid as may be determined having
regard to the period during which the taxpayer will enjoy the right to use
such film, sound recording, advertising matter, patent, design, trade
mark, copyright or other property as aforesaid and any other
circumstances which are relevant;
(dd) the provisions of this paragraph shall not apply in relation to any such
premium or consideration paid by the taxpayer which does not for the
purposes of this Act constitute income of the person to whom it is paid,
unless such premium or consideration is paid in respect of a right of use
of a line or cable—
(A) used for the transmission of electronic communications; and
(B) substantially the whole of which is located outside the territorial
waters of the Republic,
where the term of the right of use is 15 21 years or more;
Italicised amendment effective 1 April 2019 and applicable in respect of assets brought into use on
or after that date.
Effective 17 January 2019.
With effect from 1 April 2019, 15 years or more will be reduced to 10 years or more.
(ee) the allowance under subparagraph (vi) shall not exceed for any one year
such portion of the amount of the premium or consideration so paid as
is equal to the said amount divided by the number of years for which the
taxpayer is entitled to the use or occupation, or one tenth of the said
amount, whichever is the greater; 22
3.2.1 Deduction of a lease premium
Section 11(f) provides for the deduction of an allowance in respect of any premium or
consideration in the nature of a premium paid by a lessee.
As noted in 3.1.1 the meaning of the words “premium or consideration in the nature of
a premium” as referred to in section 11(f) and in paragraph (g) is generally the same.
Therefore, to the extent the type of property (for example, land and buildings, plant and
machinery, or trademark) overlaps, payments that are not considered to be a premium
or consideration in the nature of a premium under paragraph (g) from the lessor’s
perspective would similarly not constitute a premium from the lessee’s perspective and
would not qualify for a deduction of an allowance under section 11(f). For example, a
lessee will not be entitled to an allowance under section 11(f) for rental deposits and
up-front rentals. 23
The scope of property included in paragraph (g) and section 11(f) differs slightly, for
example, section 11(f) includes pipelines, transmission lines and knowledge transfer
which are not included in paragraph (g). However, the principles related to what
constitutes a premium still apply.
In order to qualify for a deduction under section 11(f) the payment of a premium or
consideration in the nature of a premium must meet certain requirements. These are
considered below. A payment that does not qualify for a deduction under section 11(f)
may qualify for a deduction under section 11(a) if all the requirements of that section
are met. In the latter case the full amount will be deductible in the year during which
the expenditure was incurred, subject to potential spreading required under
section 23H.
3.2.2 Actually paid by the lessee
The lessee will be entitled to a deduction of the allowance under section 11(f) only if
the expenditure was paid and not if it was incurred but not yet paid by the lessee. The
deduction of the allowance under section 11(f) therefore commences only in the year
of assessment in which the premium is paid assuming the other requirements of the
section are met.
A lessee that agrees to pay a lease premium or consideration in the nature of a
premium at the end of the lease period, or that incurs a liability to pay it, but has not
made the payment, will not be entitled to the deduction of the said premium over the
period of the lease.
Effective 1 April 2019.
In C: SARS v BP South Africa (Pty) Ltd 2006 (5) SA 559 (SCA), 68 SATC 229 the parties agreed
and the court ordered that the upfront rental be deducted under section 11(f). However, the court
did not rule on whether the up-front rental constituted a lease premium.
3.2.3 The meaning of “the right of use or occupation”
The words “the right of use or occupation” referred to in section 11(f) have the same
meaning as the words “use or occupation or the right of use or occupation” referred to
in paragraph (g). 24
3.2.4 Used or occupied for the production of income or income is derived from it
An allowance under section 11(f) will be granted to the lessee only if the property as
specified in section 11(f)(i) to (v) is used or occupied for the production of income 25 or
income is derived from it. 26
No deduction will be allowed if the lessee’s “income” is exempt income or “income”
which is not included in gross income. For example, for a person who is not a resident,
“income” from a non-South African source would be excluded from gross income. 27
The deduction must be apportioned if the property is used only for a part of the year of
assessment because the section requires that the property must be used or occupied
or income must be derived from it in order to qualify for a deduction. 28 For example, if
the commencement of the lease does not correspond with the commencement of the
year of assessment or the lessee stops using the property concerned during the year
of assessment, the allowance will be apportioned. This requirement also means that if
the lease is terminated early or the lessee simply stops using the asset in the
production of income or deriving income from it, the balance of a lease premium not
yet deducted will not qualify for deduction under section 11(f).
See examples under 3.2.5.
3.2.5 Amount of the allowance - maximum annual allowance 29
Subject to the exception below, the allowance under section 11(f) must be spread over
the number of years the lessee is entitled to the use or occupation of the asset. The
deduction for a year of assessment is equal to the greater of –
• the premium or consideration in the nature of a premium that was paid divided
by the number of years the lessee is entitled to the use or occupation of the
asset; or
• one twenty-fifth of the premium or consideration in the nature of a premium that
was paid. 30
The maximum period over which the deduction is calculated is therefore limited to
25 years.
See 3.1.2.
Port Elizabeth Tramway Company Ltd v CIR 1936 CPD 241, 8 SATC 13.
The requirement that the property detailed in section 11(f)(v) must be used is found through the
linkage to an affected asset as defined in section 12D. See also wording of section 11(f)(i)-(v) and
section 23(f).
See 3.2.7 for the circumstances in which, notwithstanding that this requirement has been met, the
deduction will be denied if the lease premium does not constitute income from the lessor’s
perspective.
See ITC 971 (1962) 24 SATC 791 (F) for a comparable principle.
Excluding a premium paid for imparting or undertaking to impart knowledge of specified asset – see
3.2.6 for these types of premiums.
Section 11(f) proviso (aa). This proviso also applies to assets specified in section 11(f)(i), (ii), (ii)bis,
(iii) or (v).
With effective from 1 April 2019 a different deduction was introduced for the premium
or consideration in the nature of a premium paid by a taxpayer for the right of use of
any line or cable used for the transmission of electronic communications contemplated
in paragraph (c) of the definition of “affected asset” in section 12D. 31 The allowance
must still be spread over the number of years the lessee is entitled to the use or
occupation of the asset. However, the deduction for a year of assessment is equal to
the greater of –
• the premium or consideration in the nature of a premium that was paid divided
by the number of years the lessee is entitled to the use or occupation of the
asset; or
• one tenth of the premium or consideration in the nature of a premium that was
paid. 32
Therefore, for a premium or consideration in the nature of a premium paid by a
taxpayer for the right of use of any line or cable used for the transmission of electronic
communications contemplated in paragraph (c) of the definition of “affected asset” in
section 12D, the maximum period over which the deduction is calculated is limited to
10 years.
If the lessee is entitled to the use or occupation for an indefinite period, or if the right
of use or occupation was granted under an agreement concluded on or after 1 July
1983 and the lessee or lessor has the right or option to extend or renew the original
period of such use or occupation, the lessee shall be deemed for purposes of
section 11(f) to be entitled to the use or occupation for the period of probable duration
of such use or occupation. 33 The period of the lease and, in the case of lease
agreements entered into on or after 1 July 1983, all probable renewal periods, are
relevant and must be taken into account when determining the probable duration of
such use or occupation.
Example 3 – Treatment of lease premiums and rental deposits for a lessee
Facts:
A (Pty) Ltd agreed to let B (Pty) Ltd a building it owned in the Western Cape for a
period of 24 months with an option to extend by 12 months. Based on the facts of the
case it was unlikely that B (Pty) Ltd would exercise the option to extend the lease.
Under the lease agreement B (Pty) Ltd was required to pay A (Pty) Ltd the following
amounts:
• An up-front lump sum of R20 000 payable on signature of the lease agreement.
• A monthly rental of R15 000 per month payable on or before the 5th of each
month.
• A deposit of R30 000 payable before taking occupation to cover possible
damages arising during the period the building is occupied by B (Pty) Ltd.
Section 11(f)(vi).
Section 11(f) proviso (ee). This proviso applies to assets specified in section 11(f)(vi) and is effective
1 April 2019.
Section 11(f) proviso (bb).
The agreement was concluded on 1 July year 1. B (Pty) Ltd paid the up-front lump sum
and the deposit and took occupation on 1 July year 1. The monthly rental was paid on
the 5th of each month. The building was used in the production of income. The deposit
is held in a trust account.
B (Pty) Ltd has a December year end.
Result:
The up-front lump sum is an amount that was payable for the use of the building but
which is distinct from and in addition to the monthly rental of R15 000. It therefore
constitutes a premium that is payable for the right of use or occupation of the building
under section 11(f) and B (Pty) Ltd may deduct an allowance of R5 000 (R20 000 / 2
years × 6 / 12) under section 11(f) in the year of assessment ending 31 December
year 1. In addition, B (Pty) Ltd may deduct the monthly rental of R90 000 (R15 000 × 6)
under section 11(a) for the year of assessment ending 31 December year 1.
The deposit of R30 000 does not constitute a premium under section 11(f) because it
was paid to cover damages which may arise during the lease and was not paid for the
right of use or occupation of the building. Therefore, even though it is distinct from and
in addition to the rent, it does not fall within the ambit of section 11(f). In addition, as a
refundable deposit it does not meet the requirements for deduction under
section 11(a).
Example 4 – Treatment of lease premiums for the lessee in cases of early
termination of the lease
Facts:
A (Pty) Ltd agreed to let B (Pty) Ltd a building it owned in the Western Cape for a
period of 60 months with an option to extend by 12 months. Based on the facts of the
case it was likely that B (Pty) Ltd would exercise the option to extend the lease. Under
the lease agreement B (Pty) Ltd was required to pay A (Pty) Ltd the following amounts:
• An up-front lump sum of R50 000 payable on signature of the lease agreement.
• A monthly rental of R15 000 per month payable on or before the 5th of each
month.
The agreement was concluded on 1 July year 1. B (Pty) Ltd paid the up-front lump sum
and took occupation on 1 July year 1. The monthly rental was paid on the 5th of each
month up to and including 5 August year 2. The building was used in the production of
income.
On 31 August year 2 A (Pty) Ltd and B (Pty) Ltd agreed to cancel the lease. A (Pty)
Ltd was not required to repay any portion of the up-front lump sum and B (Pty) Ltd was
not required to pay any further monthly rentals.
B (Pty) Ltd has a December year end.
Result:
The up-front lump sum is an amount that was payable for the use of the building and
which is distinct from and in addition to the monthly rental of R15 000. It therefore
constitutes a premium that is payable for the right of use or occupation of the building
under section 11(f). B (Pty) Ltd must deduct an allowance of R4 167 (R50 000 / 6
years × 6 / 12) and R5 556 (R50 000 / 6 years × 8 / 12) under section 11(f) in the year
of assessment ending 31 December year 1 and year 2, respectively.
A deduction is not available under section 11(f) for the premium which would otherwise
have been deductible under section 11(f) in year 2 and subsequent years of
assessment had the lease not been cancelled and the property been used in the
production of income. Therefore, the remaining balance of R40 277
(R50 000 – R4 167 – R5 556) will not qualify for a deduction.
B (Pty) Ltd may deduct the rental of R90 000 (R15 000 × 6 for the period 1 July to
31 December year 1) and R120 000 (R15 000 × 8 for the period 1 January year 2 to
31 August year 2) under section 11(a) in the year of assessment ending 31 December
year 1 and year 2, respectively.
Example 5 – Lease premiums
Facts:
Taxpayer A, the lessor, entered into a lease agreement on 1 July year 1 for a period
of 20 years. Taxpayer B, the lessee, paid taxpayer A a lease premium of R150 000.
Both taxpayers have a year end of 28 February.
Assume:
1. The lease is terminated after 20 years.
2. The lease is terminated on 30 June year 6.
Result 1:
Taxpayer A: Lessor
Year of assessment ended 28 February year 2
The full amount of R150 000 is included in gross income under paragraph (g).
Taxpayer B: Lessee
Year of assessment ended 28 February year 2
An allowance of R5 000 (R150 000 / 20 years × 8 / 12*) is allowed as a deduction
under section 11(f).
* The apportionment of 8 / 12 is necessary as the lease commenced during the year
of assessment.
Years of assessment ended 28 February year 3 to 28 February year 20
An allowance of R7 500 (R150 000 / 20 years) will be allowed as a deduction under
section 11(f) each year.
Year of assessment ended 28 February year 21
An allowance of R2 500 (R150 000 / 20 years × 4 / 12**) will be allowed as a deduction
under section 11(f).
** The apportionment of 4 / 12 is necessary because the lease expired during the
year, that is, on 30 June year 20.
Result: 2
Taxpayer A: Lessor
Year of assessment ended 28 February year 2
The full amount of R150 000 is included in gross income under paragraph (g).
Taxpayer B: Lessee
Year of assessment ended 28 February year 2
An allowance of R5 000 (R150 000 / 20 years × 8 / 12*) is allowed as a deduction
under section 11(f).
* The apportionment of 8 / 12 is necessary as the lease commenced during the year
of assessment.
Year of assessment ended 28 February year 3 to 28 February year 6
An allowance of R7 500 (R150 000 / 20 years) will be allowed as a deduction under
section 11(f) in each year.
Year of assessment ended 28 February year 7
An allowance of R2 500 (R150 000 / 20 years × 4 / 12) is allowed as a deduction under
section 11(f). R112 500 [(R150 000 – (R5 000 + R7 500 × 4 + R2 500)] is not
deductible as the lease is prematurely terminated.
3.2.6 Amount of the allowance - maximum annual allowance (linked to know-how)
The allowance for a premium or consideration in the nature of a premium paid for the
imparting of or the undertaking to impart knowledge directly or indirectly connected
with the use of a film, sound recording, advertising matter, patent, design, trade mark,
copyright or property of a similar nature which is used in the production of income or
from which income is derived is dealt with under section 11(f)(iv).
Paragraph (cc) of the proviso provides that the allowance shall not exceed for any one
year of assessment such portion (not being less than one twenty-fifth) of the amount
of the premium or consideration paid, having regard to the period during which the
lessee will enjoy the right to use the film, sound recording, advertising matter, patent,
design, trade mark, copyright or other property and any other circumstances which are
relevant. 34 This requirement means that the allowance must be spread over the
number of years the lessee is entitled to the use or occupation of the asset to which
such knowledge relates or 25 years, whichever is the lesser. The maximum period
over which the deduction is calculated is therefore 25 years.
Section 11(f) proviso (cc).
Example 6 – Treatment of lease premiums for imparting knowledge relating to
the use of a registered patent
Facts:
A (Pty) Ltd granted B (Pty) Ltd the right of use of a registered patent for a period of
30 years. A (Pty) Ltd also undertook to impart knowledge relevant to using the patent
in B (Pty) Ltd’s income-producing business for a premium of R100 000.
The agreement was concluded on 1 January year 1. B (Pty) Ltd paid the premium and
commenced using the patent on 1 January year 1.
B (Pty) Ltd has a March year end.
Result:
A deduction is available under section 11(f)(iv) for the premium paid by B (Pty) Ltd to
A (Pty) Ltd for undertaking to impart the relevant knowledge to B (Pty) Ltd.
The maximum amount of the deduction for a year of assessment is equal to the greater
of –
• Premium / period of entitlement to use the patent = R100 000 / 30 years
= R3 334 per year; and
• Premium / 25 years = R100 000 / 25 years = R4 000 per year.
Therefore the maximum amount of the allowance for the year 1 year of assessment is
R4 000. However, B (Pty) Ltd used the asset only for 3 months during the year of
assessment and therefore the allowance claimed must be apportioned. B (Pty) Ltd is
therefore entitled to an allowance of R1 000 (R4 000 × 3 / 12) in the year 1 year of
assessment.
3.2.7 Exclusion from deduction
A lessee is not entitled to a deduction under section 11(f) if the premium or
consideration paid does not constitute income for the lessor for the purposes of the
Act, unless the term of the right of use is 15 years or more 35 and the premium or
consideration is paid in respect of a right of use of a line or cable –
• used for the transmission of electronic communications;
• substantially the whole of which is located outside the territorial waters of the
Republic; and
• which was brought into use for the first time after 1 January 2009. 36
The term “substantially the whole” is regarded by SARS to mean 90% or more. 37
The percentage must be determined using a method appropriate to the circumstances.
With effect from 1 April 2019, 15 years or more will be reduced to 10 years or more. Before 1 April
2016, proviso (dd) of section 11(f) referred to a period of 20 years or more.
Effective date of section 14(1)(e) of the Taxation Laws Amendment Act 25 of 2015.
See BGR 20 “Interpretation of the Expression ‘Substantially the Whole’”.
3.2.8 Recoupment of the allowances granted
Under section 8(4)(a) an amount previously allowed as a deduction under, amongst
others, section 11(f) that has been recouped must be included in the lessee’s income
in the year in which it is recouped.
Example 7 – Recoupment of the allowances allowed
Facts:
Taxpayer A entered into a 10 year lease agreement on 1 January year 1 and paid the
lessor a premium of R40 000 for granting the lease. On 1 January year 4 Taxpayer A
ceded all its rights under the lease to Taxpayer B for R70 000. Taxpayer A has a
December year end.
Result:
Taxpayer A claimed an allowance of R4 000 per year under section 11(f) in year 1,
year 2 and year 3. A taxable recoupment arises under section 8(4)(a) when
Taxpayer A ceded the lease for R80 000. R12 000 (3 years of allowances) must be
included in Taxpayer A’s income under section 8(4)(a) in its year 4 year of
assessment.
3.3 A lessor’s special allowance [section 11(h)]
Section 11(h) reads as follows:
(h) such allowance in respect of amounts included in the taxpayer’s gross income
under paragraph (g) or paragraph (h) of the definition of “gross income” in
section 1 as the Commissioner may deem reasonable having regard to any
special circumstances of the case and, in the case of an amount so included
under the said paragraph (h), to the original period for which the right of use or
occupation was granted or, in the case of any amount so included under the
said paragraph (h) in consequence of an agreement concluded on or after
1 July 1983, to the number of years taken into account in the determination of
the relevant allowance granted to any other person under the provisions of
paragraph (g) of this section: Provided that where there has on or after the
twenty-ninth day of March, 1972, accrued to the taxpayer the right to have
improvements effected on land or to buildings by any other person and an
amount is required to be included in the taxpayer’s gross income under the said
paragraph (h) with respect to such improvements, no allowance shall be made
to the taxpayer under this paragraph in respect of such amount, if—
(i) the taxpayer or such other person is a company and such other person or
the taxpayer, as the case may be, is interested in more than 50 per cent of
any class of shares issued by such company, whether directly as a holder
of shares in that company or indirectly as a holder of shares in any other
company; or
(ii) both the taxpayer and such other person are companies and any third
person is interested in more than 50 per cent of any class of shares issued
by one of those companies and in more than 50 per cent of any class of
shares issued by the other company, whether directly as a holder of shares
in the company by which the shares in question were issued or indirectly
as a holder of shares in any other company;
Section 11(h) provides for the deduction of an allowance in respect of amounts
included in the taxpayer’s gross income under paragraph (g) or paragraph (h) as the
Commissioner may deem reasonable having regard to any special circumstances of
the case. The exercise of this discretion is not subject to objection and appeal. 38
3.3.1 Special circumstances
No hard and fast rules can be laid down as to what constitutes special circumstances.
It is a factual issue which depends on the circumstances of each case. In this regard
the onus is on the taxpayer to satisfy the Commissioner that there are special
circumstances which justify an allowance.
Paragraph (g)
Under paragraph (g) a lessor who derives a lease premium must include the full
premium in gross income in the earlier of the year of assessment in which the amount
is received by or accrues to the lessor. The fact that the lessor’s tax liability will be
higher in that year or that the lessor, if a natural person, may be subject to tax at a
higher marginal rate than usual as a result of the inclusion of the lease premium is not
sufficient to constitute special circumstances which entitle the lessor to an allowance
under section 11(h).
Paragraph (h)
The application of section 11(h) in the context of paragraph (h) is considered in the
Interpretation Note 110 “Leasehold Improvements”.
3.3.2 Recoupment of the allowance granted
Under section 8(4)(a) any amount received or accrued to the extent to which such
amount represents a recovery or recoupment of allowances previously granted under,
amongst others, section 11(h) must be included in the lessor’s income.
4. Conclusion
Lessors that receive lease premiums are obliged under paragraph (g) to include the
full amount of the premium in their gross income in the earlier of the year of assessment
of receipt or accrual. Lessees who pay the premium to a lessor for the right of use or
occupation are generally allowed an allowance under section 11(f) over the period of
the lease. Although there are differences, paragraph (g) and section 11(f) are
complementary.
In limited circumstances a lessor may be entitled to a special allowance under
section 11(h) in respect of lease premiums included in gross income under
paragraph (g). The amount of the allowance, if it applies, is equal to such amount as
the Commissioner deems reasonable, taking into account the special circumstances
of the case and the length of the lease.
See section 3(4).
Depending on the facts, an allowance granted under sections 11(f) and 11(h) that has
been recouped or recovered must be included in income under section 8(4)(a).
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 7 February 2019
Diamond Export Levy Act, 2007
