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					    LEGAL OPINION ON THE INTERPRETATION OF SECTION 12 H OF THE INCOME
                                 TAX ACT
                              November 2004


Legal Consultant

E K MILNER
BA, LLB, LLM, Adv Tax Cert (UNISA), Adv Dip Int Tax (RAU)

Managing Director
Ben Milner's Consulting services
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We have been requested by the Seta for Finance, Accounting, Management, Consulting
and other Financial Services (FASSET) to provide an opinion on the following matters:

1         Does the expiry date provided for in section 12H of the Income Tax Act, Act 58 of
          1962, hereafter the Act, apply to contracts initiated before the expiry date or
          contracts completed before the expiry date?

          1.1        The law

                     Section 12H(1) provides for two different deductions. The first deduction
                     is available where:

                                (a)       that employer during that year of assessment entered
                                          into a registered learnership agreement with a learner in
                                          the course of any trade carried on by that employer;

                     The second deduction is available where:

                                (b)       a learner during that year of assessment completed any
                                          registered learnership agreement entered into by that
                                          employer with that learner during that year or any
                                          previous year of assessment in the course of any trade
                                          carried on by that employer.


                     Section 12H(6) provided the following definition:

                     "registered learnership agreement" means-

                     (a)        a learnership agreement entered into between a learner and an
                                employer before 1 October 2006, which has been registered with
                                a SETA, as contemplated in section 17 (3) of the Skills
                                Development Act, 1998; or

                     (b)        a contract of apprenticeship registered with the Department of
                                Labour in terms of section 18 of the Manpower Training Act,
                                1981 (Act No. 56 of 1981);

                     Part (a) above is applicable to the current question.

          1.2        Conclusion




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           From the above it can be seen that the requirement to obtain the
           deduction is a registered learnership agreement. In order for an
           agreement to constitute a registered learnership agreement it must be
           entered into, but not necessarily completed, prior to 1 October 2006.

           A question that has not been asked but which needs to be addressed is,
           whether the learnership must be registered with the SETA prior to 1
           October 2006. On a careful reading of the above provisions it appears
           that the requirement is that the agreement be entered into between the
           employer and the learner before 1 October 2006 and not necessarily
           registered with the SETA before 1 October 2006. Nonetheless to avoid
           any uncertainty we would recommend that employer do both before 1
           October 2006.

2   The second question we have been requested to address is: in the event that an
    employee who has entered into a learnership agreement with one employer
    transfers such agreement to second employer, which employer is entitled to the
    deduction?

    2.1    The law

           Section 12H (4)provides as follows:

                   The provisions of this section shall not apply—

                   (a)     in respect of the substitution of any employer which is
                           party to an existing registered learnership agreement by
                           any other employer, as contemplated in regulation 5 (1)
                           of the Learnership Regulations, 2001;

                   (b)     where an employer enters into a registered learnership
                           agreement with a learner as a result of the substitution of
                           an existing registered learnership agreement, as
                           contemplated in regulation 5 (2) of the Learnership
                           Regulations, 2001; or

                   (c)     where an employer enters into a registered learnership
                           agreement with a learner, and a deduction is or was
                           allowable to that employer during any year of
                           assessment in respect of any other registered
                           learnership agreement entered into by that employer
                           with that learner in respect of the same learnership
                           registered by the Director General of Labour, as
                           contemplated in regulation 3 (3) of the Learnership
                           Regulations.

           Paragraph 5 of the Learnership Regulations, 2001 (GNR.330 of 3 April
           2001) issued in terms of the Skills Development Act, 1998 (Act No. 97 of
           1998) provides as follows:

                   5. Substituting a party to a learnership agreement.—

                           (1)     A SETA may approve the substitution of the
                                   employer or the training provider party to a
                                   learnership agreement in terms of section 17 (5)
                                   of the Act if a written application, accompanied




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                                   by an agreement setting out the terms of the
                                   substitution, is submitted to the SETA.

                           (2)     The parties to a learnership agreement may,
                                   with the approval of the SETA, substitute a new
                                   learnership agreement for a learnership
                                   agreement that the SETA has already
                                   registered.

    2.2    Conclusion

           The following conclusions arise from the above:

           2.2.1   Where one employer is substituted for another in terms of the
                   Learnership Regulations only the first employer may claim a
                   deduction for the entering into of the agreement. No deduction
                   may be claimed by the new employer.

           2.2.2   A similar position applies where the same parties simply
                   substitute a new agreement for a previous agreement, to wit no
                   deduction is available.

           2.2.3   The allowance granted on completion of the registered
                   learnership agreement will, it appears, be granted to the new
                   employer, provided such employer has entered into the
                   learnership agreement with the learner.

3   We have been requested to discuss the provisions in section 12H dealing with
    recoupment and to provide an example of recoupment.

    3.1    The law

           Section 12H(5) provides as follows:

           (5) Where—

           (a)     in the determination of the taxable income of an employer for any
                   year of assessment an amount is or was allowed as a deduction
                   in respect of any registered learnership agreement entered into
                   by that employer with any learner, as contemplated in subsection
                   (1) (a), and

           (b)     that registered learnership agreement is terminated prior to the
                   completion thereof for any reason other than the death of that
                   learner or the dismissal of that learner due to his or her
                   incapacity as a result of ill-health or injury,

           that amount so allowed as a deduction shall, for the purposes of section
           8 (4) (a), be deemed to have been recovered or recouped by that
           employer.

    3.2    Conclusion

           Where an employer has obtained a deduction for entering into a
           registered learnership agreement and such agreement is terminated for
           any reason other than the death of that learner or the dismissal of that




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      learner due to his or her incapacity as a result of ill-health or injury, such
      employer must show the amount of the 12H allowance claimed for such
      learner as a recoupment (income) in its income statement. The effect of
      this would be to cancel out the deduction obtained previously for having
      entered into the registered learnership agreement, although such
      reversal may only occur in a subsequent tax year.

3.3   Difficulties that arise

      The above provision raises a number of difficulties, to wit should the
      employee have left the services of the employer and a new employer has
      been substituted as the employer in terms of the learnership agreement,
      which employer must recoup the deduction of the section 12H allowance
      if the learnership agreement is subsequently terminated prior to
      completion?

      From 12H(5)(a) it appears clear that the original employer must recoup
      the deduction as the original employer has claimed the deduction and a
      deduction has been denied to the substituting employer.

      This raises the question as to how the original employer will know if the
      agreement is terminated prior to completion. Is the SETA obliged to
      advise the employer of such termination or is the employer required to
      request such information from the SETA?

      In order to obtain clarity on the above it may be prudent to approach
      SARS to discuss the matter further.




3.4   Example of recoupment

       Year        Action                                                Effect    on   income
                                                                         statement
       Year 1      Registered learnership agreement entered into         Claim a deduction of R
                   with learner not previously employed by such          25 000 in financial
                   employer    or   an    associated    institution,     statements.
                   remuneration exceeds R 25 000 per annum
       Year 2      Employee resigns to go abroad - learnership           Employer must show a
                   agreement terminated prior to completion.             recoupment (income) of
                                                                         R 25 000 in financial
                                                                         statements.
       Year 2      Employee dies - learnership agreement                 No recoupment
                   terminated prior to completion.
       Year 2      Employee dismissed - learnership agreement            Employer must show a
                   terminated prior to completion.                       recoupment (income) of
                                                                         R 25 000 in financial
                                                                         statements.
       Year 2      Employee becomes ill and can not work                 No recoupment




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            Year 2          Employer dismisses employee due to               Employer must show a
                            operational requirements of the business -       recoupment (income) of
                            learnership agreement terminated prior to        R 25 000 in financial
                            completion.                                      statements.

           Example of effect of recoupment on tax calculation

           Year 1 -            Registered learnership agreement entered into with
                               learner not previously employed by such employer or an
                               associated institution, remuneration exceeds R 25 000
                               per annum

                      Taxable Income after all other calculations
                      Completed                                        R 500 000
                      Less Section 12H deduction                        R 25 000
                      Taxable income                                   R 475 000

                      Tax to be calculated on R 475 000.

           Year 2 -            Employee resigns to go abroad - learnership agreement
                               terminated prior to completion.

                      Taxable Income after all other calculations
                      completed                                        R 500 000
                      Add Section 12H recoupment                        R 25 000
                      Taxable income                                   R 525 000

                      Tax to be calculated on R 525 000.


4   We have been requested to discuss the application of the deduction of R 25 000
    available to an employer on the entering into a registered learnership with
    particular reference to learners not previously employed.

    4.1    The law

           Section 12H(2) provides for the following limitation on the deduction
           available to the employer:

                      (2) For purposes of subsection (1), the amount of the allowance
                      in respect of—

                      (a)      a registered learnership agreement entered into by that
                               employer, as contemplated in subsection (1) (a), with a
                               learner who at the time of entering into that agreement—

                               (i)     was employed by that employer or associated
                                       institution in relation to that employer, is an
                                       amount equal to the lesser of—

                                       (aa)    70 per cent of the annual equivalent of
                                               the remuneration of that learner
                                               stipulated in the agreement of
                                               employment between that learner and
                                               employer;
                                               or




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                                    (bb) R17 500; or

                   (b)     was not employed by that employer or any associated
                           institution in relation to that employer, is an amount
                           equal to the lesser of—

                           (aa)     the annual equivalent of the remuneration of that
                                    learner stipulated in the agreement of
                                    employment between that learner and employer;
                                    or
                                    (bb) R25 000; and
                                                        th
           An associated institution is defined in the 7 Schedule to the Act as:

                   “associated institution”, in relation to any single employer,
                   means—

                   (a)     where the employer is a company, any other company
                           which is associated with the employer company by
                           reason of the fact that both companies are managed or
                           controlled directly or indirectly by substantially the same
                           persons; or
                   (b)     where the employer is not a company, any company
                           which is managed or controlled directly or indirectly by
                           the employer or by any partnership of which the
                           employer is a member; or

                   (c)     any fund established solely or mainly for providing
                           benefits for employees or former employees of the
                           employer or for employees or former employees of the
                           employer and any company which is in terms of
                           paragraph (a) or (b) an associated institution in relation
                           to the employer, but excluding any fund established by a
                           trade union or industrial council and any fund
                           established for postgraduate research otherwise than
                           out of moneys provided by the employer or by any
                           associated institution in relation to the employer;

    4.2    Conclusion

           The above sections particularly provide for the deduction to be limited to
           R 25 000 where the learner was “not employed by that employer or any
           associated institution”. Accordingly the requirement relates to that
           particular employer and not to employment in general. It should be a
           relatively simple manner for the employer to establish if the employee
           had been employed by it previously. Whether or not the learner has been
           in employment elsewhere is of no relevance in the matter.

5   We have been requested to advise as to whether the deduction available under
    section 12H may create or increase a tax loss.

    5.1    The law

           Section 20(2) of the Act provides as follows:

           (2)     For the purposes of this section “assessed loss” means any
                   amount by which the deductions admissible under sections 11 to




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                     19, inclusive, exceeded the income in respect of which they are
                     so admissible.

    5.2     Conclusion

            The deduction of the section 12H learnership allowance may create or
            increase n assessed loss of the employer.

6   We have been requested to provide a brief discussion on the manner in which a
    Partnership may claim the section 12H allowance.

    6.1     Authorities

            We provide herewith a brief extract from SILK on South African Income
            Tax whereby the taxation of partnerships is discussed:



            The Income Tax Act does not recognize a partnership as a distinct
            taxable entity. Although persons carrying on a business in partnership
            must make a joint return as partners in respect of the business,
            supplying whatever particulars may be prescribed from time to time, and
            each partner is separately and individually liable for the rendering of the
            joint return (s 66(15)), the partners are liable to tax in their separate
            individual capacities only, since s 77(7) provides that separate
            assessments must be made upon partners, notwithstanding the
            provisions of s 66(15). In practice SARS does not insist on a joint return
            by the partners but usually accepts from any one of the partners a copy
            of the financial statements disclosing the total income of the partnership
            for the year of assessment. A partnership as such is therefore not liable
            to any tax. It has no existence as a taxable entity apart from the
            individual partners who comprise the partnership.

            In practice, however, the Commissioner first determines the taxable
            income of a partnership on the basis that it is a separate taxable entity.
            He then proceeds to apportion this taxable income among the partners
            according to their rights to share in the profits of the partnership. The
            partners are then individually assessed on their respective shares of the
            partnership income after account is taken of any income derived from
            sources outside the partnership. Each partner pays tax according to his
            total income (including his share of the partnership income) and the
            rebates available to him. Should the determination of the taxable income
            of a partnership result in an assessed loss, the assessed loss is
            apportioned among the partners according to their rights to participate in
            profits or losses. Each partner is entitled to set off his share of the
            assessed loss against any income derived during the same year from
            sources outside the partnership.

7   Limitation of liability

    7.1     The maximum liability of BMTC arising out of this report is limited to an
            amount equal to twice the total fees charged for services provided in
            connection with this report.




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7.2   BMTC accepts no liability for damages or losses occasioned by any third
      party making use of this report. In any event the maximum liability
      associated with this report shall be limited to the amount specified above.




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