In Binding Private Ruling number 107 SARS expressed its view on the following scenario:
- A leases a property from B, and uses the property for purposes of operating a business.
- At the commencement of the lease, A paid an upfront lease premium in respect of the lease.
- C, a non-resident company holding all the shares in A, enters into an option agreement with B whereby C may purchase the leased property from B for less than market value when the lease agreement between A and B terminates.
- C assigns all its rights and obligations under the option agreement to A, its subsidiary, for no consideration.
- When the lease agreement terminates A exercises its rights under the option agreement and acquires the leased property from B for less than its market value.
- As of the commencement of the lease agreement it is understood between the parties that the lease premium, and rental payable under the lease agreement for the duration of the lease, contribute to the reduced purchase price.
To the extent that payment of the lease premium and rental is allowed as a deduction for A, the recoupment provisions contained in section 8(5) of the Income Tax Act No 58 of 1962 (the Act) will apply to the above scenario. Accordingly the lease premium and rental so allowed will have to be included in A's income to the extent that such premium and rental together with the purchase consideration do not exceed the fair market value of the property. This is so despite the fact that one is dealing with a lease premium or the fact that the property is acquired by virtue of rights under an option agreement that has been ceded by a foreign holding company to its local subsidiary.
Also, the base cost of the property in the hands of A will be the sum of the expenditure actually incurred in terms of paragraph 20(1)(a) of the Eighth Schedule to the Act and the amount recouped under section 8(5) of the Act (in terms of paragraph 20(1)(h)(ii)(aa) of the Eighth Schedule to the Act).