A Critical Analysis of the Application of Section 37C(1) of the Income Tax

Abstract

Section 37C(1) of the Income Tax Act 58 of 1962 was introduced as a tax incentive to encourage private landowners to incur conservation and maintenance expenditure for the public good. Section 37C(1) of the Income Tax Act deems conservation and maintenance expenditure incurred under a biodiversity management agreement concluded in terms of section 44 of the National Environmental Management: Biodiversity Act 10 of 2004 to be incurred in the production of income and for the purposes of trade. Consequently, section 37C(1) of the Income Tax Act serves as a deeming provision that allows taxpayers to apply section 11(a) of the Income Tax Act. Section 37C(1) of the Income Tax Act does not specify the types of maintenance and conservation expenditure that would qualify for a deduction. In contrast, section 11(a) of the Income Tax Act does not permit the deduction of any expenditure of a capital nature. The Explanatory Memorandum to section 37C(1) of the Income Tax Act further specifies that expenditure of a capital nature will not qualify for a deduction.
Given that section 37C of the Income Tax Act was introduced as a tax incentive – to encourage taxpayers to incur conservation and maintenance expenditure for the preservation of nature and the environment for the public good – its introduction raises the question whether the legislature intended for expenditure beyond that normally permitted in terms of section 11(a) of the Income Tax Act to be deductible. Section 37C(1) of the Income Tax Act further allows the deduction of conservation and maintenance expenditure against taxable income earned on land, including land in the proximity of the land that is subject to a biodiversity management agreement, suggesting that taxable income not directly related to the conservation and maintenance activities may be reduced by such expenditure.
The objective of this article is to provide a critical analysis of the application of section 37C(1) of the Income Tax Act in an attempt to provide clarity as to when and how the section will apply. In analysing the application of section 37C(1) of the Income Tax Act, the first step is to establish the meaning of the words “conserve” or “maintain” to determine whether capital expenditure incurred in terms of a biodiversity agreement would potentially qualify for a deduction in terms of section 37C(1) read with section 11(a) of the Income Tax Act. Furthermore, the article evaluates whether the intended objective of section 37C(1) is impeded by the exclusion of capital expenditure.
The second step is to establish the appropriate meaning and interpretation of “immediate proximity” to determine when expenditure incurred for the conservation or maintenance of land is deductible from taxable income that is not necessarily related to conservation or maintenance activities.
The article concludes by exploring the use of biodiversity tax incentives in Australia and Canada to determine whether the principles applied in these jurisdictions: 1) allow for the expenditure of a capital nature to be deducted; and 2) could potentially be suitable to adjust the current format of section 37C of the Income Tax Act to assist in reaching the intended objective of being a tax incentive; or 3) could be used to formulate alternative biodiversity tax incentives to encourage biodiversity conservation in South Africa.