FAQ - July
12 July 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Taxation of dividends and interest in a testamentary trust
A testamentary trust was formed for the sole purpose of protecting the beneficiary's inheritance from being squandered. The trustees are the father and brother and do not have the business acumen to administer the trust. I have taken over the administration (the trust was registered with the Master in 2012). I believe I should register the Will Trust with SARS on the normal IT12TR however someone more experienced in these matters than myself says as the Trust is not the beneficial owner of dividends it is not necessary. I disagree, as the beneficiary receives a monthly income from the assets which are in Fixed Deposits and Unit Trusts, surely the Trust must declare interest and dividend earnings?
Definition of "trust”, s 1 of the Income Tax Act: "means any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person;”Par (c) of the definition of "person” expressly includes any "trust”. The Commissioner will give notice, yearly, as to who is required to submit a tax return in terms of s 25 of the Tax Administration Act.
25. Submission of return.—(1) A person required under a tax Act to submit or who voluntarily submits a return must do so:
(a) in the prescribed form and manner; and
(b) by the date specified in the tax Act or, in its absence, by the date specified by the Commissioner in the public notice requiring the submission.
The notice, as published in the Government Gazette lists "persons” who are required to submit tax returns, and "persons” who are not. A trust is included in the list as a person who must submit a tax return and is regarded a "person” for purposes of the Act.
The testamentary trust you are referring to will be regarded "trust” and a "person” for purposes of the Income Tax Act and is subsequently a taxpayer in its own right which should submit an annual tax return or any other return as required in terms of the Tax Administration Act. Any income received by the trust to which another person has a vested right (i.e. the trust is not the beneficial owner) should be indicated as such on the return; this is however not sufficient reason not the submit a return.
2. Capturing expenses of a commission-earner on e-filing
Please can you confirm the following for me? As a commission based earner (or total income derives more than 50% of income), this taxpayer is exempt from section 23(m), however is this taxpayer allowed to claim monthly lease (car-repayment) as a deduction against taxable earnings? if so, on e-filing, would this just be under general business expenses, for travel allowance is not part of income?
From what I understand, your clients’ remuneration is mainly from commission and is therefore not subject to the application of s 23(m) (limitation of certain expenses in terms of s 11 of the Act).The lease payments would be deductible in terms of s 11(a) of the Act, provided that the requirements of that section are met. (if the payments are however repayments of the purchase price of the car, the interest component would be deductible and a wear and tear allowance must be deducted in respect of the capital portions of the repayments). This includes that the expenditure will only be deductible to the extent that it is incurred for purposes of the taxpayer's trade. SARS would therefore require that your client provides a logbook to prove the business portion of the expense.
3. Farming – treatment of expenses to erect tunnels
My client is a crop farmer, operating in a close corporation. He recently erected brand new tunnels in order to expand his crop growing at a cost of approximately R 1 400 000. The farmlands he uses are owned by the Family Trust, of which he is one of the beneficiaries. My question is if the erection of these tunnels falls within the definition of capital development expenditure for farming operations? Or must these items be capitalised and subsequently written of, and if so, over which period?
Par 12(1)(f) of the First Schedule to the Income Tax Act allows as a deduction the cost incurred in the erection of, or extensions, additions or improvements (other than repairs) to, buildings used in connection with farming operations, but excludes buildings used for domestic purposes.The expense is 100% deductible, but is however limited to the taxable income for that specific year of assessment in terms of par 12(3). Any balance of capital expenditure not allowed during a specific year of assessment will be carried forward to the next year of assessment.
100% of the cost relating to the erection of the tunnels may be deducted, but limited to the taxable income from farming operations during that specific year of assessment. Any balances not utilised may be carried forward to the following year/s of assessment.
4. Exemption for foreign dividend income
I have a query regarding foreign dividends received by an individual who is a South African resident in the 2013 tax year. The foreign dividend amount is R 285.70, which I filled into the IT12. However, when I do the SARS tax computation, they only include R107 as taxable income. I can't find any information as to how the taxable portion of foreign dividends received is calculated. Could you possibly assist me in this regard?
For natural persons, the old foreign dividend exemption, in terms of s 10(1)(k(ii) of the Income Tax Act was replaced with s 10B of the Act and is effective from 1 March 2012.
This exemption has two parts:
Part 1. – Full exemption, s 10B(2)
Part 2. – Partial exemption s 10B(3)
Assuming that your client does not meet the requirements for the full exemption in s 10B(2), the partial exemption will apply to your client as per the formula provided in s 10B(3):
A = B X C
A = exempt portion of foreign dividend
B = the ratio of the numbers 25 to 40 where the person is a natural person, deceased/insolvent estate or trust (natural person)
C = the aggregate of any foreign dividends that are not exempt in terms of s 10B(2)
The calculation would look as follows:
Gross foreign dividend R 287
Exemption: 25/40 x 287 (R 178)
TAXABLE AMOUNT R 107
If your client is taxed at the maximum marginal tax rate (40%), this exemption effectively results in a 15% tax rate and is to bring the effective tax rate on foreign dividends in line with Dividends Withholding Tax (local dividends).