FAQ - July 25
25 July 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Tax implications
We have a client who
won R 500 000 in a competition held by a big local and international company.
The question is whether, or not, there will be Income Tax payable on the
winnings? I know that there were
proposals in the 2011 TLAB, but as far as I am aware, it was never implemented.
The nature of the winnings from the competition must first be
considered. If the amounts are received fortuitously without the person having
done anything to earn the amounts, the winnings should be of a capital nature.
If however the person had to do something in order to receive the amount or
designedly worked to make a profit, the amount may be included in gross income
in terms of paragraph (c) of the definition of gross income. Refer to the case
of CSARS v Kotze, where the taxpayer provided information to the police in
exchange for a reward as well as the principles laid down in the case of CIR v
Pick 'n Pay Employee Share Purchase Trust regarding the nature of amounts
A capital gain in respect of a disposal relating to any form of
gambling, game or competition must be disregarded in terms of par 60 of the
Eight Schedule of the Income Tax Act, provided that that person is a natural
person and the game or competition is authorised by and conducted in terms of
the laws of the Republic.
2. Effect of a home
study on primary residence exclusion for CGT
Please advise on my
understanding of the implications of Capital Gains Tax (CGT) in respect of the
use of an office located in a primary residence. If, for example, only 15% of the residence’s
floor space is used as an office and 15% of bond interest, electricity etc is
claimed for Income Tax purposes there will be, according to my understanding,
no impact on the R 2 million primary residence exclusion.
The term ‘primary residence’ is defined as a residence in which a
natural person or special trust holds an interest and,
- must regard it as his
main residence and must or must have ordinarily resided there, and
- must use or have
mainly (more than 50%) used it for domestic purposes
Any capital gain, where the proceeds on the sale of the primary
residence does not exceed R 2 million, must be disregarded in terms of par
45(1)(b) of the Eight Schedule to the Income Tax Act. Subpar (1)(b) does
however not apply in the event that the residence or part thereof was used for
purposes of carrying on a trade for any portion of the period after the
valuation date – subpar 4(b).
The exemption of R 2 million in terms of par 45(1)(a) is however
still available, subject to par 49. An adjustment in terms of this paragraph
must be made to the primary residence exclusion where the residence is used
both for domestic and trade purposes. In other words, if 15% of the residence
were used as an office, 15% of the capital gain would not qualify for the
primary residence exclusion. The amount of R 2 million is however available in
respect of the 85% utilised as residence.
The R 2 million exclusion in terms of par 45(1)(a) applies subject
to an apportionment calculated in terms of par 49.
3. Calculation of
depreciation on use of company owned vehicle
I am trying to calculate the entire employee and Value-Added Tax
fringe benefits on the payroll-program for company owned vehicles. According to
SARS the value to be used in both cases is the cost less 15% depreciation for
each year until the employee takes possession of the vehicle. Dilemma: some
vehicles were bought in 2005 and 2007 that has no depreciated value. I have looked
on the SARS website and read all about it, but there is no indication of what
to do if the vehicle is depreciated to NIL. What do we do in this case?
For purposes of calculating the fringe benefit, to be placed on
the private use of an employer provided vehicle, one firstly have to determine
the ‘determined value’ of the vehicle in terms of par 7(1) of the Seventh
Schedule to the Income Tax Act. The ‘determined value’ of the motor vehicle is
one of the following:
- Original cost to the employer (excluding finance charges and
interest) provided that the vehicle was acquired by him under a bona fide
agreement of sale or exchange (par 7(1)(a)), or
- Its retail market value when the employer first obtained right of
use, if held by the employer under a lease or was acquired on termination of a
lease. The ‘determined value’ for a lease contemplated in par (b) of the
definition of ‘instalment credit agreement’ in s 1 of the VAT act is its cash
value as defined in s 1 of that Act (par 7(1)(b)), or
- If none of the above applies, the market value when the employer
first obtained the vehicle, or right of use thereof (par 7(1)(c)).
The ‘determined value’ may be reduced by 15% for each completed
period of 12 months on the reducing balance method if the employee was granted
the use of the vehicle not less than 12 months from the date on which the
employer first obtained the vehicle or right of use thereof (provision (a) to
par 7(1)). Unlike the straight-line method of reducing the value, the reducing
balance method should not give a nil value for vehicles purchased in 2005 and
Determine which of the 3 provisions will be appropriate to
determine the ‘determined value’ and apply the 15% depreciation rate per
completed 12 month periods to reduce this value where applicable.
Paragraph (1) of Government Notice 2835 of 1991, which provides
directions for purposes of sections 10(8) and (13), has a similar definition of
determined value. There are however slight differences to consider (e.g. cost
excludes VAT for purposes of this regulation while it may not be the case for
The requirement of the regulation is however similar to paragraph
7 as it allows a 15% per annum reducing balance reduction in the determined
value of the vehicle.