Print Page   |   Report Abuse
News & Press: Institute News

FAQ - August

16 August 2013   (3 Comments)
Posted by: Author: SAIT Technical
Share |

Author: SAIT Technical

1. Ring-Fencing of assessed losses from different trades

Question

I am Told by a member of Amway (they distribute products by way of membership ) that 60% of your purchases are Tax deductible (they state this is on advice from SARS) even though you may use it for yourself reasoning being that you use the products to test and advertise it. Two of the members who approached me are adamant that according to their Accountants they can deduct the above as well as all other expenses from income derived from other businesses or sources of income being sole proprietors which according to me SARS will not allow. In other words the loss made running your Amway Business can be deducted from other Income.

Answer

The requirements of the general deduction formula as contained in section 11(a) of the Income Tax Act, read together with section 23(g), must be considered in order to claim deductions against trading income as follows:

s11(1) For the purpose of determining the taxable income derived by any person from carrying on any trade , there shall be allowed as deductions from the income of such person so derived-

a) expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature;

The definition of "trade" as defined in section 1 of the Income Tax Act is as follows:

("trade" includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent as defined in the Patents Act, 1978 (Act No. 57 of 1978), or any design as defined in the Designs Act, 1993 (Act No. 195 of 1993), or any trade mark as defined in the Trade Marks Act, 1993 (Act No. 194 of 1993), or any copyright as defined in the Copyright Act, 1978 (Act No. 98 of 1978), or any other property which is of a similar nature).

Various court cases have been dealt with by the South African courts regarding the various components of the section 11(a) general deduction formula and the carrying on of a trade requirement. For example, in the Burgess v CIR case, it was held that this definition should be given a wide interpretation and that the definition is not necessarily exhaustive. However, a person who has interest-bearing securities or shares held as assets of a capital nature does not derive the income from carrying on any trade (ITC 1275).

The provisions relating to assessed losses are contained in section 20 of the Income Tax Act, which may be summarised as follows:

In order to determine the 'taxable income' from 'trade' the taxpayer may set off:

-       A balance of assessed loss brought forward from the previous year of assessment; and
- Any assessed loss incurred in the current year in carrying on any other trade. 

Two special concessions are available to taxpayers other than companies and close corporations, e.g. natural persons: Natural persons may set-off an assessed loss against non-trade income, such as interest. However, the provisions of section 20 is subject to the ring-fencing provisions of section 20A, which prohibits a natural person from setting off an assessed loss incurred in a trade against the income derived during the same year of assessment from another trade or a non-trading activity. However, the section 20A 'ring-fencing' of assessed losses only applies to natural persons whose taxable income equals to or exceeds the amount at which the maximum marginal rate of tax is applicable. Secondly, it applies to whether the natural person has incurred losses in at least 'three-out-of-five-years' in this trade or whether his trade has been explicitly listed as a suspect trade in section 20A(2)(b).

The second concession in respect of a natural person, is that a natural person may carry forward an assessed loss, despite the fact that he or she has not carried on a trade during the year.

To summarise:

For each trade that a taxpayer carries on during the year, he calculates a 'taxable income' or an 'assessed loss'. He then adds all the 'taxable incomes' and 'assessed losses' from the different trades to arrive at a total taxable income or assessed loss for the year of assessment. However, an assessed loss from a specific trade may not to be set off against the income from carrying on any other trade, should the provisions of section 20A be applicable.

2. Early retirement

Question

I have a client who took early retirement. He took his lump sum from retirement and went to a financial advisor who invested the money in Nedbank capital and income account and bought shares. He derived interest and dividends from this portfolio and was charged management fees by the advisor. This was claimed (apportioned between dividends and interest) as a deduction and the net income reflected in the tax return. SARS did an audit and advised that the management fee is not allowed unless he is a share dealer. It can be claimed against capital gains when shares are sold. Please confirm.

Answer

In order to claim expenses relating to the management fees of a share portfolio one has to determine whether the gain or loss is of a capital or revenue nature.  Apart from the three-year holding rule in section 9C, the Act does not provide objective rules to distinguish between amounts of a capital and revenue nature. This task has been left to the South African courts, which over many years have laid down guidelines for making this distinction. The more important of these are listed as per the attached SARS Guide for Share owners.

Some general principles as per the guide:

Scheme of profit-making

Any profit or loss on disposal of your shares will be of a revenue nature if you purchased them for resale as part of a scheme of profit-making, (Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes)17).

34.2   Shares acquired for dividend income

Shares bought for the dominant, main and overriding purpose of securing the highest dividend income possible will be of a capital nature when the profit motive is incidental (CIR v Middelman21).

Scale and frequency of transactions

The scale and frequency of your share transactions is of major importance, although not conclusive (CIR v Nussbaum22).

A person who carries on a business of share-dealing will typically claim general expenses as a deduction against income under section 11(a) of the Income Tax Act. Such expenses may include bank charges, interest on money borrowed to buy shares, technical analysis software and telephone charges. Once these shares have been held for three years it will no longer be possible to claim such expenses in relation to them under section 11 because their ultimate disposal can no longer produce gross income.

Investments made in dividend and interest bearing stock falls outside the scope of the definition of "trade” as defined in section 1 of the Income Tax Act and expenses relating thereto will not qualify as a deduction in terms of section 11(1)(a) of the Income Tax Act.

"trade”

includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent as defined in the Patents Act, 1978 (Act No. 57 of 1978), or any design as defined in the Designs Act, 1993 (Act No. 195 of 1993), or any trade mark as defined in the Trade Marks Act, 1993 (Act No. 194 of 1993), or any copyright as defined in the Copyright Act, 1978 (Act No. 98 of 1978), or any other property which is of a similar nature;

11 (1) For the purpose of determining the taxable income derived by any person from carrying on any trade , there shall be allowed as deductions from the income of such person so derived-

a)     expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature;In terms of the attached SARS guide on page.25, fees paid to a portfolio manager to manage your share portfolio do not qualify as part of the base cost of a share as it does not fall within the scope of the base cost of an asset in terms of par.20(1) of the Eighth Schedule to the Income Tax Act.

Conclusion:

Based on the information you have provided, it does not appear that the trading and requirements of section 11(a) of the Income Tax Act are met in order to deduct the management fees.

The management fees will also not qualify as part of the base cost of the shares in terms of par.20(1) of the Eighth Schedule to the Income Tax Act.

3. Business v Private kilometeres

Question

Normally travel kilometers from your home to your workplace, and back is not part of business travel.Will the following be regarded as business or private travel when determining business travel for tax submission purposes:

A Dr does not have a practice, or a fixed place or office. She travels in the morning from her home to the hospital where she is needed for that day. It might even be to Emalahleni or Nelspruit, depending on where her services is needed. She is not contracted to one specific hospital.

Will the travel to the hospital in emalahleni or Nelspruit be deemed private or business?

Answer

In the case of CIR v De Villiers the following principle was laid down: "It  has  been  generally  accepted  in  our courts  that  the  expenses  incurred  by  a  taxpayer  in  travelling  to  and  from  his  place  of  business  are domestic or private expenses. If he chooses to live in one place and to carry on his business in another place, then, even though he cannot carry on his business without travelling from his home to his place of business, the travelling expenses are regarded as falling within the category of private or domestic expenses”.

The reference is therefore to any PLACE OF BUSINESS, not necessarily his NORMAL PLACE OF BUSINESS to determine private travel. In the case of ITC 1440 the view was held that "[w]hen travelling constitutes part of the operations of earning income, expenses incurred by the taxpayer in this connection are allowed as a deduction, eg a commercial traveler. On the other hand, the mere circumstance that a man has to travel  to  the  place  at  which  he  earns  his  income  is not  of  itself  sufficient  to  render  the  cost  of  such travelling ‘expenditure incurred  in the production of  income’. Thus expenses incurred  in travelling from one’s  residence  to  one’s  place  of  business  are  not  allowable,  being  domestic  or  private  expenses prohibited as  a deduction under section 23(b)”. In the De Villiers case, commercial travel, was explained as "On the other hand, if his business requires him to move from point to point, for example as a jockey seeking employment in different towns, or as a commercial  traveler  going  from  one  town  to  another  in  search  of  business,  in  those  cases  his travelling expenses may be deducted”.

An earlier case of ITC 1163 dealt with the case of a minister who normally worked at a church but had to travel to a church in another town for income. In that case it was held that each of the two churches should be viewed as a separate place of business. 

In the scenarios of your client that you describe, travelling from his home to any of the hospitals will still constitute travelling from his residence to his place of business. If the argument in ITC 1163 is followed, the doctor would have more than one place of business – one at each hospital. Travelling from his residence to each/any of the places would constitute private travel. It is unlikely that a doctor can be seen as a commercial traveler.

4. VAT and Reimbursements

Question

I have a query relating to VAT and reimbursements. Can one claim an input tax deduction on cell phone reimbursements paid to employees. The employee receives a tax invoice in his own name and provides it to his employer, who then will reimburse him a fixed amount for business calls. My understanding is that as the tax invoice is not in the employers name he cannot claim it, despite the fact that it is a genuine business expense and has been paid for by him. Surely SARS should allow this as an input tax deduction. I have a query relating to VAT and reimbursements. Can one claim an input tax deduction on cell phone reimbursements paid to employees. The employee receives a tax invoice in his own name and provides it to his employer, who then will reimburse him a fixed amount for business calls. My understanding is that as the tax invoice is not in the employers name he cannot claim it, despite the fact that it is a genuine business expense and has been paid for by him. Surely SARS should allow this as an input tax deduction.

Answer

Before determining the VAT consequences of a transaction, it is necessary to establish the relationship between the parties. This is to determine if the vendor is acting as an agent on behalf of another person or as principal. Section 54 contains special provisions to deal with the VAT consequences arising from an agency relationship.

In order to correctly apply the VAT legislation to the concept of agents, it is necessary to identify and understand the concept of an "agent" as understood in common law.An agency is a contract whereby one person (the agent) is authorised and required by another person (the principal) to contract or to negotiate a contract with a third person, on the latter's behalf. The agent in representing the principal, creates, alters or discharges legal obligations of a contractual nature between the principal and the third party.

In essence, the principal is ultimately responsible for the commercial risks associated with a transaction, and that the agent is trading for the principal's account.

South African VAT consequences

In terms of section 17 read with section 16(2) of the VAT Act, input tax can only be claimed in respect of expenditure incurred by a vendor for consumption, use or supply in the course or furtherance of his enterprise, if he is in possession of a tax invoice in accordance with section 20 of the VAT Act.  

The employer will only be able to claim the input tax if the employee acted as an agent of the company, as indicated in section 54(2) of the VAT Act (where the supply is deemed to be made to the principal and not to the employee). Section 54(3) determines that when a tax invoice has been issued to an agent, the agent has to maintain sufficient records so that the name, address and VAT registration number of the principal can be ascertained (also refer to the other requirements in the subsection with regard to the agent notifying the principal).

The now-withdrawn VAT Ruling 384, indicates that a vendor is entitled to claim an input tax deduction in terms of section 16(2) even if the tax invoice is issued in the name of the employee, provided that the vendor:

- pays for the cost on the invoice or reimburse the employee;
- retains the tax invoice that was issued to the employee; and
- maintains sufficient records to adequately identify the nature of the costs incurred. In the regard, it is important to note that where goods or services are acquired by a vendor partly for consumption, use or supply in the course of making taxable supplies, input tax can only be claimed to the extent (as determined in accordance with the provisions of section 17) that goods or services concerned are acquired by the vendor for such purpose.

Conclusion:  

It is held that to the extent that the employee is reimbursed for business phone calls, i.e. made in the course or furtherance of the employer's enterprise, the employee would have acted as agent of the employer and the employer will be allowed to deduct the input tax thereon.

Comments...

Michael G. White says...
Posted 29 August 2013
Business v Private travel: If the doctor had a room at her home which was especially equipped for the purposes of her profession(trade) in terms of the nature of her work etc. and proceeds to visit her clients(hospitals) to continue with her professional activities ,a case could possibly be made for her to claim her travel expenses as a tax deduction(refer page 196 of Broomberg on Tax Strategy,4th edition in the case of SIR v Ineson(A) ,42 SATC 125.
Michael G. White says...
Posted 29 August 2013
I suppose if the calls amount to R50.00 or less ,an employer in the circumstances described above might be able to claim an an input tax deduction seeing that no tax invoice is required(section 20(6) of Vat Act ).
Michael G. White says...
Posted 29 August 2013
I think one needs to exercise caution before making input tax deductions as described above. It would be preferable to obtain a ruling from SARS(section 41B of the Vat Act read with section 79 of the Tax Administration Act) before going ahead with claiming such input tax deductions. I think one needs to exercise caution before making input tax deductions as described above.It would be preferable to obtain a ruling from SARS(section 41B of the Vat Act read with section 79 of the Tax Administration Act) before going ahead with claiming such input tax deductions.Note that SARS withdrew its ruling regarding allowing input tax on professional subscriptions where the tax invoice is issued to a member of accounting institute even though such subscriptions are settled by the employer(see article dated 22 January 2013 on TaxTalk website).

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

MINIMUM REQUIREMENTS TO REGISTER

The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by YourMembership  ::  Legal