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FAQ - September 20

20 September 2013   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Transfer of money from Canada to SA

Question

My father works in Canada as a medical doctor and in order to pay less tax in Canada, he registered a company  of which I have been made a director. My farther wants to send R500 000 to me as a dividend payout. What will the tax implication be for me receiving the money in SA? I understand that normally dividend payouts are taxed 15%? My father already pays 15% in Canada on this money which apparently South Africa does acknowledge since we have a double tax agreement with Canada. Pease note that my parents have dual citizenship, South African originally and now recently Canadian. They own property in South Africa and pay rates and taxes etc. yet they live outside the country for 11 months of the year. The scenario changes slightl as I am working in Saudi Arabia for about 190 days per 12-month period thus not paying tax in South Africa on my income received from Saudi. My question to you is how can I bring the R500 000 from Canada into South Africa paying the least amount of tax on it.

R500 000 dividend payout can be seen as income thus because I am not paying tax on my income received form outside South Africa i.e. from Saudi Arabia, the R500 000 form Canada will also fall under the "outside South Africa for more than 183 days per 12 month period income” and I can receive the R500 000 in one payment and not pay tax on it?

The R500 000 can be paid as donations of R100 000 each payable to me and my wife each in this tax year i.e. R200 000 this tax year and R200 000 next tax year leaving me with only paying tax on the R100 000 left over?

Answer

DONATION TAX/REMUNERATION

You state that a dividend was declared to you - you do however not clearly indicate whether you are also a shareholder of the company (in addition to being a director). If you are not a shareholder, the risk may exist that the amount given to you constitute a dividends, which could be subject to donations tax in South Africa, if your father is still considered to be a resident of South Africa for tax purposes. Alternatively, if you are really earning the amount in exchange for the services rendered as director (as opposed to being a shareholder), this amount may constitute remuneration income. 

DIVIDENDS TAX

If you receive the dividend as a shareholder, the definition of a foreign dividend in broad terms will recognise the amount as a foreign dividend in South Africa if it is treated as such in Canada. Foreign dividends are not exempt from normal tax in the Republic save for certain exemptions in s 10B of the Act. S 10B(3) includes in a person taxable income for a year of assessment an amount as calculated, which in effect results an effective tax rate of 15% on the foreign dividends received. If you hold 10% or more of the shares of this company, the full dividend may be exempt from tax in South Africa in terms of section10B(2)(a).Please note that the exemption you enjoy in respect of the income earned for services in Saudi Arabia (section 10(1)(o)(ii)) does not impact on the dividend exemptions mentioned above.

FOREIGN TAX REBATE/DEDUCTION

S 6quat allows a deduction or rebate for any qualifying foreign taxes which is proven to be payable to any foreign state to a "resident” of the Republic. I have attached Interpretation Note No 18 in this regard and suggest that you familiarise yourself with regards to the qualifying criteria for either the rebate or deduction. In brief, should the amount constitute a foreign dividend, and not be fully exempt (refer above), you (as resident) should qualify for a section 6quat rebate in respect of the Canadian tax. This rebate will be subject to certain limits to ensure that the rebate does not exceed the South African tax paid on this income.

2. Deregistration of trust as VAT vendor

Question

Upon deregistration as a VAT Vendor a deemed output is calculated on the value of the assets (the lessor of cost or market value). If no input vat was claimed on these assets can a deemed output be raised?

Trust want to deregister, own property that is used for student rental, did not claim transfer duty as input.

SARS wants to change last return to include a deemed output on book value of property.

If you did not claim input vat/transfer duty (all the properties were aquired after registration as vendor) a deemed output can not be raised at deregistration

Answer

Consequences of deregistration as VAT vendor:

Section 26 of the VAT Act states that if a person ceases to be a vendor he is still liable for the VAT Act obligations which arose while he was a vendor. Where a person ceases to be a vendor (s 8(2)), any goods (other than those on which an input deduction was denied under s17(2)) which forms part of his enterprise, are deemed to be supplies made immediately prior to him ceasing to be a vendor. This means that when a person ceases to be a vendor he will have to pay an output tax on all assets which forms part of his enterprise (i.e. assets used to make taxable supplies). An enterprise is specifically defined in section 1 to exclude the making of exempt supplies. In terms of section 12(c) the supply of a dwelling under a rental agreement is exempt (supply of residential accomodation). If the properties were used for these purposes (it appears from the query as if it was used for student accomodation), it is submitted that these properties were not part of the enterprise that ceased to be register as a VAT vendor.Therefore, where the property was not used by the vendor in his enterprise to make taxable supplies (as would be the case if used for residential rentals), and no input tax deduction was claimed, the output tax provisions of section 8(2) will not be applicable.

3. Leasehold improvements

Question

We need some advice on the tax implications on leasehold improvements for both the lessor and lessee. It is clear from the Income Tax Act what the normal tax effects will be if an obligation exist to incur the improvements, although it is silent on the tax implications if voluntarily improvements are made by the lessee.  The rental is market related. Please could you provide us with advice on the tax for a lease without an obligation to make improvements. i.e. the lessee simply builds another building on the land and uses it until the end of the lease.  When the lease terminates, the lessee just departs and no other moneys change hands. Specifically, considering donations tax, is there a donation or a S58 deemed donation from the lessee to the lessor either on completion of the improvement or upon the eventual termination of the lease ? Considering CGT, according to the Comprehensive guide to CGT there will be a capital loss for the lessee when the lease terminates (the lessee has a base cost and gets no proceeds). If they are connected persons, will the proceeds equal the market value?  What will the VAT implications be if no consideration is given by the lessor to the lessee at the end of the lease.

Answer

The improvements to the property will have to be considered in terms of the provisions of the Income Tax Act as follows:

Income Tax

Leasehold improvements – section 11 (g)

Subject to certain requirements, section 11(g) of the Act provides for an annual allowance in respect of expenditure incurred on leasehold improvements effected by a lessee where the lessee is under an obligation in terms of a lease agreement to effect such improvements. It does not cater for voluntary improvements (please note that an amendment to section 12N has been proposed to allow a lessee to deduct allowances on voluntary improvements.) It seems that your client will not qualify for an allowance in terms of section 11(g) of the Act as the leasehold improvements carried out were not pursuant to obligations imposed by a lease agreement

Section 13 allowances

If the improvements are buildings used for carrying on a process of manufacture in the course of trade or is used for research & development purposes, the lessee may qualify for an allowance in terms of section 13 in respect of the costs incurred. 

Other deductions

Wear and tear in terms of section 11(e) 

Section 11(e) of the Act prohibits a taxpayer from claiming wear and tear on "buildings or other structures or works of a permanent nature”.  In this regard, our Courts have laid down guidelines as to what constitutes permanent structures, refer SIR v Charkay Properties (Pty) Ltd (1976 (4) SA 872 (A)). Since your client do not own the building, it is therefore, necessary to ascertain the extent to which your client may claim wear and tear allowances on the improvements under section 11(e) of the Act.  Consideration should be given to items of a permanent and items of a non-permanent nature. Items of a less permanent nature such as aircons, dry-walls, etc. may be deductible, even though the cost of the structure itself would not qualify for this deduction.  The section 11(e) allowance should be calculated in accordance with the South African Revenue Service (SARS), Interpreation Note No. 47 and Binding General Ruling 7.

Repairs and maintenance

section 11 (d)In terms of section 11 (d) of the Income Tax Act, expenditure actually incurred during the year of assessment on repairs of property occupied for the purposes of trade or in respect of which income is receivable, is deductible. If there are repairs and maintenance effected to the property which do not contain any amounts of a  capital nature, it should qualify as a deduction in terms of section 11(d) of the Act. The construction of a new building is however unlikely to constitute repairs and maintenance expenditure.

Donations Tax

In terms of section 54 of the Income Tax Act, donations tax is levied on ‘property' disposed under any donation by a resident donor. The leasehold improvements will constitute ‘property', as the definition in section 55(1), which includes corporeal immovable property.
The word ‘donation' is defined as a gratuitous disposal of property, including any gratuitous waiver or renunciation of a right (s 55(1)). Since the voluntary leasehold improvements incurred by the lessee will become the property of the lessor, there is a disposal of property. One has to refer to case law to determine whether the disposal is "gratuitous”.In the Ovenstone case it was held that a donation is a disposition of property ‘gratuitously out of liberality or generosity'.  A donation requires a motive of sheer liberality or ‘disinterested benevolence',Welch's Estate case.
In the case of the leasehold improvements, if one accepts that a motive of sheer liberality or disinterested benevolence remains an essential element; the lessee did not dispose of the property with any such motive to the lessor.  It is therefore submitted that there will be no donation.

Capital Gains Tax 

Two possible disposals can arise in respect of the leasehold improvements. Firstly, as soon as the improvement is made, ownership of the structure passes to the owner of the land that it is affixed to. Para 33(3)(c) specifically states that no part disposal takes place for CGT purposes when the improvement is made. The Guide however states that:  "The cost of improvements to the leased  asset  qualifies  as  part  of  the  base  cost  under  para 20  and  will  be  brought  into account for capital gains tax purposes on the termination of the lease." If we can kindly refer you to the SARS Capital Gains Tax Guide (Issue 4), section 24.2 which deals more extensively with leasehold improvements and the capital gains tax implications. 

Value-Added Tax

Section 7(1)(a) of the VAT Act provides that VAT shall be levied and paid at 14% for the benefit of the National Revenue fund on:

The value of

-       a supply
-       of goods or services
-       in the Republic of SA
-       by a vendor
-       in the course of furtherance
-       of an enterprise.

To fall within the scope of the VAT Act, a payment (consideration) must be received by a vendor in respect of taxable "supply” made by that person. This can be an actual supply, or a supply which the Act deems the person to make in the circumstances. It is submitted that the leasehold improvement will not be subject to VAT as such an improvement is given unconditionally and does not constitute payment for a supply of goods or services to the lessor. Depending on the terms and conditions of the lease agreement, the improvements may constitute a form of rental consideration (barter transaction) if the rental is reduced by reason of the improvments - this is only likely to be the case if improvement are made in terms of a contractual obligation. 

If the lessee and lessor are connected persons, the provisions of section 10(4) need to be considered as the supply of the property may in certain instances trigger VAT.

4. Tax exempt income

Question

According to my client the International Finance Corporation (see letter attached), all income he received from the IFC is tax exempt. I have asked SARS call center about it, have consulted all my tax books on hand and asked other tax consultants. No one seem to know about this. If my memory serves me right, I asked SAIT about this +- a year ago, but at that stage I did not have this letter attached.

Is it possible for SAIT to guide me on this as I can not find any information to this. 

·         The client works in SA when he receives this money
·         No IRP5 was issued
·         Where will this income be declared
·         How will it be reflected that the income is tax free, if it is

Answer

Residence 

One has to consider whether your client was a resident for tax purposes in South Africa. The term ‘resident’ is defined in s 1 of the Act, and a natural person can be regarded as being a resident for purposes of this definition in the event that: -a person is ‘ordinarily resident’ in the Republic, or-deemed to be a resident by virtue of a physical presence test.

Ordinarily Resident 

The term ‘ordinarily resident’ is not defined in the Act and has no special or technical meaning but is based on fact.

Case Law 

Levene v IRC (1928) AC – it was held that the term ‘ordinary residence’ connotes residence in a place with some degree of continuity apart from accidental or temporary absences. A person must be regarded as being ordinarily resident in the place where he/she lives life on an ordinary and regular basis. Reid v IRC (1926 SC) – a person can be ordinarily resident in two places. Cohen v CIR (1946 AD) – the court suggested that a person is ordinary residence is that place to which he returns naturally and as a matter of course after all his wanderings. A persons actions solely cannot be used to determine whether he is ordinarily resident in South Africa or somewhere else during any specific year of assessment. For this purpose one has to consider evidence relating to his mode of life outside that year of assessment.

Physical Presence Test 

Where a person is not ordinarily resident in the Republic, that person may still be deemed to be a "resident” for tax purposes in the Republic by virtue of the physical presence test as per SARS Interpretation Note No. 4, attached.

 If your client is a resident, he will be liable for tax in terms of Section 1 of the Income Tax Act which defines ‘gross income’ as follows:

 "in the case of any resident, the total amount, in cash or otherwise received by or accrued to or in favour of such resident;...". He would therefore be subject to tax in South Africa on his world-wide income. Section 10(1)(o)(ii) of the Act exempts from income tax: (Kindly also see SARS Interpretation Note.16 in this regard)

"any remuneration as defined in paragraph 1 of the Fourth Schedule

(i) …
(ii) received by or accrued to any person during any year of assessment in respect of services rendered outside the Republic by that person for or on behalf of any employer, if that person was outside the Republic-
(aa) for a period or periods exceeding 183 full days in aggregate during any 12 months period commencing or ending during that year of assessment; and
(bb) for a continuous period exceeding 60 full days during that period of 12 months, and those services were rendered during that period or periods:

Provided that-
(A) for purposes of this subparagraph, a person who is in transit through the Republic between two places outside the Republic and who does not formally enter the Republic through a port of entry as defined in the Immigration Act, 2002 (Act No. 13 of 2002), shall be deemed to be outside the Republic; and(B) the provisions of this subparagraph shall not apply in respect of any remuneration derived in respect of the holding of any office or from services rendered for or on behalf of any employer, as contemplated in section 9(1)(e)”’ From the information you have provided it seems that the income was taxed in the other state (as the letter refers to a payment net of tax), but one has to consider the provisions of any double tax agreement between SA and the contracting state. From the information you have provided it is not clear who the contracting state is. We can therefore not comment on any DTA exemption or an exemption in terms of another convention.

Foreign Tax Credit Section

6quat of the Income Tax Act is aimed at providing relief against double tax, by allowing, as a rebate against SA tax, any foreign tax paid (converted to Rands) in respect of foreign sourced income included in SA taxable income (section 6quat(1)). The rebate is, however, limited to the SA tax attributable to the foreign income. The purpose of the rebate is to prevent double taxation on foreign source income. The formula as per the attached SARS note can be used to calculate the maximum foreign tax that may be deducted. As the services were rendered from within South Africa, the source is unlikely to be a foreign source in which case the section 6quat rebate will not be available.

Section 6quin provides for a rebate of foreign tax paid by a South African resident on income received for services rendered within the Republic, but taxed outside the RSA. This rebate is only available in respect of withholding taxes if the tax is imposed by another country with which South Africa has concluded a DTA.

The rebate is limited to the lessor of the normal tax attributable to the amount received or accrued or the actual amount of the foreign tax levied by the foreign country.If your client intends claiming a rebate under section 6quin, a FTW01 form must be submitted within 60 days from the date when the tax was withheld.(please also note that section 6quin was only introduced from 1 January 2012 and applies in respect of taxes withheld during a year of assessment starting on or after 1 January 2012. A portion of the income covered by the letter may therefore not qualify for this rebate). Kindly refer to the attached comprehensive SARS 2013 IT return guide for individuals and specifically sections 4.2 and 4.3 which relates to the disclosure of foreign income.

5. Small business Corporation

Question

The incorporated company, Inc, for professional service providers. Reading notes on SA Tax, I interpret this that this Inc company is taxed as a company. If the requirements of a SBC are met, then this incorporated company will be taxed at the SBC rates of tax. (ie employs three or more non related staff). Would the incorporated company be allowed to pay a salary to the directors and thus we set up tax planning opportunities between the incorporated company and the individual, being a shareholder / director of the incorporated company Could you confirm my understanding of the above and advsie how SARS treats / taxes these Incorporated companies? 

Answer

For tax purposes there is no difference between a personal liability company (an incorporated), and for example a (Pty)Ltd company (the personal liability company is not listed in section 38(2) of the Income Tax Act as a public company). Provided that the requirements of s 12E, definition "small business corporation” have been met, the company will qualify for preferential tax rates.

Conclusion 

The payment of salaries to shareholders of the company will not affect the companies "small business corporation” status provided that all requirements (s12E) have been met. In cases of non-arm's length remuneration packages, you have to bear the provisions of the various anti-avoidance provisions in the Act, including the general anti-avoidance provisions, in mind as the company may be exposed to various tax issues if such structuring is done on an artificial basis. 

6. Fringe benefit for member of CC

Question

The member of a close corporation bought a vehicle seven years ago.  He has been using it since it was new.  He has been paying the use of motor vehicle fringe benefit since then.  The market value of the vehicle currently is R55000.00. Should he still be paying the fringe benefit on the original price of R240000.00? How can this be structured differently?

Answer

Paragraph 7 of the Seventh Schedule of the Income Tax Act No.58 of 1962 ("the Act”), deals with motor vehicle fringe benefits as follows:

·         The use of a motor vehicle given to an employee is subject to taxed based on a fringe benefit of 3.5% per month of the determined value of the motor vehicle – paragraph 7(4)(a); 
·         Where the vehicle use is given for part of a month, the value of the fringe benefit must be calculated based on the ratio of the days’ use to total number of days in the month – paragraph 7(4)(b); 
·         The value of the fringe benefit is not reduced for temporary breaks in use – paragraph 7(5); 
·         Where the vehicle is subject to a maintenance plan, the monthly fringe benefit is 3.25% of the determined value; 
·         The determined value is reduced by payments made by the employee for the use, except for payments in respect of the cost of the licence, insurance, maintenance or fuel.  This is because with these, the formula changes; 
·         The employer is permitted to base the employees’ tax on 80% of the value of the fringe benefit; 
·         In order to reduce the fringe benefit, the employee will have to prove business use, but the fringe benefit is only reduced on assessment. It cannot be reduced by the employer – paragraph 7(7); 
·         For the employee to claim a reduction in value of the fringe benefit on assessment, accurate records of distances travelled for business purposes must be kept.  On assessment, SARS will then reduce the private use value of the vehicle.

This is done as follows:
·         Calculate the ratio of business use over total use (in kilometres);
·         Multiply this by the fringe benefit;
·         Deduct this business use from the total fringe benefit to arrive at the value of the private use.

"Determined value", in relation to a motor vehicle, means-

i)              where such motor was acquired by the employer under a bona fide agreement of sale or exchange concluded by parties acting at arm's length, the original cost thereof to the employer (excluding any finance charge or interest payable by the employer in respect of the employer’ acquisition thereof); or 
ii)             where such motor vehicle-is held by the employer under a lease (other than an 'operating lease' as defined in section 23A(1), the retail market value thereof at the time the employer first obtained the right of use of the vehicle or, where at such time such lease was a lease contemplated in paragraph (b) of the definition of "installment credit agreement" in section 1 of the Value-added Tax Act, 1991, the cash value thereof as contemplated in the definition of "cash value" in the said section; or 
iii)            in any other case, the market value of such motor vehicle at the time when the employer first obtained the vehicle or the right of use thereof:

Provided that- 

a)            where an employee has been granted the right of use of such motor vehicle as contemplated in subparagraph (ii) above (other than a motor vehicle acquired under an operating lease as defined in section 23A(1)) and such vehicle, or the right of use thereof, was acquired by the employer not less than 12 months before the date on which the employee was granted such right of use, there shall be deducted from the amount determined under the foregoing provisions of this subparagraph a depreciation allowance calculated according to the reducing balance method at the rate of 15 per cent for each completed period of 12 months from the date on which the employer first obtained such vehicle or the right of use thereof to the date on which the said employee was first granted the right of use thereof. 

An employee will therefore get taxed on the original value placed on the vehicle – it is not reduced annually as the vehicle gets older (the reduction in proviso (a) is only for the period between the date when the employer acquired the vehicle and when its use was first given to the employee). Therefore in year five of use the fringe benefit will be the same as in year one although the vehicle is much older. Similarly, a point will be reached where the cumulative value of the fringe benefit on the right of use exceeds the actual value of the vehicle.Regarding structuring of the benefit, this would be advisory services beyond the scope of this service. You could however consider alternatives involving (1) transfer of the vehicle to the employee (as opposed to continuing the grant the use to him) that would be a fringe benefit in terms of para 5 of the Seventh Schedule on the market value at the time of transfer; or (2) sale and repurchase agreements between the employer and employee to reset the employer's acquisition cost to the current market value (there could however be a tax avoidance arrangement risk to this particular transaction).

7. Physical presence

Question

The following information applies to one of our clients, with regards to the tax year ended 29 February 2012:

·         He worked for a company.  The company is registered in Switzerland and the work being performed, were done in Afghanistan.  He was paid in USD and worked for this company for 153 days out of the tax year.  Of these 153 days, he was outside of South Africa for 104 days for the work that he did for this Swiss company.

·         He then accepted employment from a South African company, where he also did some work in Afghanistan.  He worked for this company for the remaining 213 days of the tax year.  Of these 213 days, he worked outside of South Africa for this company, for 110 days.

·         He therefore worked for 214 days out of the country, during this particular 12 month period.

·         When we worked on the return and saved the return on 16 November 2012, we received an assessment (this happened before we could finalise the return and actually submit).  It still showed under returns issued on efiling, but already showed the assessment.  A short while later, an additional assessment came through.  The SARS call centre could not help (on their side it showed as being submitted) and we therefore submitted the return with a memo attached to explain that the first assessments were based on incomplete return).

·         We submitted his income tax return with full disclosure of his income from the Swiss company (no IRP5 for this, but we attached the contract), as well as the SA company (with the IRP5 applicable here) on 23 November 2012.

·         We submitted (through efiling) the contract with the Swiss company, the IRP5 from the SA company, the secondment letter from the SA company, the passport copies, a calculation detailing the breakdown between the days out of the country (for ease of reference) for both income streams (from the Swiss company, as well as from the SA company), a completed list of answers to the questions as per interpretation note 16 for the exempt foreign income (for ease of reference), medical aid certificate, IT3b and IT3c certificates and RA certificate.

·         We submitted a notice of objection through efiling on 8 December 2012, as we enquired from the SARS call centre as to the status of the submission and were advised to do so.

·         A reduced assessment was issued on 20 March 2013, but no exemption was taken into account for the income from the SA company, while the full income from the Swiss company was ignored.

·         We submitted another notice of objection (for this new assessment) on 6 May 2013 and received a letter indicating that we are not allowed to do a notice of objection on this.

·         We therefore submitted a notice of appeal on 7 May 2013 and asked for the exempt income from the SA company to be taken into consideration and for the foreign income from the Swiss company to be corrected.

·         We received a reduced assessment on 26 July 2013 with the Swiss income not showing, the SA company income now showing the correct exempt portion and the medical aid incorrectly showing only the medical aid as per the IRP5 from the SA company (and not the complete deduction, based on the medical aid certificate that was submitted before). 

My questions:

·         Am I correct in saying that SA residents are taxed on their worldwide income and therefore the taxpayer should be taxed on the income from the Swiss company while he was not working in Afghanistan?  If so, then the fact that SARS ignored the Swiss income on both occasions above, lead to incorrect assessment by SARS.

·         The medical aid deduction (here I am referring to the capped amount, as applicable for 2012) should be based on the medical aid certificate and not only the IRP5 information (as the IRP5 information is not complete).

·         The above, now means that the tax payer were refunded an amount that is greater than what should have been refunded to him (the nett effect of the income not shown and the medical deduction not correctly shown). 

·         How do we now go about sorting this out with SARS?  The next step after a notice of appeal is to take this to court.  Obviously I do not want to do that. 

The tax payer was in the country for more than 91 days in aggregate for the relevant tax year.

He started working for the Swiss company in March 2009.
For the tax year March 2009 to February 2010, he was outside of RSA for 274 days and therefore in the country for 91 days.
For the tax year March 2010 to February 2011, he was outside of RSA for 283 days and therefore in the country for 82 days only.
For the tax year March 2011 to February 2012, he was outside of RSA for 228 days and therefore in the country for 138 days.

To my knowledge, he was in South Africa prior to accepting the appointment with the Swiss company. The Swiss company did not deduct any taxes, nor any other deductions.

Answer

Residence One has to consider whether your client was a resident for tax purposes in South Africa. The term ‘resident’ is defined in s 1 of the Act, and a natural person can be regarded as being a resident for purposes of this definition in the event that:

-a person is ‘ordinarily resident’ in the Republic, or
-deemed to be a resident by virtue of a physical presence test.

Ordinarily Resident

The term ‘ordinarily resident’ is not defined in the Act and has no special or technical meaning but is based on factCase Law Levene v IRC (1928) AC – it was held that the term ‘ordinary residence’ connotes residence in a place with some degree of continuity apart from accidental or temporary absences. A person must be regarded as being ordinarily resident in the place where he/she lives life on an ordinary and regular basis. Reid v IRC (1926 SC) – a person can be ordinarily resident in two places. Cohen v CIR (1946 AD) – the court suggested that a person is ordinary residence is that place to which he returns naturally and as a matter of course after all his wanderings. A persons actions solely cannot be used to determine whether he is ordinarily resident in South Africa or somewhere else during any specific year of assessment. For this purpose one has to consider evidence relating to his mode of life outside that year of assessment. 

Physical Presence Test

Where a person is not ordinarily resident in the Republic, that person may still be deemed to be a "resident” for tax purposes in the Republic by virtue of the physical presence test as per SARS Interpretation Note No. 4, attached.From the information you have provided it appears that your client will be regarded as being ordinarily resident in SA. (He was an ordinarily resident before he started working abroad, and he still returns to SA on a regular basis). Where a person is seen as an ordinarily resident in the Republic, the physical presence test will not apply. Your client will therefore be liable for tax in terms of Section 1 of the Income Tax Act which defines ‘gross income’ as follows: in the case of any resident, the total amount, in cash or otherwise received by or accrued to or in favour of such resident. This would include income earned from any source (including the services rendered in Afghanistan).

Section 10(1)(o)(ii) of the Act exempts from income tax: (Kindly also see SARS Interpretation Note.16) 

"any remuneration as defined in paragraph 1 of the Fourth Schedule
(i) …
(ii) received by or accrued to any person during any year of assessment in respect of services rendered outside the Republic by that person for or on behalf of any employer, if that person was outside the Republic-
(aa) for a period or periods exceeding 183 full days in aggregate during any 12 months period commencing or ending during that year of assessment; and
(bb) for a continuous period exceeding 60 full days during that period of 12 months, and those services were rendered during that period or periods:

Provided that-
(A) for purposes of this subparagraph, a person who is in transit through the Republic between two places outside the Republic and who does not formally enter the Republic through a port of entry as defined in the Immigration Act, 2002 (Act No. 13 of 2002), shall be deemed to be outside the Republic; and
(B) the provisions of this subparagraph shall not apply in respect of any remuneration derived in respect of the holding of any office or from services rendered for or on behalf of any employer, as contemplated in section 9(1)(e)”’ From the information you have provided, it appears that the income will be exempt in terms of section 10(1)(o)(ii) of the Act. You are correct in saying that the medical aid certificate serves as proof to substantiate a deduction for medical aid.

Duty to point out SARS errorsThe Tax Administration Act (TAA) does not impose any duty on a taxpayer to inform SARS of errors made by SARS when assessing the taxpayer. The risk would however exist that SARS could adjust the assessment in terms of section 92 of the TAA but this should be subject to the time periods in section 99 as you did make full disclosure to them. An adjusted assessment may be coupled with interest added from the date that the tax would have been payable had it been correctly assessed. As the TAA does not make provision for a procedure to inform SARS about errors they made that favour the taxpayer, it is submitted that you need not necessarily followed the dispute resolution procedures should you wish to report the error to them.


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