FAQ - October 04
07 October 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Taxability of Foreign Capital Gain in South Africa
Our client is a SA resident. He purchased two properties in
Australia during 2004, and then sold the properties during the 2013 tax year. To
calculate the capital gain I used the base cost times the exchange rate of the
month purchased and the selling price times the exchange rate of the month
Due to the increase of exchange rate from 2004 to 2013 he
makes a profit even though in Australian dollar amount he makes a loss. He bought
the one property for $373522 and sold it for $300 000 = made a loss of $ 73522.
However in rand value the sum he paid initially was R1 840 715 and sold it for R2486
940 = Profit of R646 224. He did not bring the foreign funds back to SA, he
left it in Australia and bought another property. Is he still liable to pay
capital gains tax on the profit or can we argue that he left the funds is
Australia and did not actually make the rand value profit.
The question is therefore: must the client pay capital gains
tax on the profit? I am of the opinion that he should - he however states
that1 he was told he will not have to pay capital gains tax as he did not bring
the funds back to SA.
both the proceeds derived from, and the expenditure incurred in respect of, an
asset are in the same foreign currency will para 43(1) apply.
1 – Disposal of asset in respect of which proceeds are derived and expenditure
is incurred in same foreign currency [para 43(1)]
In 1998 Neil purchased a flat in Sydney for
AU$135 000 in order to derive rental income. The market value of the property
on 1 October 2001 was AU$220 000. In 2008 the property is sold for AU$270 000
when the average AU$/R exchange rate is AU$1 : R6,0663. Neil adopted the market
value of the property as the valuation date value and elected to use the
average exchange rate for the purpose of translating the capital gain to rands.
The capital gain on disposal of the asset is determined as
Determine capital gain in foreign currency
cost (220 000)
gain in foreign
currency 50 000
Translate capital gain in foreign currency to rands
gain in foreign currency as
exchange rate AU$1 :
gain in rands
Para 43(1) has the effect that CGT is only calculated
on the real gain/loss and not on the foreign currency gain/loss.
2. Provisional Tax
I visited SARS recently querying an amount of R4097.19
penalty charge for under payment of provisional tax. I was told the amount of
the penalty calculated was correct and that I could not lodge an objection.
The reason for the under estimate of the provisional tax
was the client switched unit trusts which created a capital gain of R44061.00
and I was not informed of this transaction as the client was unaware of the tax
implications of capital gains when she switched funds.
My client is 77 years old.
The first provisional tax basic amount was R152077.16 and
the tax paid of R1707.76 was based on taxable income of R129864.00
The second provisional tax basic amount was R131922
and the tax paid of R1552.24 was based on taxable income of R129000.00
My understanding [according to paragraph 20A
penalty] is as follows:
If the estimate is less than 90%
of actual taxable income [R175004 x 90% = R157504] and also less than the
In her case the basic amount was R131922 and the taxable
estimate was R129000 [less than basic amount]
SARS will charge a penalty
Calculation as follows
Normal tax payable as per assessment
Less provisional tax paid
Difference R 9331
Penalty 20% of
Would you kindly check my calculations and inform me as
to whether the calculation is correct or is SARS correct. If SARS is correct can you explain where I went wrong in
Paragraph 20 of the Fourth Schedule provides for a penalty if
the provisional tax estimate is understated. Where the Commissioner is
satisfied that any estimate was seriously calculated, with due regard to the
factors having a bearing on it, and was not deliberately or negligently
understated, the Commissioner may, in his or her discretion, remit the penalty.
Where the actual taxable
income for the year is R1million or less, the penalty on under estimation is
calculated as follows:
tax on 90% of taxable
tax on basic
the lesser of the above two
The amount of employees tax and provisional tax
on which the penalty is
The penalty is 20% of this
We are unsure as to how
the penalty amount as per the attached SARS assessment was calculated and it
does appear to include an additional penalty amount. We would suggest you
submit a Notice of Objection in this regard.
3. Permanent Write-off of Tax Debt
My client had a total tax debt of R1.5million
(vat/paye/tax). They approached SARS for a permanent write-off and it was
granted by SARS. In the clients book we passed the jounal to write off the
balance of the debt. Will the debt that has been written off be regarded as
Section 19, as well as paragraph 12A of the Eighth Schedule
to the Income Tax Act provides for the income tax (including capital gains tax)
consequences in respect of the reduction or cancellation of debt, but the
provisions thereof specifically exclude a 'tax debt' as defined in section 1 of
the Tax Administration Act and to which Chapter 14 of the said act refers to.
Since there are no special inclusions in gross income or in
taxable income (for capital gains tax purposes) with regard to the reduction or
cancellation of a 'tax debt', the waiver of the tax debt will not be subject to
Section 19, as well as paragraph 12A of the Eighth Schedule to the Income Tax Act provides for the income tax (including capital gains tax) consequences in respect of the reduction or cancellation of debt, but the provisions thereof specifically exclude a 'tax debt' as defined in section 1 of the Tax Administration Act and to which Chapter 14 of the said act refers to.
Since there are no special inclusions in gross income or in taxable income (for capital gains tax purposes) with regard to the reduction or cancellation of a 'tax debt', the waiver of the tax debt will not be subject to any taxation.
4. Complex Deseased Estate Situation
Facts of the Case:
The administrator of the deceased
estate was only recently appointed.
X Blog and Mrs Y Blog were married in community of property.
Mr X Blog owned and resided in a
residential dwelling (wife resided with him).The
property was purchased on the 21/09/1989 for an amount of R 172,500.00 (details
regarding any alterations of repairs to property pre- or post-valuation date
Mr X Blog passed away on the
05/02/2004. The asset was not transferred to the wife and the deceased died
property was valued on the date of Mr X Blog's death at R 680,000.00
Mrs Y Blog subsequently passed
away on the 18/10/2005.The property was again valued on
her date of death at R 710,000.00
The only heir to Mrs Blog is a
The property was sold by the
administrator on the 23/05/2013 for R 1,000,000.00
The question that arise in
respect of the above:
(i) There are 4 separate taxpayers that arise as a result of the
deaths of the natural persons, how would one treat the "disposal" or
"deemed disposal of the primary residence in each of the 4 taxpayers
income tax returns?
(ii) The par 40(1) of the 8th Schedule
to the Income Tax Act states that a deceased person must be treated as having
disposed of his/her asset to his/her deceased estate for proceeds equal to the
market value of those assets at the date of that person's death, and the deceased
estate must be treated as having acquired those assets at a cost equal to that
I have thus performed a CGT
calculation in respect of the property in Mr X Blog's as taxpayer and then
transferred the market value (R 680,000) to be treated as expenditure actually
incurred (base cost) in the hands of Mr X Blog's deceased estate (deceased
However par 14 (disposal by spouse married in community of property)
would impact the calculation as only half of the property accrues to him?
(iii) The roll over relief provision (par 67) is not available as the property
was not transferred to the wife?
(iv) Would one have to calculate a capital gain/loss in the hands of Mr X
Blog's deceased estate?
(v) As the property falls within the joint estate of the spouses, one would
have to calculate a capital gain/loss in the hands of Mrs Y Blog.
(vi) The asset was only sold in 2013
at a value of R 1 million, how would this impact any of the calculations above?
(vii) A distribution of the value of
the property would be made to the heir (daughter).
‘roll-over’ relief in terms of par 67 would apply if that surviving spouse
acquired ownership of the asset:
- from a spouse dying in testate, or
last will and testament of the deceased spouse, or
- as a result of a re-distribution agreement between the
heirs and legatees of that deceased's spouse.
means that roll-over relief applied when the property was transferred to the
surviving spouse. In turn, if any asset of a deceased person is transferred
directly to the estate of a deceased person, the deceased estate is treated as
having acquired the asset at the date of death of the deceased person (par
40(1A)(a)). This amount is treated as the expenditure for par 20(1)(base cost).
40(2) deals with the CGT treatment of assets disposed of by the executor to an
heir or legatee (other than surviving spouse). It will be deemed that the
estate has disposed of the assets for proceeds equal to its base cost (market
value on date of death). This means that when the estate disposes of the asset
to the heir or legatee, there will be no capital gain or loss in the estate.
5. Repair expenditure deduction from rental income
My client let her house in Broadlands(purchased in
October 2011) for the period 15 March 2012 to 15 December 2012 as she had been
unable to find a suitable buyer for her existing home. Once a buyer was found,
notice was given to the tenant. Before taking occupation of her property in
Broadlands the carpets were replaced, the inside of the house painted and the
garden restored. This repair expenditure to the Broadlands property was done in
December 2012, January & February 2013.
In your opinion, may this repair expenditure be
claimed as a deduction from the rental income earned for the period 15 March
2012 to 15 December 2012?
S 11 of
the Income Tax Act permits a deduction only if the taxpayer is engaged in the
carrying on of a trade. In its opening words s 11 provides as follows:
purposes of determining a taxable income derived by any person from carrying on
a trade, there shall be allowed as deductions from the income of such person so
clear from the above that a requirement for an expense to qualify as a
deduction in terms of s 11, is that the taxpayer had to carry on a trade.
From the information provided is it
evident that your client did not carry on a trade (and had no intention of
carrying on a trade).
6. Government grant to disabled child - Deductibility of medical expenses paid by parent
A client of ours has a
disabled son, for which he pays additional expenses for, for example school
fees to a special needs school. The taxpayers son receives a Government grant
as a result of his disability and my question is whether he is still able to receive
a medical deduction from the additional expenses even though his son receives a
expense to qualify as a deduction for purposes of s18 of the Income Tax Act, it
must have been actually paid. You do not provide specific with regards to the
grant, and it is unclear as this amount is specifically paid in lieu of medical
expenses or whether this is grant for purposes of sustaining the child’s
general cost of living expenses.
If the father actually paid the
expenses, and was not reimbursed specifically for those expenses, then those
amounts were actually paid by the father and should qualify for a deduction in
terms of s 18 of the Act (provided all other requirements have been met).
7. Primary residence
Taxpayer currently lives in his wife’s house
(she owns the full property). Taxpayer owns a flat (which he rents out per
month). Taxpayer wants to sell the flat he owns, and continue living in his
wife’s house. Will the flat be viewed as a primary residence (even though he
does not live in it) or a 2nd property? My opinion is that this will fall under
primary residence CGT, as this is the only property he owns.
In terms of the definition of "primary residence” par 44 of the
8th Schedule to the
Income Tax Act, a requirement is that a person must, or must have ordinarily
resided in that residence.
Your client did not ordinary reside in that property and
therefore the property will not fall within the definition of "primary residence”.