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FAQ - October 04

07 October 2013   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Taxability of Foreign Capital Gain in South Africa

Question

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 sold. 

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.

Answer

When 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.

Example 1 – Disposal of asset in respect of which proceeds are derived and expenditure is incurred in same foreign currency [para 43(1)]

Facts:

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.

Result:

The capital gain on disposal of the asset is determined as follows:

Step 1: Determine capital gain in foreign currency

AU$

Proceeds                                                                                                         270 000
Less: Base cost                                                                                              (220 000)
Capital gain in foreign currency                                                                       50 000 

Step 2: Translate capital gain in foreign currency to rands

Capital gain in foreign currency as above                                                      AU$50 000
Average exchange rate AU$1 :                                                                      R6,0663
Capital gain in rands                                                                                       R303 315 

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

Question

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 basic amount. 

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                  R12591
Less provisional tax paid                                                  (R3260)
Difference R 9331

Penalty 20% of R9331                                                     R1866.20

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 my calculations.

Answer:

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:

Normal tax on 90% of taxable income                                                           RXXX
Normal tax on basic amount                                                                          RXXX

Use the lesser of the above two amounts                                                 RXXX

Deduct: The amount of employees tax and provisional tax paid               RXXX

Amount on which the penalty is based                                                           RXXX

The penalty is 20% of this amount                                                             RXXX

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

Question

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 income.

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.

Answer:

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

Question

Facts of the Case:

The administrator of the deceased estate was only recently appointed. 

Mr 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 (1/10/2001)no supplied).

Mr X Blog passed away on the 05/02/2004. The asset was not transferred to the wife and the deceased died intestate.The 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 daughter. 

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 market value.

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 estate taxpayer).

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).

Answer

The ‘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
- the 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.

This 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).

Par 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

Question

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?

Answer

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:

For the 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 derived…

It is 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.

Conclusion

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

Question

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 Government grant.

Answer

For an 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

Question

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. 

Answer

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”.

Comments...

Karin Swart (Viljoen) says...
Posted 11 October 2013
Please explain to me when to use code 4211 or 2533 for rental loss claim.

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