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FAQ - November 14

14 November 2013   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Question 1 - Second residence liable for income or capital gains tax

If one has had a second residence that was rented out for a couple of years and the net income was declared, relevant tax paid and subsequent rental income ceased as there was a lot of maintenance to be done in the flat. Whilst these repairs were being done the expenditure was claimed and the net loss was set off against other income. The flat has now been sold and a profit of R 100 000 has been made.

Is this capital gains or is it to be reflected as income on rental income? If one had second residence that was rented out for a couple of years and the net income was declared and relevant tax paid then maintenance was done for two years and no income was received, but the expenses were claimed for and the loss offset against other income.

The property has now been sold and a profit of R100000 has been made - Does this fall under normal income tax or capital gains tax.

Answer

For an amount to be taxable it must constitute ‘Gross income’.  ‘Gross income’ is defined in section 1 of the Income Tax Act.  The preamble to the definition is as follows:

"Gross income” in relation to any year or period of assessment, means – 

  • in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or
  • in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the Republic,during such year or period of assessment, excluding receipts or accruals of a capital nature.

The requirements of the general definition of ‘gross income’ can therefore be summarised as follows:

  • in any year or period of assessment
  • the total amount, in cash or otherwise
  • received by or accrued to or in favour of
  • excluding receipts or accruals of a capital nature.

The term capital is not defined in the Income Tax Act and over the years the courts have laid down various tests to be applied in deciding whether a receipt is of a capital or revenue nature.

In terms of section 102 of the Act, the burden of proof whether an amount is of a capital or revenue nature rests with the taxpayer.The following are indicators and various court cases exist in this regard.

Intention

The intention ("ipse dixit”) of the taxpayer. The dominant intention with which a taxpayer acquires an asset determines whether it is capital or revenue in nature. (CIR v Stott). To acquire and hold an asset as an income producing asset, i.e. to earn flow of future income would be regarded as a capital asset and in the absence of a change of intention the disposal of such asset will give rise to a receipt of a capital nature. To acquire an asset for the purpose of making a gain, by selling in a scheme of profit making would therefore constitute trading stock with the intention of resale at a profit and revenue in nature. (Lace Property Mines, Ltd v CIR). However, intention is a very subjective term and one also has to consider other objective factors.

Nature of the taxpayer’s business

Where a person sells an asset of the type which he buys and sells in the ordinary course of his business, he will have greater difficulty in discharging the onus of showing that the amount is capital.

Length of time the asset was held

Clearly an asset which has been held for a long period of time is more likely to be regarded as capital in nature.

Frequency of similar transactions

If the asset in question is one which the taxpayer regularly buys and sells in the ordinary course of his business (scheme of profit making), the presumption is that it is revenue in nature. (Stephan v CIR)

Nature of asset

Certain assets are likely to have the appearance of trading assets while others are more likely to have the appearance of fixed assets. The nature of the asset may therefore have an effect on a court’s decision (Marson v Mortin). Fixed property are more likely to have the appearance of fixed assets.

Conclusion:

From the information you have provided it appears that the sale of the property may be argued as capital in nature. (The property was used as a capital asset (tree) to earn revenue in the form of rental income (fruit)). However, one will also have to consider the intention and other objective factors as mentioned above and each case will have to be judged on its own merits.

Question 2 - VAT on Barge sold to foreign company

If a company purchased a barge (vessel) from an auction in South Africa and claimed the vat on this asset then sells it to an overseas based company who they know in turn is going to register this vessel to their South African based branch.

Does my client charge the international company Vat or not?

Answer

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.

Section 11(1)(a) of the VAT Act sets out which exported goods are zero rated.

"Export” in relation to any movable goods supplied by any vendor under a sale or an instalment credit agreement, means –

(a)  Consigned and delivered by the vendor to the recipient at an address in an export country;Or (b)  Removed from the Republic by the recipient for conveyance to an export country in accordance with any regulation made in terms of the VAT Act…

Exported basically means consigned or delivered (by the vendor) to an address in an export country. If the vendor gives the goods to a foreign purchaser in South Africa and the purchaser takes the goods out of the country, this is not an export by the vendor, but may fall into the provisions relating to an "export incentive scheme”, in which case the purchaser may claim a refund of the VAT paid by him.

Section 11(2) of the VAT Act allows for the zero-rating of certain export related services. Services physically rendered outside the Republic are zero-rated in terms of section 11(2)(k). Services supplied to a person who is not a resident in the Republic are zero-rated provided that certain conditions are met; section 11(2)(l). Kindly refer to section 11(2) of the VAT Act for more detail in this regard.

Where the sale constitutes an export, the vendor has to keep certain documentation for the zero rating of exported goods. Kindly find attached SARS IN 31 in this regard.

Conclusion:

From the information you have provided it does not appear that the goods will qualify as an export (the vessel will remain in South Africa). The VAT zero-rating applicable to exported goods will therefore not apply and VAT will have to be levied at the standard rate.

Question 3

I have a client I think may be suitable for the Turnover tax system. According to the Sars website, this replaces vat, tax and dividend tax. Can a member of a CC therefore only declare dividends to himself and not a salary?

Answer

A shareholder in a registered micro business (company or cc) is exempt from the Dividends Tax to the extent that the aggregate amount of dividends paid by that registered micro business to its shareholders during the year of assessment in which that dividend is paid, does not exceed R 200,000 – section 64F(h).

Question 4

A client donates 10% of his gross monthly earnings to a church. Will this donation be deductible for income tax?

Answer

Section 18A of the Income Tax Act allows a deduction (subject to 10% limit of taxable income) of the sum of bona fide donations of cash or property in kind made by a taxpayer, during the year of assessment, to:

- Certain public benefit organisations approved by the Commissioner under section 30. These are approved PBO’s which carry on activities listed under part II of the Ninth Schedule;

A claim for a deduction in respect of any donation shall not be allowed unless supported by a receipt issued by the donee. Kindly refer to s18A(2) of the Act for the requirements pertaining the receipt.

Donations to PBO’s are exempt from donations tax in the hands of the donor in terms of section 56(1)(h) of the Income Tax Act.


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