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FAQ - December 10

10 December 2013   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Sale of goodwill and Capital Gains Tax

Question

I have a client who had a petrol service station. He has been trading as a sole proprietor. He paid R 450 000 for the business when he bought it 12 years ago. He has just sold it for R 6200 000. All the assets on the property basically belong to the Petrol station franchise, he just paid rent on a monthly basis. He only had some small office furniture. How do i calculate the capital gains tax. is it purely on the goodwill (purchase price which he paid) less the selling price. He has turned 55 in November. Does he qualify for the exemption?

Answer

Paragraph 57(1) contains two definitions that apply for the purposes of para 57. 

‘"Active business asset” means—
(a) an asset which constitutes immovable property, to the extent that it is used for business purposes;or
(b) an asset (other than immovable property) used or held wholly and exclusively for business purposes,but excludes—

(i) a financial instrument; and
(ii) an asset held in the course of carrying on a business mainly to derive any income in the form of an annuity, rental income, a foreign exchange gain or royalty or any income of a similar nature.

Under para 57(2), only a natural person may disregard a capital gain under the relief provided and only in respect of the disposal of an ‘active business asset’, if that asset or interest in a partnership or a company.

  • had been held for a continuous period of at least five years before the disposal contemplated,
  • that natural person had been substantially involved in the operations of the business of that small business during that period, and
  • that natural person had attained the age of 55 years or the disposal was in consequence of ill-health, other infirmity, superannuation or death.

The disposal of an active business asset of a small business owned by a natural person as a sole proprietor. What is envisaged is an economic unit loosely termed a ‘business’ as opposed to individual assets. In the case of a sole proprietor, a business might mean a ‘taxi business’ or a ‘printing business’ or an ‘accounting business’ or a ‘farming business’ as distinct from all the assets of the sole proprietor, for instance, a primary residence, household furniture, or an investment in a portfolio of a collective investment scheme. 

Provided that the requirements of para 57(2) have been met, does one then have to consider whether the asset disposed of would qualify as an "active business asset”. From what I understand, the assets (other than immovable property) are few, and the real asset being sold is goodwill (or the business).

The term "asset” is defined in Part 1 of the 8th Schedule and includes property of whatever nature, whether moveable or immovable, corporeal or incorporeal but excluding any currency (excludes coins made mainly from gold or platinum), and a right or interest of whatever nature to or in such property.

Conclusion 

It is my understanding that the goodwill (assuming that it is goodwill) being sold would fall within the definition of "active business asset” and your client may therefore well qualify for relief in terms of par 57 as the asset (goodwill) was used or held wholly and exclusively for business purposes.

2. Services rendered by NPO

Question

I have a client that is dealing with a non-profit organization (approved in terms of sec 30 and 18A of the income tax act). The NPO is providing services to the client. My understanding is that my client can receive tax benefits: (The client is paying to the NPO an amount BELOW the market value for services rendered by the NPO.)

Income tax implications

1.       The client can deduct the payment in terms of sec 11a
2.       The client can deduct the payment again in terms of sec 18A, limited to the 5% of taxable income.
3.       Are these sections interpreted correctly or are there any other benefits to the NPO and the client.
4.       What will change if the NPO is not approved in terms of sec 30 and 18A?

VAT implications

What are the VAT implications on the transaction – the NPO is registered for VAT. Does the NPO charge VAT?

Answer

The donation of a service such as time, skill or effort to an approved organisation will not qualify as a deduction for purposes of section 18A as a service is not a donation of "property made in kind”. 

Where an auditor, medical doctor, lawyer, accountant, plumber, electrician, or any other professional person provides a voluntary service or renders their service free of charge, no tax deduction certificate may be issued. 

If an association not for gain receives donated goods or services and on-supplies the goods, that subsequent supply of the donated goods is exempt from VAT and therefore no output tax will be payable thereon. The same exemption applies where the association not for gain makes or manufactures any other goods which it supplies, if at least 80% of the value of the materials used consists of donated goods. An association not for gain may not deduct input tax in respect of costs incurred to make these exempt supplies.

3. SARS refusing to disclose VAT returns of client

Question

Vat audit, need to submit an appeal, due date 11 Dec 2013, no vat returns are available. SARS is refusing to disclose returns under review, and they are not on e-filing. Period under review 2007 to 2010.

Previous tax practitioner did not keep records of all returns submitted. We are reviewing all input and output vat for the period, where else can we get the returns since the previous practitioner or client doesn't have the returns? Why cant SARS provide us with the returns seeing that they were manually submitted? How are we going to verify the correctness of what was submitted to what we have calculated without the returns?

Answer

S 73 of the Tax Administration Act: 

73. Disclosure to taxpayer of own record.—
(1) A taxpayer or the taxpayer’s duly authorised representative is entitled to obtain—

(a) a copy, certified by SARS, of the recorded particulars of an assessment or decision referred to in section 104 (2) relating to the taxpayer;
(b) access to information submitted to SARS by the taxpayer or by a person on the taxpayer’s behalf; and
(c) other information relating to the tax affairs of the taxpayer.

(2) A request for information under subsection (1) (c) must be made under the Promotion of Access to Information Act.
(3) The person requesting information under subsection (1) (b) may be required to pay for the costs of copies in accordance with the fees prescribed in section 92 (1) (b) of the Promotion of Access to Information Act. 

Conclusion

It is my understanding that SARS must provide your client with copies of the relevant returns in terms of subsection (1)(b), or alternatively (1)(c) of s 73.

4. Client passed away, what is procedure to notify SARS

Question

Last week Monday a client’s son passed away from natural causes. We not sure what's the procedure to make SARS aware that he has passed on. 

Answer

Complete the attached IT77 and indicate that the registration/change of details relates to a deceased estate. Attach a certified copy of the death certificate as well as the Masters letter appointing the executor.

5. Request for correction

Question

If a taxpayer made a mistake on his ITR12 you can just click request correction and fix the error by filing a new ITR12. But if the taxpayer was on audit this option is not available any more. If you go to SARS they agree that you have 3 years to request a correction but have the same problem that the ITR12 is locked for editing and resubmission. 

If you then object on a NOO1 the auditor all of a sudden have never heard of section 79a and that you have 3 years to request a undisputed error. SARS just says your objection is late and the taxpayer must pay the tax. Why does the law say I have 3 years to correct an error but SARS makes it impossible to do. I need something I can include in my objection.

Answer

The s 79A of the Income Tax Act has been repealed as from 1 October 2012 and has been replaced by s 93 of the Tax Administration Act. This section reads more or less the same as the old s 79A and allows for an assessment to be revised to correct an undisputed error.

In practise have I however noticed that SARS is often reluctant to revise an assessment on this basis and demands that an objection be lodged which is technically incorrect and only where there is a dispute should one object. I suggest that you once again request the correction but rather in terms of s 93 of the Tax Administration Act.


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