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FAQ - 15 January 2014

15 January 2014   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Tax implications of donating cash to major children

Q: I have a client that has 3 children (none who are minors) for whom he wants to give R 1 500 000 each and he wanted to know what tax implications this transaction will have.

To my knowledge there will be donation’s tax if the funds are given to them without any repayment. I have identified the following two options:

  • ·The donations tax is either at 20% of the R 1 500 000 when the loan is given; or 
  • ·Donations tax on the interest free component each year (after any repayments or donations (exempt donations are currently R 100 000 in total per year) per taxpayer, in other words the client).

Are these the only two options or are there any other options I might have missed? Any exemptions I might have missed?

A: The answer to your question is fact dependent. The following guidance should be useful in this regard:

In the event that the father pays the monies to the children without it being in the form of a loan (thus a pure donation), then the transaction may result in donations tax at a rate of 20% in the hands of the father in terms of s 54 of the Income Tax Act. 

Where the payment to the children is made in the form of a bona fide loan, the facts and circumstances of the case must be considered to determine whether interest should be charged. It was held in the case of C: SARS v Woulidge 63 SATC 483 2002 (1) SA 68 (SCA) that an interest-free loan (more specifically the interest that should have been charged) may constitute an other disposition as contemplated in section 7. If any of the provisions of section 7 may apply (for example, the interest free loan is made available conditionally to the children (s 7(5)), the lack of interest may constitute an other disposition in which case the parent (donor) may be taxed on income generated by the child as a result of the loan being interest free. If none of the scenarios contemplated in section 7 are applicable, the fact that the loan is interest-free may have tax implications. It should be noted that a loan that is interest-free from the date that it is advanced should not have donations tax implications as no property is disposed of. If the father however waives his established right to interest, this waiver should attract donations tax. 

It should furthermore be noted that a loan which is advanced with the intention of being written off (i.e. utilising the R100 000 annual exemption) may not be a bona fide loan; in such a case the risk may exist that SARS could view this loan as a simulated donation (in the case of C:SARS v NWK Ltd 73 SATC 55 [2011] 2 All SA 347 (SCA) it was held that: "In my view the test to determine simulation cannot simply be whether there is an intention to give effect to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve an objective other than the one ostensibly achieved they will intend to give effect to the transaction on the terms agreed. The test should thus go further, and require an examination of the commercial sense of the transaction: of its real substance and purpose. If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation").

It should also be noted that should the children be required to do something (give quid pro quo) in exchange for the interest-free nature of the loan, this benefit may be treated as an amount in their hands and could be included in their gross income (see Brummeria Renaissance (Pty) Ltd and Others, C: SARS v 69 SATC 205 2007 (SCA)). This would depend on the facts of the particular arrangement between the father and the children. 

Lastly, it will be different in the instance where the father instructed that the loan be made from a company where he is a shareholder, and the loan is made to a connected person in relation to that shareholder. Such a loan may constitute a deemed dividend in accordance with section 64E(4) and be subject to dividends tax if the loan does not bear interest at the official rate in terms of the Seventh Schedule. Furthermore, and assuming that the father is a shareholder of a company, and a donation is made by that company to his sons on the instance of the father (shareholder), may the father become liable for donations tax in terms of s 57 of the Income Tax Act.

2. Requirements for a valid tax invoice – section 20 of the VAT Act

Q: A person is not registered for Vat. He issues an invoice for services, but the word "TAX" on the invoice is crossed out, leaving only "INVOICE" on the paper. Tax Invoice books are easy available, but Invoice books not so much.

Is this illegal? One of his customers is refusing to pay him now, because of the crossed out word.

Please note, the invoice clearly states no VAT is charged.

A: A "tax invoice” is defined in s 1 of the Value Added Tax Act as a document as required in terms of s 20 of the Value Added Tax Act. The document described below would not fall within this definition as it has not met the requirements of the Act. Therefore, even though the document includes the words "tax invoice”, this should have no bearing for purposes of the Value Added Tax Act as the person is not a VAT vendor.

Conclusion

The invoice is not a "tax invoice” as defined and should not serve any purpose for the Value Added Tax Act. The fact that the words tax invoice shows on the invoice is neither here nor there as the invoice is merely an invoice in the normal sense.

3. Submission of FTW01 form for section 6quin rebate

Q: If we submit our FTW01 form late, will we still be able to claim our foreign tax credit?

A: In terms of s 6quin, sub-section 3(A) of the Income Tax Act, no deduction in terms of that section of the Act may be allowed where a declaration (form FTW01) was not submitted within 60 days from the date when the tax was levied and withheld.


Comments...

Daniel P. Foster says...
Posted 20 January 2014
Witn regards to Q1 (loan to children), I would further suggest that the client must also consider the CGT and Estate Duty implications of creating this asset (debt) and how this will be dealt with in future if it is not repaid. Such a loan can potentially store up future tax problems which need to be planned for.

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