FAQ - 06 March 2014

Author: SAIT Technical

1. Section 42 transaction, section 24BA & full time employment

Q: In order to not contravene s24BA, how do you value the full time employment of one contributor to the s42 transaction?

Is it market value of salary, over expected years of employment, less any expected remuneration at current value, but not sure as section 42 deals with asset and excludes personal goodwill, so not sure at all. 

A: It is recommended that you obtain advice on the detail of the transaction. In principle, the following guidance would be useful to consider:

 It is our understanding that the mother will contribute the asset to the company in exchange for shares (x%) (s 42). The son will then 'earn' his shareholding (y%). If this understanding is not correct, the views below may not be relevant. 

Section 42 and section 24BA will only apply to the transaction in which the mother contributes the asset to the company in exchange for the company issuing shares to her. Section 24BA may however apply as it states that it would apply where: "(b) the consideration contemplated in paragraph (a) is (before taking into account any other transaction, operation, scheme, agreement or understanding that directly or indirectly affects that consideration) different from the consideration that would have applied had that asset been acquired in exchange for the issue of those shares in terms of a transaction between independent persons dealing at arm’s length." If I understand the risk you require assistance on correctly, it would be that section 24BA could be triggered if the mother receives too many/too few shares in relation to the value of the total company taking into account the son's contribution?. Section 24BA provides no guidance on how it should be proved that the terms of the transaction are similar to those in a transaction between independent persons dealing at arm’s length. It is however submitted that in light of section 102(e) of the Tax Administration Act, the mother should be in a position where she can argue that the transaction took place at arm's length terms if the value placed on the son's contribution is based on a market related remuneration. 

Please bear in mind that from the son's perspective, section 8C of the Income Tax Act is likely to apply if he does work/employment to earn shares in the company. The value of such shares would be taxed as income (please refer to section 8C for the detailed requirements). The son does not enter into a section 42 transaction with the company.

2. Validity of tax invoice where invoicing is in foreign currency 

Q: I have a client, that sells services to countries in North Africa. He invoices them in dollars. He does not put the spot rate and rand equivalent on the invoice. I am now doing his VAT returns. Further, the client is exempt from paying VAT on foreign invoices. Will SARS have a problem with the invoice if the rand equivalent is not shown on the invoice?

Can I use supporting documentation from the bank to show that the rand equivalent of the dollar amount was paid? 

A: In terms of s 20(4) of the Value Added Tax Act, a tax invoice must be in the currency of the Republic unless the supply is charged with tax under s 11 (zero-rated supply).

3. Section 10(1)(0) exemption 

Q: I have a client who has worked on the offshore rigs and qualifies under section (ii) any 12 month period

- 01/04/2011 to 31/03/2012          

- 188 days out of the country         

- 82 and 89 consecutive days

SARS assessed him with the full amount being taxable.

I have objected, and now SARS have requested the following:

- Job description

-  A letter from the company/employer indicating the dates he left SA and returned to SA

He is still employed overseas, but not for the same company, if we have provided copies of bank statements and passports reflecting the entry and exit stamps, do we have to provide the documents requested? 

Can they force his income to fall in the scope of Section (i) during year of assessment?

A: In this instance, it appears as if the provisions of either s 10(1)(o)(i) (as he is involved in prospecting/exploration or mining, provided that a rig constitutes a ship (please refer to the discussion in Interpretation Note 34 as to what forms of marine mining falls within the ambit of s 10(1)(o)(i) as this may depend on the terms of the person's engagement) or s10(1)(o)(ii) if the services were rendered to an employer while physically "outside” the Republic may apply. 

(It must be noted that the borders of the Republic include territorial waters, which is a belt of sea within 12 nautical miles (roughly 22,2km) beyond the coastline of the country. Remuneration from services rendered beyond the coastline of the Republic will therefore only be exempt if the services are rendered outside the territorial waters.) 

The additional documentation requested by SARS that you refer to appears to relate to proving that the person was outside of SA for purposes of providing services to an employer (see Interpretation Note 16 para 4.5).

It is submitted that certain income earned abroad may fall within the scope of both s 10(1)(o)(i) and (ii) - in this case, a taxpayer would generally be indifferent as to which of the two apply as both would exempt such income.