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FAQ - 20 March 2014

17 March 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Capital gains tax and small business tax exemption

Q: A taxpayer has passed away and we are trying to value his assets and capital gains tax related to it. However, we are not sure if we can claim the R1.8 million exemption for small businesses. 

Can the R1.8 million small business exemption for capital gains tax be claimed for a company which owns shares and receives dividends which is its main business, SARS says we cannot claim the exemption. 

Are shares a financial instrument for SARS as for Accounting IAS, as shares are a financial instrument but SARS seem to say a financial instrument is an interest bearing instrument and not shares? 

A: A ‘financial instrument’ is defined in s 1 of the Income Tax Act and includes inter alia loans, options, forward exchange contracts, shares, participatory interests in collective investment schemes, index linked investments and bank deposits.

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.’

Conclusion

The exemption will not be available to your client as shares are regarded as financial instruments and are therefore not "active business assets”.

 

2. Capital gains tax

Q: A taxpayer owned an acre of land with a house on it and subdivided it into 2 quarter acres, plus half an acre with the house on it.

If a taxpayer subdivided the property that is his primary residence and sold off a portion of the land, is he liable for capital gains tax on the sale?

A: Under para 46(c) of the 8th Schedule of the Income Tax Act the exclusion is not available when land is disposed of separately from the ‘residence’. It is provided that the land must be ‘disposed of at the same time and to the same person as that residence’.

You may also want to consider whether the proceed on the sale of the land may constitutes revenue instead of capital.

 

3. Tax administration Act

Q: SARS initially disallowed taxpayer's travel expenses as no log book was sent in, but only actual expenses.

The taxpayer then provided a log book after which he received notification from SARS that the logbook information has been accepted and travel expenses have been recalculated accordingly.

Upon revised assessment, SARS has taken the revised travel expenses plus the original travel expenses into account. Therefore doubling up the expense which resulted in a refund. 

Is there any clause in the Tax Administration Act indicating some kind of penalty or other, if SARS erroneously refunds a client upon assessment and the client doesn't let them know?

A: 92. Additional assessments.—If at any time SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus, SARS must make an additional assessment to correct the prejudice.

An "understatement” is defined in s  221 of the TAA:

‘understatement’ means any prejudice to SARS or the fiscus in respect of a tax period as a result of—

(a) a default in rendering a return;

(b) an omission from a return;

(c) an incorrect statement in a return; or

(d) if no return is required, the failure to pay the correct amount of ‘tax’.

In this instance am I of the view that no "understatement” took place as the error relates to an error by SARS in issuing an incorrect assessment. SARS may issue a revised assessment to correct their error.

 

4. Transfer duty exemption

Q: Does a company incorporated under section 21 qualify for the transfer duty exemption?

A: A public benefit organisation (PBO) which has been approved by the Commissioner under section 30(3) of the Income Tax Act will qualify for exemption from transfer duty on property which is acquired for purposes of carrying on one or more approved public benefit activity (PBA). The exemption from transfer duty will also be considered in respect of a statutory body which has been established by or under any law and which is exempt from income tax in terms of section 10(1)(cA)(i) of the Income Tax Act and which has as its sole or principal object, the carrying on of an approved public benefit activity. (This would include public schools, universities, universities of technology (previously called technikons), museums, libraries etc.) The exemption in section 9(1A) applies where the entity that qualifies for the exemption in terms of section 9(1)(c) transfers a property to another entity that it controls.

The Act also contains an exemption for the acquisition of property by any institution or body for purposes of a public hospital in terms of section 9(1)(d). The conditions of the exemption are the same as those which apply to PBOs as explained above.



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