FAQ – 3 June 2014
03 June 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
improvements where no contractual obligation was created by the lease agreement
client has a restaurant franchise, which in according to the franchise agreement,
has to look like the franchise brand and he accordingly has to incur
considerable capital expenditure.The property from which the franchise is operated is leased from a
landlord where, according to the rental agreement, the rented property is received
as a white box and at the conclusion of the rental agreement, if not renewed,
has to be returned as a white box to the landlord.In
accordance with the contract, the lessee has no obligation to construct any
capital structures etc. that will be included in the taxable income of the
lessor. The lessor only receives the monthly rent.The
assets, as purchased by the client, is capitalized in accordance with
either being kitchen equipment, furniture and fittings etc. but there are also
capital expenditure for construction, plumbing and electrical cost which are
capitalized to capitalized leasehold improvements in the books of the company.
A: In order to qualify for an allowance in terms of sec 11(g) of
the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’), the
obligation to effect the improvements must have originated from the lease
agreement. It is therefore held that an agreement by a third party to effect
the capital expenditure would not entitle the lessee to a sec 11(g) allowance.
Furthermore, sec 11(g)(vi) requires that the value of the improvements had to
be included in the lessor’s income (which is not the case as par (h) to the
gross income definition would also only apply where the leasehold agreement
required the lessee to effect the improvements) in order for sec 11(g) to
No other section can be used in your instance as the
restaurant is not a ‘hotel keeper’ as defined in sec 1 of the Act (for sec
13bis(e)), it is not carrying on a ‘process of manufacture’ (for sec 13(1)),
sec 12N would also not be applicable as well as sec 13quin (due to the taxpayer
not owning the improvement). It is therefore submitted that the capital
expenditure would not qualify for any allowance or a deduction in terms of sec
11(a) (due to it being capital in nature).
As to the CGT consequences, there would be no part-disposal
of the bare dominium in the improvements to the lessor in terms of sec 33(3)(c)
of the Eighth Schedule to the Act. Upon expiry of the lease where the
improvements are removed or destructed, a disposal would come into existence in
terms of par 11(1) as it would constitute an ‘extinction’ of an asset. In that
instance the proceeds would be equal to Rnil, whilst the base cost would be
calculated in terms of par 20, which would lead to a capital loss(es).
2. Par 57 of the Eighth Schedule to the Income Tax Act
Q: My client sold
his legal practice and received the para57(2) exemption as he had reached the
age of 55. He now wants to start a new legal consultancy. Will the
para 57(2) exemption be revoked if he does so?
Under para 57(4) all capital gains qualifying under para
57(2) must be realised within two years of the first qualifying disposal.
More than 2 years have lapsed since he sold his legal practice.
A: Par 57(4) of
the Eighth Schedule to the Income Tax Act (No. 58 of 1962) (hereinafter
referred to as ‘the Act’) would come into operation where a person disposes of
an ‘active business asset’ over a period of time, for example, a disposal of an
interest in a company taking place over a period of time, in which case the
entire gain must be realised over a period not exceeding 24 months in order for
the gain to qualify for the exclusion provided by par 57(2). From the facts
provided it would seem as if your client traded as a sole proprietor who sold
his business lock stock and barrel and he is therefore not at risk in terms of
Provided that his new legal practice constitutes a ‘small
business’ as defined in par 57(1) of the Eighth Schedule, he would be entitled
to another par 57(2) exclusion on the small business’ ‘active business assets’,
subject to par 57(6) and particularly par 57(3), which would limit the
exclusion of the gains in terms of par 57(2) during a person’s lifetime to R
1.8 million. Remember that par 57(2) would require that an ‘active business
asset’ be held for at least five years for the exclusion to apply thereto (for
the second disposal).
3. Issuing of sec 18A
receipts for a PBO applying a donation for purposes other than its objects
Q: I’m dealing with a Non Profit Company, with
Section 18A status from SARs. If a donor donates a property to this NPO, and
receive a section 18A receipt for this, can this NPO thereafter donate this
property to another NPO with NO Section 18A status and no similar public
benefit activities as itself (i.e. to a religious institution)?
accepted that the parties will be able to rebut the presumption of purpose –
section 80G of the Income tax Act (No. 58 of 1962) (hereinafter referred to as
‘the Act’). As per our telephonic conversation, it was held that the PBO is a
sec 18A(1)(a) approved PBO who physically carries out the public benefit
activities (a doing PBO) as opposed to a sec 18A(1)(b) PBO who funds the public
benefit activities of other PBOs (a conduit PBO). It was further held that the
PBO is feeding the needy and is therefore involved in ‘Welfare and
Humanitarian’ activities which are listed in par 1 of Part II of the Ninth
Schedule to the Act. The PBO is in arrangement with a person who is planning to
donate a property to the PBO which the PBO wants to donate to a non-profit
company (NPO) who is not approved as a PBO, but who carries on ‘Religion,
belief or philosophy’ activities, listed in Part I of the Ninth Schedule. It is
however advised that you do obtain a legal opinion from an expert in this
field. The purpose of this platform is to provide guidance and we do not have
all of the facts (i.e. the PBO’s memorandum of incorporation (MOI), audit
certificates etc.) in our possession).
May the PBO donate assets to another NPO not registered
in terms of sec 30 and carrying on a different public benefit activity?
The PBO’s MOI must comply with the requirements of sec 30(3)
of the Act, unless the PBO signed a written undertaking in terms of sec 30(4)
that it would comply with sec 30(3)(b), should its MOI not have complied
therewith. In either instance, the PBO’s actions must be guided by its MOI,
which must comply with sec 30, which implies that the PBO may not act outside
its powers, otherwise than allowed in sec 30 of the Act. Sec 30(3)(b)(ii)
requires that a PBO must ‘...utilise its funds solely for the object for
which it has been established’. This again refers one back to the PBO’s
MOI. Should the PBO’s only approved public benefit activity be welfare
and humanitarian, which must be stated in its MOI, then it is submitted that it
cannot make a donation to a religious NPO if religion is not included as one of
its public benefit activities. Should ‘Religion, belief or philosophy’ in terms
of par 5 of Part I of the Ninth Schedule have been approved as one of the PBO’s
public benefit activities, as well as par 10 of Part 1 of the Ninth Schedule
‘Providing of Funds, Assets or Other Resources’ (in terms of par 10(a)(iii)),
then it would seem as if such a donation to the NPO may be permissible.
Should the deduction to the religious NPO be permissible,
may the registered PBO issue a sec 18A certificate to the donor of the
Sec 18A(2A) of the Act holds that a PBO mentioned in sec
18A(1)(a) (a doing PBO) may only issue a sec 18A receipt in respect of a
donation to the extent that donation would be used solely to carry on
the public benefit activities listed in Part II of the Ninth
Schedule to the Act. Religious activities are not listed in Part II and
the PBO would therefore not be entitled to issue a sec 18A certificate to the
donor of the property should it subsequently decide to donate the property to a
such an institution.
Furthermore, sec 18A(2)(a)(vi) determines that a sec 18A deduction
would only be allowed if supported by ‘...a certification to the effect that
the receipt is issued for the purposes of section 18A of the Income Tax Act,
1962, and that the donation has been or will be used exclusively for the
object of the public benefit organisation, institution, board, body or
agency concerned or, in the case of a department in carrying on the relevant
public benefit activity’.
Therefore, should the donation not be utilised for the object of
the PBO, then it would not be entitled to issue the sec 18A certificate in
terms of sec 18A(2A).
Possible ramifications if a PBO issues sec 18A
certificates in contravention of sec 18A(2A) or fails to comply with its MOI
Sec 18A(5)(c) sets out the ramifications if the PBO issued a
sec 18A certificate in contravention of sec 18A(2A). According to sec
18A(5)(c)(ii), the Commissioner may in writing direct that any donation
received by the PBO in respect of which a sec 18A receipt was issued during any
year of assessment would be deemed to be taxable income . Furthermore, sec
18A(5)(c)(ii) holds that if corrective steps are not taken by the PBO by the
time stated in the Commissioner’s notice, that all sec 18A receipts issued by
the PBO after the date in the Commissioner’s notice shall not qualify as valid
sec 18A receipts for purposes of sec 18A(2).
Furthermore, should the PBO apply the donation for purposes
falling outside the scope of its MOI, thereby failing to comply with the
provisions of sec 30, then the Commissioner may, in terms of sec 30(5) withdraw
the PBO’s approval in terms of sec 30 from the beginning of the year of
assessment, if corrective steps are not taken by the within the period stated
by the Commissioner in the notice.
4. Input tax on
employee membership and seminar fees paid to professional bodies by employers
Q: Mayinput tax be claimed by a company
paying for the professional SAIT membership of an employee as well as
paying for the employee to attend SAIT seminars?
A: It should be
noted that the tax consequences stipulated below would differ where you have a
tax practitioner, registered as a vendor and working independently (i.e. not an
employee) who pays for these fees.
VAT Ruling (074/2010), which allowed employers to claim
input tax on the subscription fees paid to professional bodies was withdrawn
with effect from 1 January 2013 with the effect that one has to use the normal
VAT principles to determine if an ‘input tax’ credit may be claimed by the
employer. In order for a vendor to become entitled to an input tax deduction,
one needs to consider the definition of ‘input tax’ as defined in sec 1 of the
Value-Added Tax Act (No. 89 of 1991) (hereinafter referred to as ‘the VAT Act’)
read with sec 7(1)(a) of the VAT Act. The definition of ‘input tax’ requires
the services to be ‘... acquired by the vendor..’. The problem that comes in is
that services are supplied to and acquired by the employee, not the employer
making the payment and therefore no input tax may be claimed on the membership
fees paid on the employees’ behalf.
The employee would not carry on an ‘enterprise’ as defined
in sec 1 of the VAT Act due to the application of proviso (iii)(aa) of the
definition of ‘enterprise’ which excludes employment therefrom. The employee
may consequently not register as a ‘vendor’ in accordance with sec 23 of the
Act read with the definition of ‘vendor’ in sec 1 of the Act (unless the
employee also carries on business in his own name, in which instance the
subscription fees may form part of his/her enterprise if the enterprise
constitutes i.e. a sole proprietorship providing tax consulting services).
Therefore, in most instances, the services by the
professional body are supplied to and acquired by the employee (not the company
paying for it) and the company may therefore not claim the input tax deduction.
It is submitted that this would also be the case with the training seminars as
the services are provided to the employees – not the employer making the
payment. However, where the employer organises with a third party to
provide training to its employees then an input tax credit may be claimed by
the employer as the training services would be supplied to the employer.