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FAQ - 5 August 2014

05 August 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Possible tax implications of immovable property made available by one connected person to another free of charge

Q: Our client is a director and shareholder of two different companies (100% shareholding in both). The one company holds a property which the other company runs its affairs from but at a rental of nil. We would like to confirm whether a deemed dividend will thus be applicable due to the fact that connected parties have a rental transaction between them at a value of nil. Kindly provide me with the applicable legislation as well.

A: There are a couple of things to consider regarding the query below.

For income tax, the building made available to another person without the intent on earning income would not constitute a trade. In this regard the revenue expenses in respect of the building may not be deductible as the taxpayer would not comply with either s11(a) or s23(g). Furthermore, the taxpayer would not be able to claim the s13quin allowance on the commercial building for the same reason.     

Please also note the judgement in See CSARS v Brummeria 2007 (6) SA 601 (SCA) as to what benefits constitute "an amount” received or accrued, invariably by the lessee as well as SARS’ interpretation in Interpretation Note 58 which at 6.1 states that it applies to all benefits not just interest free loans. This should be considered notwithstanding that at 6.3 SARS states that generally no revenue amount would accrue if there was not some form of value exchange by the persons, though each case would be dealt with on its own merits. In this regard the taxpayer should also consider s80A – s80L regarding impermissible tax avoidance arrangements that have no commercial substance or if there is a possible tax benefit from this arrangement (e.g. one company has a loss to utilise).

A further consideration is s58 Income Tax Act regarding donations tax which will deem a dividend where property is disposed of for inadequate consideration. In this regard "property” is defined to include right in immoveable property which may arguably include a right to use immoveable property.

VAT implications

No mention is made in the information supplied regarding whether or not the companies are registered VAT vendors.  For completeness sake the VAT implications also need to be considered.  In terms of s10(4) VAT Act, when a vendor supplies goods to a connected person who is a vendor for no consideration, or for a consideration that is less than the open market value and the connected person would not have been able to claim a full input tax credit the consideration of the supply is deemed to be its open-market value.  The value is usually determined with reference to the consideration, but for qualifying transactions between connected persons, the actual consideration must be ignored and the open market value of the supply is taken to be the deemed consideration.

Dividend tax

A dividend is defined in s1 in general terms as any amount transferred or applied by a resident company for the benefit or on behalf of any person in respect of any share in the company, whether by way of distribution or as consideration for the acquisition of any share in that company.  Deemed dividend tax implications may however be triggered when the shareholder (natural person) owes an amount of money to a company.  Refer s64E(4) for more information should this be applicable. In our view, though the making available of the property without consideration could be considered an amount (See CSARS v Brummeria 2007 (6) SA 601 (SCA)), s64D requires in its definition of "dividend” that for the DWT to apply that the s1 dividend must be "paid”. Therefore there will be no dividend. We are further of the view that this would also not be regarded as a dividend in specie as it is not a distribution of an "asset in specie” and it was not paid or became due or payable per s64E(2) & (3) to the holder of a share in the payor company.

2. Employees tax on CCMA payments

Q: A CCMA settlement agreement states that the amount payable to an employee is ''without deduction". Does the employer withhold employee tax?

A: SARS sets out its practice prevailing in this regard in Interpretation Note 26: The Taxation of CCMA and Labour Court Awards to Employees and Former Employees.  We don’t know what caused the amount to be paid to the employee, i.e. unfair dismissal, etc. and the guidance will be general in nature. 

We agree with the point made in paragraph 4, namely that "CCMA and Labour Court awards will be taxed either under the general definition of "gross income” in section 1 of the Income Tax Act or they may be specifically included under paragraph (d), paragraph (f) or, if applicable, paragraph (c) of this definition.”  SARS sets out a number of examples of awards and its tax consequences in Annexure A to the Interpretation note. 

With regard to employees tax they state that "CCMA and Labour Court awards, which are taxable either under paragraph (c), (d), or (f) of the definition of "gross income”, will constitute "remuneration” as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act. These amounts will, therefore, be subject to the withholding of employees’ tax by the employer.”  It then points out that "applications for directives, to determine the amount of employees’ tax to be deducted from the awards, must be submitted by the employer to the relevant SARS branch office.” 

3. Penalties on the late submission of ITR12’s

Q: How does SARS calculate penalties for late submission of Individual Income Tax returns? I have a client who has not submitted his income tax returns since 2009.

A: The client (taxpayer) faces two kinds of penalties here.  The first is the fixed amount penalty that is levied for "failure to comply with an obligation that is imposed by or under a tax Act and is listed in a public notice issued by the Commissioner” – see section 210(2) of the Tax Administration Act.  In terms of notice 790 (Gazette 35733) the failure by a natural person to submit an income tax return as and when required under the Income Tax Act for years of assessment commencing on or after 1 March 2006 where that person has two or more outstanding income tax returns for such years of assessment.  The penalty is then determined in accordance with the fixed amount penalty table – see section 211 of the Tax Administration Act.  It is levied monthly, but may be limited to 36 (or 48) months. 

The second penalty is a percentage based penalty and is imposed in terms of section 213 of the Tax Administration Act.   We don’t have enough information to comment on this one.

Remember that the voluntary disclosure relief excludes a penalty imposed under that Chapter or in terms of a tax Act for the late submission of a return or a late payment of tax.  

4. Consequences where an employer decided not to withhold employees’ tax from the remuneration paid to an employee as a result of the sec 10(1)(o)(ii) exemption, where the employee subsequently do not qualify for the exemption for the period assessed.

Q: An employee is working abroad on behalf of the employer. His contract stipulates that he will be working abroad for 1 year. The employer used code 3652 and didn't deduct any employees’ tax from the employee. However, the employee resigned and didn't reach the 183 days requirement. What should the employer do with regards to this employee?

A: SARS, in their Interpretation Note 16, states the following in paragraph 4.7:

"The potential for an exemption under section 10(1)(o)(ii) of the Act does not automatically waive the liability of an employer to deduct employees’ tax in terms of the Fourth Schedule to the Act. An employer that is satisfied that the provisions of section 10(1)(o)(ii) will apply in a particular case may, however, elect not to deduct employees’ tax in a particular case. Where it is found that the exemption was not applicable the employer would be held liable for the employees’ tax not deducted as well as the concomitant interest and penalties.” 

We don’t necessarily agree that that view (as stated in the last sentence above) would always apply.  Paragraph 5(3) of the fourth Schedule provides as follows:

"Where the employer has failed to deduct or withhold employees' tax in terms of paragraph 2 and the Commissioner is satisfied that the failure was not due to an intent to postpone payment of the tax or to evade the employer's obligations under this Schedule, the Commissioner may, if he is satisfied that there is a reasonable prospect of ultimately recovering the tax from the employee, absolve the employer from his liability under subparagraph (1) of this paragraph.” 

The problem is that the employer may not be able to withhold the tax as the last month’s remuneration (the resignation month) may not be sufficient.  That is why we think the parties should provide detail to SARS to satisfy SARS that the tax will be recovered from the employee.  This may be easy if the return of income can be submitted and covers the full period.  

The IRP5 should be amended to reflect the correct code.  



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