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FAQ - 23 October 2014

22 October 2014   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. The taxation of distributions made by a trust to a non-resident beneficiary

Q: When a trust has no interest-free loans from a donor or trustee and the trustees make a distribution to a non-resident, must the trust pay the tax on that distributed income or capital and distribute the remaining balance (i.e. the distribution minus the tax) to the non-resident? 

The donor and trustees (parents) passed away and the trustees are in the process of selling all the trust’s assets and distributing the proceeds to the beneficiaries. One of the beneficiaries is a non-resident.

My opinion is that if there is an interest-free loan from the donor, then the income attributable to the donated asset(s) must be taxed in the donor’s hands. However, if there is no donation I do not know if the sections are still applicable.

A: You are correct in stating that if there was an interest-free loan and the income accrued by reason of or in consequence thereof then section 7 would apply. The same principle applies with respect to the capital gain (paragraph 72 that you also referred to). Both these provisions will then deem the ‘income’ to accrue to the donor. We understand that this does not apply as there is no interest-free loan.  

The distribution (vesting) of income in the hands of a beneficiary will be deemed to accrue to the beneficiary and the fact that the beneficiary is not a resident is irrelevant. The non-resident beneficiary will have South African sourced income and will potentially be taxed in the RSA thereon, but at the rates applicable to the beneficiary (not the 40% rate applicable to the trust). 

The same does not apply to the vesting of a capital gain.  In terms of paragraph 80(2), where a trust beneficiary who is a resident acquires a vested interest (including an interest caused by the exercise of a discretion) in that capital gain (not in the asset), then the capital gain so vested must be disregarded for the purpose of calculating the aggregate capital gain or aggregate capital loss of the trust and must be taken into account for the purpose of calculating the aggregate capital gain or aggregate capital loss of the beneficiary in whom the gain vests. This only applies where the beneficiary is a resident.  

SARS explains this as follows in paragraph 14.9.2 of their CGT guide: "No flow-through of capital gains is permitted when the beneficiary is a non-resident” and "in the case of a non-resident beneficiary any capital gain arising in the trust on vesting will … be taxed in the trust…” – see paragraph 14.11.4 of the guide. The inclusion rate in the trust is 66.6% and the tax rate is 40%.  

2. Deductibility of UIF from a director’s salary

Q: Must UIF be deducted from a director’s salary?

A: In terms of section 4, the Unemployment Insurance Contributions Act applies to all employers and employees. None of the exclusions in section 4 deals with your example. Section 5 of the Act, in addition, also refers to every employer and employee – see also section 8. The Notice issued by the Minister (determination of the limit on the amount of remuneration for the purposes of determination of contribution) also refers to "... an employer to an employee ...”

We submit that the contributions must be made in all instances (and in respect of the same person) where there is an employer and an employee. An employee is a defined term (in the UIF Act) and must be read with remuneration in the Act.  

"Employee" means any natural person who receives any remuneration or to whom any remuneration accrues in respect of services rendered or to be rendered by that person, but excludes an independent contractor. 

"Remuneration" means "remuneration" as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, but does not include any amount paid or payable to an employee-

a)      by way of any pension, superannuation allowance or retiring allowance;

b)      which constitutes an amount contemplated in paragraphs (a), (cA), (d), (e) or (eA) of the definition of "gross income" in section 1 of the Income Tax Act; or

c)       by way of commission;

As director’s remuneration is included in the definition it will be subject to UIF.  

3. Section 18 medical deduction for payments made by parent for the maintenance of a disabled child 

Q: My client, who has no medical aid, enquired whether she can claim a deduction on the maintenance she pays towards her bi-polar adult child. Her child receives a disability grant and is not working. In my opinion, all medical expenses paid on her behalf will be deductible as a medical expenses (the taxpayer is over the age of 65 years). However, the amount paid for her upkeep (i.e. maintenance) will not be claimable.

What kind of proof does SARS require in order to claim medical expenses paid on behalf of the adult child? 

A: In terms of the Income Tax Act ‘qualifying medical expenses’ means any expenditure that is prescribed by the Commissioner (other than expenditure recoverable by a person or his or her spouse) necessarily incurred and paid by the person during the year of assessment in consequence of any physical impairment or disability suffered by the person or any dependant of the person.  

The emphasis is on expenses ‘prescribed by’ SARS.  In Annexure B – The prescribed list of expenditure SARS states as follows (under nature of expense: personal attendant care expenses):

Examples:

Actual living-in expenses: Electricity, food and water incurred and paid by the taxpayer for the care attendant. SARS would generally allow the living-in expenses incurred and paid by the taxpayer, if the aggregate amount of such expenses does not exceed 10% of the annual salary payable to a care attendant up to a limit of 50% of the annual domestic worker minimum wage under Area A of the Sectoral Determination 7 for Domestic Workers (currently R18 076.08).

Exclusions:

  • The spouse, parent or child is excluded as a care attendant. For example, if the wife is a person with a disability and the husband looks after her, the amount paid to the husband by the wife will not qualify for a deduction.
  • Any living-in expenses for a person with a disability and any other living-in expenses other than food, electricity and water for a care attendant. For example, the taxpayer cannot claim for the space (for example room) used by the person with a disability in the house.  

The following documentation must be retained for audit purposes when a medical deduction/credit is claimed for a year of assessment:

  • A completed list of amounts not submitted to or recoverable from the taxpayer’s medical scheme, together with proof of such amounts incurred and paid. 
  • A duly completed and signed Confirmation of Disability (ITR-DD) form.  

The aforementioned documentation as well as receipts must not be submitted with the annual income tax return, but must be stored and made available on SARS’ request, in the event that the taxpayer is required to substantiate the medical claims. The taxpayer is required to keep records such as receipts, paid cheques, bank statements, deposit slips and invoices for five years from the date on which the return for the relevant year of assessment was received by SARS.

Disclaimer: Nothing in this queries and answers should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answers, SAIT do not accept any responsibility for consequences of decisions taken based on this queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.

Comments...

Michael J. de Bliquy says...
Posted 23 October 2014
Re: The non-resident issue and the Trust. One should also consider the wording of the Trust Deed. 80(2) has potential application but consider the entitlement of the beneficiary.

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