FAQ - 23 October 2014
22 October 2014
Posted by: Author: SAIT Technical
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
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
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
"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-
by way of any pension, superannuation allowance
or retiring allowance;
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
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
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).
- 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
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.