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FAQ - 23 June 2015

23 June 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Does farming income distributed by a trust to a beneficiary retain its original nature? 

Q: I have a farming trust, which distributes taxable farming income, to another (rental) trust. The rental trust is a beneficiary of the farming trust. My question to you is, when the income is recognised in the rental trust, will it retain its "original nature” as farming income, or will it be seen as "capital income”?

A: Our guidance assumes that the farming trust is a discretionary trust and that the distribution is in terms of a decision by the trustees to vest the amount in the rental trust.  Section 25B(2) applies and deems the amount to be an amount which has accrued to the beneficiary (rental trust) and not to the farming trust.  On that basis the nature of the receipt will not change as the receipt by the first trust is effectively ignored. 

We are not sure why you raised the issue, but need to point out that section 26(1) and the First Schedule of the Income Tax Act applies only when the taxpayer is carrying on farming operations.  There is no definition of the expression ‘farming operations' in the Act.  The question whether a person is carrying on farming operations is one of fact.  In the Kluh Investments case Judge Rogers explained it as follows:

"Section 26(1) does not apply merely because there has accrued to the taxpayer income which has ‘derived from’ farming operations; the section applies to a person carrying on farming operations to the extent that his income is derived from such operations. Two questions must therefore be answered: (i) Was the person whom SARS wishes to tax a person carrying on farming operations during the year of assessment in question? (ii) If so, did the particular item of income in dispute derive from those farming operations?”

From the facts the second trust may well not be carrying on farming operations. 

2. 5 year old error in a VAT return: does section 98(1)(d)(ii) of the TAA apply?  

Q: The taxpayer (a company) is a VAT Vendor. During its statutory audits (2007/2008), audit journals were passed which resulted in an increase in input VAT. The accountant did not realise that he/she has to account for this input VAT on the VAT returns and that it needs to be done within 5 years from the date of the invoice. The accountant claimed the VAT in later periods (2013/2014) and the SARS auditor denied the input VAT claim based on the above section that 5 year period has lapsed.

Can the vendor request under section 98(1)(d)(i)(aa) and section 98(2) of the TAA that the 2007/2008 VAT assessments be withdrawn and that the correct amounts be declared on it based on the fact that the returns contain undisputed factual errors by the taxpayer? According to section 99(2)(d)(iii) the period of limitations for issuance of assessments does not apply if section 98(2) is applicable.

Or can the vendor request under section 93(1)(d)(ii) that reduced assessments be issued for 2007/2008 also based on the fact that these returns contain undisputed errors by the taxpayer in a return?

A: We accept that none of the exceptions in section 99(2) applies. 

The only option available to the taxpayer would be the one where the assessment is withdrawn (section 98(2)).  Section 93 results in a reduced assessment and that is caught by the 3 year prescription rule.  Where the assessment is withdrawn in terms of section 98(2) it regards the assessment as not having been issued and prescription therefore is not an issue.  SARS would therefore not be able to entertain a reduced assessment under section 93 as section 99 would not permit that. 

The taxpayer of course bears the onus to proof that it was, amongst others, a bona fide error – see the JB Mining case. 

3. A portion of a monthly payment to a PBO is a donation: is it deductible under section 18A?  

Q: We have a client which is a registered PBO in terms of section 30 of the ITA and has approval to issue 18A certificates. The PBO is considering setting up a loyalty program whereby members can sign up and make monthly payments to the PBO. The loyalty program entitles the member to a range of promotional offers. In the terms and conditions for membership of the loyalty program it is recorded that the monthly payment is equally split into a donation component and a benefit component, but the member only ever makes one payment per month to the PBO. Would the donation component of the monthly loyalty program payment qualify for section 18A approval?

A: We agree with you – the parties may find it difficult to meet the onus of proof if it is disputed that there was a bona fide donation. 

Section 18A(1) of the Income Tax Act requires that it must be "any bona fide donation” paid by the taxpayer to an approved public benefit organisation and where that donation will be utilised "solely in carrying on activities contemplated in Part II of the Ninth Schedule”. 

The definition in section 55(1) of the Income Tax Act is not relevant to section 18A and the word ‘donation’ (in section 18A) must take it ordinary meaning.  According to Judge Marais (in the Welsh case) "The test to be applied at common law to determine whether the disposition of an asset amounts to a donation properly so called (as opposed to a remuneratory donation) is so well settled that it hardly needs repetition. The test is of course that the disposition must have been motivated by ‘pure liberality’ or ‘disinterested benevolence’.  As it was put in De Jager v Grunder, ‘Was die dryfveer iets anders as suiwer vrygewigheid en welwillendheid jeens die eiser, was dit geen skenking nie.’  Furthermore, there is a presumption against donations in our law.”

We don’t know what the "loyalty program” entails.  The SARS view, in paragraph 23.11 of the guide that you refer to that "there must be no quid pro quo, no reciprocal obligations and no personal benefit for the donor…” is based on the section 55 definition, but we agree with them that " if the donee gives any consideration at all it is not a donation…” So if the loyalty program provides some benefit to the person participating in it there will not be a bona fide donation.  The words ‘ bona fide’ emphasises in our view the point. 

4. How do I submit my tax return if my employer passed away and never gave me an IRP5?  

Q: I was employed by a close corporation during the period 1 March 2014 until 28 February 2015. The owner passed away in December 2014. I requested an IRP5 and was told by the persons who took over the day to day operations that it is not their responsibility to give it to me.

I have printed all of my bank statements and payslips for the period and have cross referenced them to the payments received into my bank account. I also have a copy of his death certificate.

My Question: How should I submit my tax return this year? What proof should I send with it? Will I be liable to pay PAYE over to SARS if the cc did not pay what it had deducted from me to SARS? Or will SARS claim it from the estate? Whom should I ask for the IRP5?

A: Para 13(1) of the 4th Schedule to the Income Tax Act states that it is the employer’s responsibility to furnish an employee with an employees’ tax certificate (an IRP5).

Of course, the employer is an entity, but the member(s) of the CC would be the people ultimately responsible for making sure they comply with the tax law.

Note para 13(2) of the 4th Schedule:

"The employees’ tax certificate referred to in sub-paragraph (1) shall be delivered—

(a)    if the employer who is required to deliver the certificate has not ceased to be an employer in relation to the employee concerned, within 60 days after the end of the period to which the certificate relates;

(b)   if the said employer has ceased to be an employer in relation to the employee concerned but has continued to be an employer in relation to other employees, within fourteen days of the date on which he has so ceased; or

(c)    if the said employer has ceased to be an employer, within seven days of the date on which he has so ceased,”

Also not para 13(5):

"It shall be the duty of any employee or former employee who has not received an employees’ tax certificate within the time allowed by sub-paragraph (2) forthwith to apply to the employer for such certificate.”

You have to find out who did the accounting and tax compliance for the CC (was there an internal accountant or was this function outsourced to another company)?

Perhaps that person still managed to submit the PAYE returns (EMP201s) and EMP501s.

Just because you did not received an IRP5, it doesn’t automatically mean the accountant didn’t submit that IRP5 in advance to SARS.

Filing your return

Nevertheless, you can still submit your tax return for the 2015 tax year, but may encounter some challenges.

 

The first page of the ITR12 will ask you if you received an IRP5. You can try answering ‘yes’ and see if a completed IRP5 is automatically generated and shown in the return. If that doesn’t happen, your answer will be ‘no’.

The only place where I’ve found you can disclose your salary income for that employer is under ‘professional, business and trade income’.  In that section of the return, you’ll disclose your salary from that CC under ‘other’.

You’ll be assessed and the ITA34 will obviously not show PAYE which should have been deducted from your final tax liability. As a result, you’ll have to object and your objection must include a letter to SARS where you explain your circumstances for why you never got an IRP5 from the CC. You’ll also attach the payslips as proof that the CC did in fact deduct PAYE from your salary.

This usually works.

With regards to your question about you being liable for the PAYE the CC never paid over to SARS, please see the following link for a similar question we once answered:

https://sait.site-ym.com/news/226684/Can-SARS-recover-PAYE-from-an-employee-if-his-employer-never-paid-it-.htm

Extra information

Furthermore, before you ask us anything in future, I would urge you to go visit www.thesait.org.za/news . This webpage is titled "news and press”. Once there, there is a drop-down menu next to the phrase ‘Filter news by category’. The drop down menu is handy as it allows you to look through categories like ‘case law’, ‘transfer pricing and international tax’, ‘Institute Announcements’ and ‘VAT’. Choose the last 2 categories at the bottom, titled ‘SARS operational and eFiling questions’ and ‘technical and tax law questions’ respectively.

You will find there a lot of questions we have been asked by members and the answers we provided.

It’s a valuable resource.

Disclaimer: Nothing in these 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 these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision. 



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