FAQ - 19 August 2015
19 August 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Can an individual deduct interest incurred on an access
bond used to fund investment income?
Q: A client uses money from his bond to buy shares or
invest in other investments yielding a high return. Can he subtract the bond
interest from the interest received?
A: On the basis that the amount received is income
(as defined in section 1(1) of the Income Tax Act we agree with your
In order for the taxpayer to make a deduction of the
interest in terms of section 24J(2) it is necessary that the taxpayer must be
able to meet the burden of proof that a trade was being carried on, and that
the amount of the expense was incurred in the production of the income.
Judge Heher of the Supreme Court of Appeal made the following obiter comment in
the Scribante case:
"In addition, borrowing money and re-lending it at a higher
rate of interest, thereby making a profit, constitutes the carrying on of a
trade...” The Judge used the Burgess case as authority for this.
The next issue is section 23(f). In terms of this no
deduction is possible in respect of the interest (or part thereof) that is
exempt from normal tax – the dividend will not be income or of a foreign
dividend the deduction will be denied. The ‘interest expense’ may
therefore have to be apportioned and only deducted from the "income” portion if
the taxpayer qualifies for the section 10(1)(i) exemption.
2. Can a company get an income tax deduction on school fees
paid for a shareholder’s relatives?
Q: A company will be settling school fees for family
members of the member of the Close Corporation. He has asked if this can be
structured in a way to be tax deductible. I am of the opinion this will not be
deductible for tax, but cannot find the appropriate section in the tax Act.
A: Please note that the service offered by SAIT does
not include the giving of an opinion. We can only provide guidance.
We also don’t know what the motive of the close corporation is in paying the
school fees (see our last comment).
The principle in this instance is that the taxpayer (the CC)
will have to meet the onus of proof with regard to two issues. Judge
Conradie explained the two issues as follows in the Warner Lambert case:
"Deductible expenditure has certain characteristics: it must
be incurred in the production of income (s 11(a)) and will not be allowed as a
deduction against gross income if it is not laid out or expended for the
purposes of trade.”
It was stated by judge Watermeyer, in the PE Tramway case,
that "… income is produced by the performance of a series of acts, and
attendant upon them are expenses. Such expenses are deductible expenses,
provided they are so closely linked to such acts as to be regarded as part of
the cost of performing them.” In the recent MTN case it was confirmed that
expenses "which is "necessarily attached” to the performance of income-earning
operations” also qualify.”
Judge Beadle explained it as follows in the Rendle case:
"In deciding whether such an expenditure is deductible, it
seems to me the enquiry must be whether the "chance” of such expenditure being
incurred is sufficiently closely connected with the business operation.
The enquiry is not whether the actual expenditure itself (should it ever
eventuate) is sufficiently closely connected. If the expenditure itself had to
be a necessary concomitant of the business before it could be deducted, it
could hardly be called "chance expenditure”. The word "chance” is singularly
inappropriate when describing an event which is bound, or almost bound, to
happen. If such chance expenditure is to be deductible, if it is closely enough
connected with the business operation, and is still to retain its character of
"chance expenditure”, it can only be the "chance” or the "risk” of it being
incurred which must be the links connecting it with that business operation.”
If the taxpayer therefore can prove that the cost of the
school fees meets these requirements it can make the deduction.
We indicated that we didn’t know what the motive for the
expenses was and therefore accepted that it was not in respect of services
rendered by the members (the connected persons). Our response would not
change if the section 10(1)(q) exemption applies, but it may well constitute a
dividend which would be subject to the dividends tax.
3. Must employers issue IRP5s to employees whose taxable
income is below the tax threshold?
Q: I have a number of clients that is still of the
opinion that the staff member’s earning under the tax threshold do not have to
get IRP5’s/IT3(a)’s. I am not looking at it from a labour law point of view,
but purely from SARS point of view (or as Tax Practitioner).
I have few scenarios:
Clients in building
industry with daily so called casual workers/labours
Clients with permanent
staff members e.g. garden service, but all staff earn less than the tax
Clients that pay people
on ad-hoc basis, or students doing work over holiday period
It is important to note that in all cases, where applicable,
the clients will issue salary slips, deduct UIF and staff will get the leave
I am of the opinion that these staff members/workers must be
issued with IRP5’s/IT3(a)’s. However, I cannot find a specific reference from a
SARS/Income Tax act to provide to my clients to convince them that we need to
issue the prescribed certificates to these staff members.
A: According to an FAQ on the SARS website an
"employer is obligated to furnish the employee with an IRP5/IT3(a)
We however agree with you that is not in line with the Act
itself which, in paragraph 13(1) of the Fourth Schedule to the Income Tax Act,
requires of "every employer who … deducts or withholds any amount by way of
employees’ tax…” to "… deliver to each employee or former employee to whom
remuneration has during the period in question been paid or become due by such
employer, an employees’ tax certificate …”
If no tax was deducted or withheld, because the employee’s
income is below the tax threshold, there is no obligation to issue a
certificate. We accept that, with regard to building contractors, the
BIFSA ruling of 2005 (CON181356) doesn’t apply. When section 8 of the
Unemployment Insurance Contributions Act, 2002 was amended it was explained
that the "… amendment provides for the introduction of employer reconciliations
for purposes of unemployment insurance contributions and essentially mirrors
the obligation of an employer to submit employer reconciliations of employees’
tax as provided for in the Fourth Schedule to the Income Tax Act, 1962.”
Section 8 however doesn’t require of the employer to issue the employee with an
The reconciliation declaration (the EMP501 refer to
paragraph 14(3) of the Fourth Schedule) is the document on which an employer’s
PAYE, SDL and UIF liabilities are declared with associated payments,
certificate values and the resulting net effect of setting off payments again
It appears that the only way the employer can do the
reconciliation of the UIF payments is in fact to issue an IT3(a).
4. How do I disclose that a taxpayer is married customarily
as a Muslim in the ITR12?
Q: I have quite a few Islamic clients who are married
customarily where there is no civil union or contract besides a Nikah
certificate confirming the marriage.
The question is how are Muslim marriages recognised in South
Africa for tax purposes? In other words, which box must be ticked the person’s
tax return, ‘unmarried’, in or out of ‘community of property’?
A: Our guidance assumes that the request is related
to Income Tax and we therefore didn't deal with the Estate Duty or Intestate
The answer lies in the definition of spouse in section 1(1)
of the Income Tax Act. We copied it here for your convenience:
A ‘spouse’, in relation to any person, means a person who is
the partner of such person—
in a marriage or customary union recognised in
terms of the laws of the Republic;
in a union recognised as a marriage in
accordance with the tenets of any religion; or
in a same-sex or heterosexual union which the
Commissioner is satisfied is intended to be permanent,
and ‘married’, ‘husband’ or ‘wife’ shall be construed
accordingly: Provided that a marriage or union contemplated in paragraph (b) or
(c) shall, in the absence of proof to the contrary, be deemed to be a marriage
or union out of community of property;
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.