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FAQ - 19 August 2015

19 August 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 view. 

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 threshold

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 due.

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) certificate.”  

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 IT3(a). 

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 liabilities. 

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 succession issues. 

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—

(a)    in a marriage or customary union recognised in terms of the laws of the Republic;

(b)   in a union recognised as a marriage in accordance with the tenets of any religion; or

(c)    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. 


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