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FAQ - 30 September 2015

30 September 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. If a company ceases trading are expenses still deductible even though the company is not carrying on a trade?

Q:  If a company ceases trading on 31 July 2015 and there are expenses that have to be paid after 31 July 2015, are these expenses deductible even though the company is not carrying on a trade?

These expenses would be debt collection fees to collect outstanding debtors as at 31 July 2015, bank charges as the bank account can only be closed after all outstanding debtors have been received and all expenses and taxes have been paid, accounting fees for all accounting, tax returns, deregistration etc.  

Could one argue that these expenses have to be laid out as part of the trade that was carried on till 31 July 2015? 

A: When a taxpayer has ceased trading, expenditure incurred after the date of cessation is non-deductible. It does not follow that the moment trading stops, no further deductions are permissible. If the obligation was incurred whilst trading, a deduction is still available provided the other requirements of the section are satisfied (ITC 1029 26 SATC 54). For example, pensions payable after the cessation of trade are still deductible (ITC 729 18 SATC 96).

The deductibility of interest incurred on a loan after the cession of trade will depend on whether the loan is terminable at the option of the borrower or whether it has been entered into for a fixed period. The view of the courts is that interest is still deductible in the case of the latter, but not in the case of the former (ITC 1135 31 SATC 228 and ITC 1171 34 SATC 80).

Difference of opinion exists on when trading ceases . In ITC 1627 60 SATC 26 at 32, 1999 (10) JTLR 277 the opinion was expressed that

'there is much to be said for the view that trading only ceases when all the debts of the business have been paid and all sums due to it have been collected'.

The Supreme Court of Appeal holds a different view. In Timberfellers (Pty) Ltd v CIR (1997) 59 SATC 153 and Robin Consolidated Industries Ltd v CIR 59 SATC 199 it was held that the mere collection of book debts does not constitute the carrying on of a trade. These decisions are in conflict with the earlier decision of SIR v Kempton Furnishers (Pty) Ltd1974 (3) SA 36 (A), 36 SATC 67, where it was indirectly accepted that collection of book debts does constitute the carrying on of a trade. It is considered that too formalistic an approach was taken in the Timberfellers and Robin Consolidated cases and that trading only ceases once all debts have been paid and collected. It is understood that the Commissioner confines the Timberfellers and Robin Consolidated decisions to cases where the taxpayer is in the process of being sequestrated or liquidated and not, for example, when a business is sold as a going concern.

In CIR v Contour Engineering (Pty) Ltd 61 SATC 441 it was held that the collection of book debts by a liquidator during a period of liquidation does not constitute trading, as collecting is his statutory duty. The aim of the liquidator in collecting the book debts is not to carry on a trade, but to wind up the affairs of the company. The lock, stock and barrel sale of the assets of a company in liquidation also does not constitute the carrying on of a trade, as it amounts to a mere realization of assets and not trading in them. The fact that the income obtained from the realization forms part of the taxpayer's gross income is irrelevant: Robin Consolidated Industries Ltd v CIR 59 SATC 199. It is submitted that too formalistic a view of the trade requirement was taken in the Contour Engineering and Robin Consolidated cases, and that trade should cease only when all the debts have been paid and collected by either the taxpayer or the liquidator.

The reasoning of the Court in Robin Consolidated Industries Ltd v CIR, (supra) should not be interpreted to mean that a company in liquidation can never trade. The question is whether trading activities, apart from the collection of book debts, takes place: ITC 1751 65 SATC 294; 2003 JTLR 90.

See also Case Number 10836, discussed in 2004 The Taxpayer 90.   

2. What are the tax implications where an individual donates to a trust and vice versa?

Q:  If an individual donates to a trust, how would this be taxed and if a trust donates to an individual how would this then be taxed? 

A:  Our guidance assumes that the transfer of property or money to the trust is a donation and we only address the donations tax consequences. 

The donation by an individual to a trust will be a taxable donation unless one of the section 56(1) exemptions apply (where the trust for instance is an approved public benefit organisation).  We accept that none of the exemptions apply.  The value of this donation would then be added to the previous donations made by the individual in the same year of assessment and to the extent that the amount (the total) exceeds R100 000, the donations tax at 20% will apply. 

If a trust donates to an individual the same principle applies, but the section 56(2) amount (the R100 000 mentioned above) is then R10 000.  Note that where the individual is a beneficiary the property may well be disposed of under and in pursuance of any trust – in other words the section 56(1)(l) exemption applies. 

If the exemption (mentioned above) doesn’t apply the trust will be the donor and the done will be the person receiving the donation.

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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