FAQ - 30 September 2015
30 September 2015
Posted by: Author: SAIT Technical
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
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).
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).
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
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.
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.
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.
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?
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?
Our guidance assumes that the transfer of property or money to the trust
is a donation and we only address the donations tax consequences.
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.
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.
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.