FAQ - 14 October 2015
14 October 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Should brokerage fees be deductible or included as
a part of base cost of shares?
Q: A trust invests in shares via the JSE. Their
income consists of capital gains, interest and dividends. SARS didn't allow the
expenditure which included broker fees, administration fees, bank charges and
accounting fees. All expenditure was added back. We understand the concept of
trade as a requirement for Section 11(a). We are of the opinion that the
expenses are deductible either as normal expenses or capital expenses which
form part of the base cost. Is there another section under which these
expenditures can be deducted for tax purposes?
A: We agree with you that in order for the taxpayer
to make a deduction of "broker fees, administration fees, bank charges and
accounting fees” 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 expenses were
incurred in the production of the income. Judge Heher of the Supreme
Court of Appeal made the following obiter comment in the Scribante case:
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. Based on the facts we can’t comment
on whether or not the taxpayer will be able to prove that a trade is carried on
in this respect. It may well be the passive investment of funds which
would not constitute a trade.
The next issue is
section 23(f). In terms of this no deduction is possible in respect of
the income (or part thereof) that is exempt from normal tax – the dividend will
not be income (or a part of a foreign dividend) and the deduction will be
denied. The expenses will therefore have to be apportioned and only
deducted from the "income” portion.
A possible reason
for thinking the deduction can be made could be the wording in Practice Note 31
(which is not law): "While it is evident that a person (not being a
moneylender) earning interest on capital or surplus funds invested does not
carry on a trade and that any expenditure incurred in the production of such
interest cannot be allowed as a deduction, it is nevertheless the practice of
Inland Revenue to allow expenditure incurred in the production of the interest
to the extent that it does not exceed such income. This practice will also be
applied in cases where funds are borrowed at a certain rate of interest and
invested at a lower rate. Although, strictly in terms of the law, there is no
justification for the deduction, this practice has developed over the years and
will be followed by Inland Revenue.” My view is that Practice Note 31 is
no longer valid and should have been withdrawn.
In terms of
paragraph 20(1)(c) of the Eighth Schedule to the Income Tax Act, the following
expenses may be added to the original cost in determining base cost:
actually incurred as expenditure directly related to the acquisition or disposal
of that asset namely—
(i) the remuneration
of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or
legal advisor, for services rendered;
(ii) transfer costs;
(iii) stamp duty,
transfer duty or similar duty;"
It is potentially
only the broker’s fee that could be added to base cost.
2. Should you register
for VAT if you’re being paid to transport staff for another company?
Q: We have a client who has a
contract with the mines to transport their staff with his minibuses. The mine
pays him an amount each month. His income exceeds R1,000,000.00 per
A: Section 12(g) of the VAT Act
states the following supply is exempt from VAT:
by any person in the course of a transport business of any service comprising
the transport by that person in a vehicle (other than a game viewing vehicle
contemplated in paragraph (e) of the definition of "motor
car” in section 1) operated by him of fare-paying passengers and
their personal effects by road or railway (excluding a funicular railway)”
raised would be whether the supply qualifies as being exempt due to the fact
that it is not the passengers who are paying the fare, but rather the "mine”.
In this regard, the book Value Added Tax in South Africa by de
requirement that the passengers must be ‘fare-paying’ does not mean that the
passengers themselves must pay a fare. It will suffice if a fare is paid,
whether by the person actually using the transport or some other person, for
example, an employer on behalf his employees.”
therefore seem the supply is exempt.
of the ‘enterprise’ definition in section 1 of the VAT Act states "any activity
shall to the extent to which it involves the making of exempt supplies not be
deemed to be the carrying on of an enterprise”.
persons carrying on an enterprise (as per section 23) may register, it seems
your client doesn’t have to register, based on all the information you’ve
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.