Print Page   |   Report Abuse
News & Press: Institute News

FAQ - 31 August 2016

31 August 2016   (0 Comments)
Posted by: Author: SAIT Technical
Share |

Author: SAIT Technical

1. Has SARS imposed an understatement penalty correctly?

Q:  A trust has farming, interest and dividend income.  The expenses have been set off against farming income in the financial statements but SARS has apportioned expenses against interest and dividend income and imposed understatement penalty.  According to SARS, the adjustment has been made according to sec23(f).  Is this correct?

A: It is the taxpayer who must apportion the ‘dual purpose’ expenses.  

In order for any taxpayer to make a deduction 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.  It may well be that the dividends result from the passive investment of funds which would not constitute a trade.  

The next issue is section 23(f).  In terms of this section 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 a portion of a foreign dividend - and the deduction will be denied.    

Section 23(g) may also present a problem in this instance.  

The Income Tax Act does not prescribe how apportionment must be done.  The issue of the apportionment of expenses was considered recently by the Supreme Court of Appeal – CSARS v Mobile Telephone Networks Holdings (Pty) Ltd.  Judge Ponnan commented as follows:

"Where - as here - expenditure is laid out for a dual or mixed purpose the courts in South Africa and in other countries, have, in principle, approved of an apportionment of such expenditure…”

"Over time, the courts have applied various formula to achieve a fair apportionment.” 

"Apportionment is essentially a question of fact depending upon the particular circumstances of each case (Local Investment Co v Commissioner of Taxes (SR) 22 SATC 4). As Beadle J put it in Local Investment Co (at II): 

"It does not seem possible to me to lay down any general rules as to how the apportionment should be made, other than saying that the apportionment must be fair and reasonable, having regard to all the circumstances of the case. For example, in one case an apportionment based on the proportion which the different types of income bear to the total income might be proper, as was done in the Rand Selections Corporation’s case, supra. In another case, however, such an apportionment might be grossly unfair;”  

It seems that SARS favours the apportionment on the basis of gross income – they argued that in the MTN case.  See also Interpretation note 64 where they state (in paragraph 7.2) that "general expenditure must be allocated to the various sources of income on a logical, fair and reasonable basis. For example, depending on the facts it may be acceptable to allocate the general expenses pro rata by applying the ratio that a particular source of receipts and accruals bears to the total receipts and accruals derived by the entity.”  

So, if the taxpayer didn’t apportion SARS would be correct to impose the understatement penalty. 

2. How do I split a CGT exclusion between directors?

Q: Assuming that all the requirements are met to qualify for the R1.8 million exclusion upon sale of a Small Business, I would like to know how the remaining CGT is calculated. If there are 3 directors, each with 33.33% share, do you apportion one third of the base cost and one third of the exclusion to each, to calculate the remaining gain applicable to each person? Otherwise what is the correct way to calculate it?

A: From the information provided the capital gain, in this instance, arises (for each of the holders of shares) in respect of the disposal of an entire direct interest in the company (which consists of at least 10% of the equity of that company).  The capital gain can then be disregarded to the extent that the interest relates to active business assets of the business, which qualifies as a small business, of that company – paragraph 57(2)(c) of the Eighth Schedule to the Income Tax Act.  

It is therefore necessary to determine the portion of the assets of the close corporation that qualify as ‘active business assets’.  The liabilities of the close corporation are ignored, since the paragraph refers to ‘assets’ and not ‘net assets’.  

No apportionment is therefore necessary in respect of the base cost of "the direct interest in the company” and each individual, because of your assumption, would qualify for the exclusion. 

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. 


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by YourMembership  ::  Legal