FAQ - 31 August 2016
31 August 2016
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Has SARS imposed an understatement penalty
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?
is the taxpayer who must apportion the ‘dual purpose’ expenses.
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.
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.
23(g) may also present a problem in this instance.
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:
- 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…”
time, the courts have applied various formula to achieve a fair
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):
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;”
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.”
if the taxpayer didn’t apportion SARS would be correct to impose the
do I split a CGT exclusion between directors?
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?
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.
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
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.
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