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FAQ - 31 May 2017

31 May 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is it possible to a claim medical aid deduction even though you don’t belong to a medical aid?

Q: If a client does not belong to a medical aid, can he claim his prescribed pharmacist expenses and doctors’ visits? Everywhere you read is about medical credits that has to do with medical aid contributions per how many members and nothing on only medical expenses.

A: The issue is whether or not it is qualifying medical expenses as defined in section 6B (for purposes of the medical rebate).  We accept that, if the individual is not a member of a medical scheme, section 6B of the Income Tax Act, however, doesn’t refer to a medical scheme. 

The section 6B(1)(a)(i) requirement is that it must be “amounts … paid by the person … to any duly registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopedist for professional services rendered or medicines supplied to the taxpayer…”  The subsection doesn’t, as with nursing or a nurse (in item (ii)), refer to illness or confinement.  The item (i) expenses are also not further qualified as is for instance expenses in consequence of any physical impairment or disability suffered by the taxpayer – there the expenses must be prescribed by SARS. 

The only requirements then seem to be that it is paid to a duly registered person (mentioned in the section) and that it must be for professional services rendered.  We submit that duly registered refers to registered with the Health Professions Council of South Africa – see SARS’s guide on the determination of medical tax credits and allowances.   

No guidance is given on the meaning of professional services rendered and the phrase must take its ordinary meaning.  The Health Professions Act, 1974, refers to a person practicing “any health profession the practice of which mainly consists of -

(i)            the physical or mental examination of persons;

(ii)           the diagnosis, treatment or prevention of physical or mental defects, illnesses or deficiencies in man humankind;

(iii)          the giving of advice in regard to such defects, illnesses or deficiencies; or

(iv)         the prescribing or providing of medicine in connection with such defects, illnesses or deficiencies…”

Remember that the taxpayer would bear the onus of proof if the claim is disputed. 

 

2. Is a share buyback a deemed dividend?

Q: Pty ltd buys back shares from shareholder for R1 000 000. Pty Ltd has now 80 issued shares and not 100. Do you declare a dividend of R1 000 000 in the name of the shareholder and pay over R200 000 DWT. Or does the shareholder pay CGT on the R800 000? I do not understand the tax implications for the shareholder who sold the 20 shares and the implications for the Pty Ltd who bought back shares with its savings.

A: As defined in section 1 of the Companies Act, a “distribution" means “a direct or indirect-

(a) transfer by a company of money or other property of the company, other than its own shares, to or for the benefit of one or more holders of any of the shares, or to the holder of a beneficial interest in any such shares, of that company or of another company within the same group of companies, whether-

(iii) as consideration for the acquisition-

(aa) by the company of any of its shares, as contemplated in section 48”. 

The definition of a ‘dividend' in section 1(1) of the Income Tax Act includes: “any amount transferred or applied by a company (that is a resident) for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied...(b) as consideration for the acquisition of any share in, that company.  It does not include any amount so transferred or applied to the extent that the amount so transferred or applied ... (i) results in a reduction of contributed tax capital of the company...”   

The amount paid to the holder of shares in the company to acquire the shares would therefore constitute a dividend for tax purposes, except to the extent that the payment results in a reduction of contributed tax capital.  It must be remembered that the directors of the company or some other person or body of persons with comparable authority must determine the amount that will reduce the contributed tax capital.  This must be evidenced from the minutes or the agreement – and is dealt with in section 48 of the Companies Act.  

The amount paid by the person for the share(s) is not necessarily the contributed tax capital of the company (CC).  It would only be that if the amount was paid to the company when the share was originally issued.  The contributed tax capital is the “stated capital or share capital and share premium as would have constituted a dividend, as defined before that date (1 January 2011), had the stated capital or share capital and share premium been distributed by that company immediately before that date (1 January 2011)…”  The contributed tax capital must be determined by the company – it will normally be the consideration received by or accrued to that company for the original issue of shares - essential it is what was referred to as pure capital. 

The tax consequences for the company then would be that it (not the shareholder) is liable for the dividends tax (it is a distribution in specie), but no capital gain or loss arises as the cancellation of the shares as it is not a disposal. 

The shareholder will receive the dividend free of normal tax – see section 64FA.  The member disposed of his or her interest in this transaction and a capital gain or loss (more probably) will arise.  The gain or loss is calculated by using as proceeds the amount of the return of capital (the reduction in the contributed tax capital) and the base cost the amount incurred in acquiring the shares. If acquired before 1 October 2001 there are other options with regard to the amount of the base cost, but the principle is the same.

Disclaimer: Nothing in this query and answer 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 answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


 

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