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FAQ - 28 June 2017

28 June 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. How is a base cost determined for capital gains purposes?

Q: My client has built a second house on his property about 5 years ago. He never kept any documents/receipts for the cost. He now divided the property and sold the second house. How do we determine the cost if there is no documents?

A: As the property was constructed after 1 October 2001, the base cost must be determined in terms of paragraph 20(1) of the Eighth Schedule.  It requires expenditure actually incurred, in other words, it doesn’t mention a valuation.  None of the other events, envisaged in the Eighth Schedule, where a market value can be used, apply.  In our view, “a valuation for the base cost based on the certificate of a Quantity surveyor” will not meet the requirement to prove the amount actually incurred. 

Before the promulgation, and effective date of the Tax Administration Act, section 73B of the Income Tax Act required of a taxpayer to retain documents relating to capital gains for a period of five years after the asset was disposed of.  These documents included, amongst others, invoices and other evidence of payment. 

It would therefore not be acceptable to argue that the detail can’t be re-called.  It had to be retained. 

The cost of subdividing the land would probably be an expense directly related to the sale of a portion of the land.  It is added to the above – paragraph 20(1)(c)(i).  Subdivision is usually merely a preparatory step before an actual disposal.

The consolidation or subdivision of land will not in itself give rise to a disposal or part-disposal, since the owner retains all rights in the land. With a subdivision it will be necessary to allocate the base cost among the subdivided parts on some logical and reasonable basis, for example, by using the proportions based on the relative market values of the subdivided parts at the time of the subdivision. Paragraph 33 will not apply at the time of the subdivision since that provision requires a part-disposal. 

2. What is the tax implications on an interest free loan between family members?

Q: Father makes a R2, 000,000 interest free loan to his son. According the agreement, the son must pay only the capital of R2, 000,000 back over 20 years. The loan is interest free. What will the tax implications be?

A: Judge Froneman in CSARS v RM Woulidge said, “as long as the capital remains unpaid the failure to charge interest represents a continuing donation…”  The court case dealt with section 7 of the Income Tax Act.  We accept that the son is not a minor.  

With regard to loans to children (not minors) it is generally accepted that the interest free loan doesn’t actually result in a donation for donations tax purposes.  The question is whether the interest not charged, constitutes a donation – the ‘failure to’ as the Judged said. 

SARS recently caused the Income Tax Act to be changed and has introduced section 7C into the Act.  It deems a donation to arise when an interest free loan is made to a trust by a person connected to the trust (under certain circumstances). 

The parties will, if they don’t view this as a donation (not property or the waiver of a right), will have to prove that it was not a donation as defined in section 55(1) of the Act or, if it was, that section 56(2)(c) applies. 

On the assumption that section 31 one the Income Tax Act doesn’t apply, we agree with you that the Act doesn’t deal with this.  This of course accepts that there is not a tax benefit – see the impermissible avoidance sections. 

3. Do I have to be registered as a Tax Practitioner with a PR number, in order to do my client’s employee's payroll on their behalf on my VIP payroll System?

Q: I only do payslips for my clients, and then at month end I complete and submit the EMP201 on behalf of my client, and every six months, I do their IRP5's and IT3A's. That is everything included in what I do for my clients. EMP201, IRP5 and IT3A. Do I need to registered as a tax practitioner to provide these services?

A: Section 240 of the Tax Administration Act is relevant.  In paragraph (1) it states, amongst others, that “every natural person who -

(a) provides advice to another person with respect to the application of a tax Act; or

(b) completes or assists in completing a return by another person,

must –

(i) register with or fall under the jurisdiction of a ‘recognised controlling body’ … 21 business days after the date on which that person for the first time provides the advice or completes or assists in completing the return; and

(ii) register with SARS as a tax practitioner…” 

From the information provided you are actually completing or assisting in completing a return of your clients for consideration.  You are not doing so to or in respect of the employer by whom you are employed on a full-time basis or under the supervision of a registered tax practitioner who has assigned or approved the assignment of those functions to you.  On that basis, you must be registered as a tax practitioner. 

In its criteria for the recognition of controlling bodies, SARS indicated that, in the individual doesn’t have an NQF 6 or higher tertiary or post Grade 12 relevant qualification (B Com, etc), with at least one accounting, commercial law or tax law module, that the professional body must then have the following minimum qualifications and experience for their membership: 

NQF 4 (Grade 12) plus

  • If previously employed, five years of working experience in interpreting and applying the various tax Acts – verified by a letter from the employer attesting to the experiential requirements.

or

  • If the individual tax practitioner is self-employed – five years working experience interpreting and applying the various tax Acts must be in evidence, supported by client references. A schedule of client references confirming a tax practitioner’s status and the number of years that the professional relationship has been in place is sufficient.

Plus

Commitment by the controlling body to ensure that members with the minimum education requirement of NQF 4, increase their qualifications to at least NQF 5 in the three years subsequent to joining the controlling body. 

I accept that SAIT has made the commitment referred to above.  

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.

 

WHY REGISTER WITH SAIT?

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.

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