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FAQ - 4 October 2017

04 October 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. What interest rate is applied to intercompany loans?

Q: Should interest be charged at the official SARS interest rate applicable to low/interest free loans on intercompany loans or not?

A: The Income Tax Act doesn’t prescribe the rate at which interest should be charged. 

The Act contains various anti-avoidance rules that deal with the taxation of a difference between the amount of interest actually incurred and the amount of interest that would have been incurred at the official rate.  These anti-avoidance provisions include the following:

 Section 7C of the Act which applies in respect of zero or low interest loan advanced to a trust by a connected person of that trust. The official rate of interest is used under this provision to quantify a donation that arises from advancing a zero or low interest loan to a trust. 

  Section 64E(4) of the Act where the official rate of interest is used to quantify a deemed dividend in respect of a zero or low interest loan made by a company to a shareholder by virtue of a share. 

 Seventh Schedule where the official rate of interest is used under this provision for fringe benefit determination in respect of a zero or low interest loan between an employer and employee. 

These anti-avoidance provisions merely result in a deemed donation, deemed dividend or taxable benefit. 

Section 31 of the Income Tax Act, if there is an 'affected transaction' requires of the taxpayer to use an arm's length rate.

2. Can S18A certificates be issued for any general donations in support of a PBO's activities?

Q: A client received correspondence from the Western Cape Rotary branch indicating that S18A certificates can only be issued for specified purposes and not for general donations. Is this the case?

A: The deduction, under section 18A of the Income Tax Act, is only available in respect of “bona fide donations” and requires “a receipt issued by the public benefit organisation, institution, board, body or agency or the department concerned”, on which certain details are given. 

A public benefit organisation doesn’t, by virtue of the fact that it is a public benefit organisation, qualify to issue the section 18A receipt.  Section 18A(2) requires “a certification to the effect that the receipt is issued for the purposes of section 18A of the Income Tax Act, 1962, and that the donation has been or will be used exclusively for the object of the public benefit organisation, institution, board, body or agency concerned or, in the case of a department in carrying on the relevant public benefit activity…” 

This follows from the requirement in section 18A(1) that the deduction is in respect of “any bona fide donations by that taxpayer … to any public benefit organisation contemplated in paragraph (a)(i) of the definition of ‘public benefit organisation’ in section 30(1) approved by the Commissioner under section 30; or institution, board or body contemplated in section 10(1)(cA)(i)”. 

The public benefit organisation must therefore also have approval to issue the section 18A receipt.  The SARS approval (as PBO) is based on Part 1 of the Ninth Schedule and the section 18A on part 2 of the Schedule.  The donation must therefore be for activities listed in part 2 of the Ninth Schedule – if not, the receipt can’t be issued.  We therefore don’t agree with your comment that it “can be issued for any donations received in support of the PBO's activities including general donations”. 

3. What are the tax implications when an employer takes out group cover?

Q: My client is taking out group cover, the risk component for her employees. Must this be included on their payroll as a benefit or can we deduct it as an expense incurred in the production of income?

A: We are not sure on what grounds you consider this not to be a ‘taxable benefit’ or may need more information.  From the facts provided this may well be an unapproved group life assurance policy – the policy is owned by the employer and not a fund. 

For the purposes of the Seventh Schedule and of paragraph (i) of the definition of "gross income" in section 1(1) of the Income Act, “a taxable benefit is deemed to have been granted by an employer to his employee in respect of the employee's employment with the employer, if as a benefit or advantage of or by virtue of such employment or as a reward for services rendered or to be rendered by the employee to the employer:

                …

(k) the employer has made any payment to any insurer under an insurance policy directly or indirectly for the benefit of the employee or his or her spouse, child, dependant or nominee: Provided that this paragraph shall not apply in respect of an insurance policy that relates to an event arising solely out of and in the course of employment of the employee;”

We agree that the employer will then make the deduction under section 11(a).  

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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