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Tax Planning Opportunities For Indivisuals Are Severly Limited

01 November 2008   (0 Comments)
Posted by: Author: Muneer Hassan
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Tax Planning Opportunities For Indivisuals Are Severly Limited

Planning helps one better to cope with the future.It is an injunction that is as applicable to taxation as to any other sphere of activity.The problem is that the authorities have, over the years, tightened up on the scope for planning to reduce the tax burden of the salaried individual employee.

One of the few opportunities presents itself by way of a travel allowance, which can be incorporated into the salary structure - though the allowance must obviously be justified if it is not to be challenged by SARS. To justify the allowance the employee must undertake business journeys using a vehicle not supplied by his/her employer.

Most benefits received by salaried employees will be subject to tax in terms of the Seventh Schedule to the Income Tax Act.However, in certain instances no value may be placed on the benefit derived.Thus, for example, no value may attach to subscriptions an employer has paid to a professional body due by the empoloyees  if membership of that body is a condition of the employee's employment.

The deductions available to salaried individuals are limited in terms of Section 23(m) of the Income Tax Act–limitations that do not,however,extend to commission earners,defined as agents or representatives whose remuneration is normally derived mainly (more than 50%) in the form of commissions based on his/her sales or the turnover attributable to him/her.

Excluded from the limitations of Section 23(m) and the deduction of employee tax are amounts paid for services rendered by an independent contractor, who must demonstrate his/her independence .Thus, a contractor is deemed not to carry on a trade independently if:

-The person to whom the services are rendered and the person rendering the services are subject to the control or supervision of any other person as to the manner in which his duties are performed or as to his hours of work (excluding a person who employs three or more full time unconnected employees).

Corporate and CC taxpayers must be alert to the personal service company pitfall.Taxpayers conducting their trade through a company or close corporation must avoid being labelled a "personal service company”. A personal service company is taxed at 33% and its available deductions are limited by Section 23(k) of the Income Tax Act.

Corporate taxpayers must take great care when drafting contracts, as in terms of the gross income definition contained in Section 1 of the Act, gross income is "…the total amount, in cash or otherwise, received by or accrued to or in favour of such person…”Following careful analysis of contacts it can generally be established whether or not an amount has accrued to the taxpayer. If in doubt, expert advice should be sought.

When tax avoidance impinges on tax evasion

Tax evasion is an illegal activity deliberately undertaken by a taxpayer to reduce or free himself from a tax liability.The evasion is subject to the severe penalties contained in Section 76 of the Income Tax Act, in terms of which a taxpayer is liable for a penalty of up to twice the amount of the original tax liability.Tax avoidance is a legal activity designed to arrange a taxpayer’s affairs so as to reduce the level of taxation for which he is liable.

The Act contains provisions designed specifically to prevent or counter specific avoidance schemes. Examples are:

-Paragraph (c) of the definition of gross income in Section 1 deals with the receipt or accrual by a person of amounts for services rendered or to be rendered; and

-Sections 7(2) - 7(10) deal with income derived by a person in consequence of donations by another person.

When structuring transactions careful note should also be taken of Sections 80A to 80T, which cover impermissible tax avoidance and reportable arrangements.SARS could also use case law to attack transactions on the basis of substance over legal form.

When a trust can help – and when it can’t

A trust is defined in Section 1 of the Income Tax Act as "any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under a will of a deceased person”.

Given its perceived tax advantages, the popularity of - especially - the inter vivos trust continues to grow.Not surprisingly, then, there have been several recent legislative amendments that have far-reaching consequences for trusts and, more especially, the inter vivos trust, as tax planning instruments.These changes have been effected primarily due to SARS’s often justified belief that trusts are used solely as a tax planning tool. It is therefore unwise to select the trust merely for its possible tax benefits,because  with changing tax legislation - such benefits may not last long.

Ordinary trusts pay income tax at a flat rate of 40%. Special trusts are taxed at between 18% and 40% the same rates as individuals.Personal service trusts are also subject to tax at a flat rate of 40%.

Being a more expensive tax vehicle,in effective tax planning a trust should not bear the tax - which should always be paid by either the beneficiaries or the founder or donor.A trust cannot claim a primary or secondary rebate or the Act’s interest exemption.

In terms of Section 2 of the Estate Duty Act, assets of the trusts not held by the deceased immediately prior to his death are excluded from estate duty.As such, a trust still remains an effective tax planning tool for estate duty.

Source: By  Muneer Hassan (TaxTALK)


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