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FAQ - 18 June 2014

Wednesday, 18 June 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Deemed dividend in terms of sec 64E(4) of the Income Tax Act (No. 58 of 1962)

Q: The minimum interest rate that should be charged on low interest/interest-free loans to directors / members in order to prevent a deemed dividend from being charged was 6% last year. When I went to SARS's website, however, next to the heading relating to this, the table included refers to fringe benefits, but this table states that the rate on fringe benefits has changed to 6,5% on 1 Feb 2014. Where do I get hold of the rate applicable to loans to directors / members? In the financials there is a director / shareholder with a debit loan of R900 000. I want to prevent a deemed dividend from being charged by SARS, but do not want to charge unnecessary interest on the loan.

A: Our guidance assumes that the provisions of the Companies Act in this regard were observed.  The relevant provision in the Income Tax Act is found in section 64E(4).  Our guidance assumes that the "director / shareholder” is a connected person in relation to that company or to a connected person in relation to a person who is a connected person in relation to that company. 

The amount of the dividend that will be deemed to have been paid (in terms of section 64E(4)(a)) is an amount equal to the market-related interest in respect of that debt, less the amount of interest that is payable to that company in respect of that debt for that year of assessment. 

For the purposes of section 64E(4), 'market-related interest', in relation to any debt owed a company means the amount of interest that would be payable to that company on the amount owing to that company in respect of that debt for a period during a year of assessment if the debt had been owed for that period at the official rate of interest as defined in paragraph (1) of the Seventh Schedule.  This rate has indeed changed to 6.5% on 1 February 2014 (it was 6% before).  See the SARS table at the following link:

We need to comment on your statement "I want to prevent a deemed dividend from being charged by SARS, but do not want to charge unnecessary interest on the loan.”  The relevant words are "interest that is payable to that company in respect of that debt…”  The Act does not provide guidance on the meaning of this phrase.  We submit that it does not mean that the interest must actually have been paid, but must have been payable.  We assume that in the approval of the loan (as mentioned above) it was also agreed that interest will be payable.  We are basically saying that the mere accounting for interest after year end may not meet the requirement that the interest was payable before year end. 

2. Output tax on laboratory services rendered on samples imported from Namibia

Q: My client has a laboratory in CT. He receives samples from Windhoek, do the analysis of the sample in his CT lab and send a report back to Windhoek. The question is whether he must add VAT to his invoice or not.

A: We submit that the client is in actual fact rendering a service and the report itself is part of the service and not an export of goods. 

South Africa does not have a place of supply rule and services supplied to a non-resident may qualify for the rate of zero per cent.  You mention that the client receives samples from Windhoek, but don’t indicate whether or not this person is a resident of the RSA or carries on an enterprise or other activity from a fixed or permanent place in the RSA.  Services physically rendered in the RSA to a person who is not a resident of the RSA can be zero-rated if section 11(2)(l) applies and the required documents to prove this was obtained (section 11(3)).  (All section reference are to sections in the Value-Added Tax Act). 

If we accept that services are not supplied directly in connection with land or any improvement thereto situated inside the RSA, there are two issues which must be considered.

The recipient must be "a person who is not a resident of the Republic” (RSA).  This is a defined concept and basically requires that the company must not carry on in the RSA any enterprise or other activity and from a fixed or permanent place in the RSA relating to such enterprise or other activity.  If the person is therefore a resident of Namibia this may apply. 

The second issue then is that the said person (the non-resident) or any other person must not be in the RSA at the time the services are rendered.  In this instance the person in Windhoek must NOT be present in the RSA at the time the service is rendered (section 11(2)(l)(iii)) for the rate of zero per cent to apply.  If the non-resident is present in the RSA at the time, the service will be standard rated (section 7(1)(a)). 

3. Treatment of the Employment Tax Incentive in the hands of the employer

Q: How is the Employment Tax Incentive given by SARS treated in the hands of the employer? Is it treated as exempt income in the financials or is it included in taxable income and consequently subject to tax at 28 per cent?

A: The Employment Tax Incentive Act, 2013 (as did the Bill) actually deals with the tax consequences of the employment tax incentive – in the Schedule (section 13 on page 9) where it amends section 10 of the Income Tax Act. 

The employment tax incentive is exempt from normal tax in terms of section 10(1)(s).  It is therefore not subject to normal tax at 28%. 

4. Disposals from a trust par 80(1) and (2) of the Eighth Schedule

Q: The taxpayer is a trust and is the registered owner of a block of flats which is being sold. The taxpayer is of the opinion based on advise obtained from another accountant that the sale of the fixed property can be processed through in the name of the trustee and beneficiary. The trustee / beneficiary would then be subject to the CGT at the rates applied to an individual and not at the CGT rates applied to the trust. Is this view correct?

A: In providing this guidance, it is assumed that the trust is a discretionary resident trust and that all of the beneficiaries are ‘resident’ as defined in sec 1 of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’). It is further assumed that the attribution rules in par 68, 69, 71 and 72 do not apply to the asset being disposed of. 

Par 80(2) of the Eighth Schedule to the Act would allow the trust to dispose of the asset and to distribute the capital gain (not a loss and not the asset) to the beneficiary, in which case the disposal would not give rise to a capital gain in the hands of the trust (par 80(2)(a)), but rather in the hands of the beneficiary and the capital gain must be taken into account in calculating the aggregate capital gain or loss in the hands of the beneficiary to whom the gain is distributed (par 80(2)(b)). Thus, by using par 80(2), the capital gain can be attributed to the beneficiary and would consequently be subject to an annual exclusion in terms of par 5 of the Eighth Schedule and it can also be subject to a more favourable inclusion rate of 33.33% in terms of par 10(b)(i) of the Eighth Schedule. It should be noted that this would only apply if a capital gain comes into existence as capital losses would be trapped in the trust by virtue of par 39 of the Eighth Schedule. 

If you take the option of first vesting the asset in the beneficiary before the beneficiary disposes of the asset, then there would be a disposal in terms of par 11(1)(d) of the Eighth Schedule which would be deemed to have taken place at proceeds equal to the market value of the asset in terms of par 38 of the Eighth Schedule. The time of disposal must, in this case, be determined by par 13(1)(a)(iiA) of the Eighth Schedule. Par 80(1) would then apply which would cause the capital gain (not capital loss) to be disregarded by the trust and to be taken into account in the beneficiary’s aggregate capital gain or loss (disposal 1). The beneficiary would then again be liable for CGT when he/she ultimately disposes of the asset to the third party (disposal 2).

Therefore, should your client take the par 80(1) route, then two disposals would come into existence as opposed to only one disposal when the gain gets attributed to the beneficiary in terms of par 80(2) of the Eighth Schedule.



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