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FAQ - 30 October 2014

Tuesday, 28 October 2014   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1.  Medical expense deduction for the hearing impaired 

Q: I have a client whose child is hearing disabled. The doctor completed the ITR-DD form and stated the child's disability is "moderate”. The child is, however, in a school with small classes because of his disability.

SARS just rejected the medical deduction because the disability is moderate and not severe.

Where in the Income Tax Act does it say that moderate cases are rejected; is it also possible to object and what section of the law can I quote?

A: In terms of section 6B (or possibly section 18) a ‘disability’ means a moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if the limitation—

(a) has lasted or has a prognosis of lasting more than a year; and

(b) is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner.  

It therefore includes a moderate limitation.  SARS discusses this issue (moderate) in paragraph 9.3.2 Guide on the Determination of Medical Tax Credits and Allowances (Issue 4).  

We are not sure what the relevance of ‘small classes’ are, but submit that, if the rejection was solely on the basis that it was moderate, the taxpayer should object.  We accept that it was diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by SARS – see the guide.

2.  Deductibility of cellphone expenses for members of Parliament and the Legislature

Q: Parliament members they receive a monthly allowance which is not included in the income and therefore does not reflect on the IRP 5 certificate. On assessment we can therefore only claim cellphone expenses which exceeded their yearly allowance. The members of Legislature also receives an allowance, but this allowance is reflected under code 3713 on their IRP 5 certificates. What amount will the Member of Legislature be able to claim against his Public Office Bearers (‘POB’) allowance?

In my opinion, due to the fact that the member of Legislature did not get the benefit of the expense during the tax year and was taxed in full thereon, he should be able to claim the full cellphone claim on his POB allowance.

A: Our guidance assumes that each of the individuals concerned are a holder of a public office as defined in section 8(1)(e).  

The principle is that cell phone expenses can only be ‘deducted’ if the holder of the public office receives an allowance. If not section 23(m) will apply. We are not sure why the allowance does not reflect on the IRP5 and can’t comment on that. It is possible that section 8(1)(f) is relevant in that instance. We copied it below: 

"Where it is expected of any person contemplated in paragraph (e) (i) to defray any expenditure referred to in paragraph (d) out of his salary received as the holder of any public office, an amount equal to a portion (which shall be determined by the National Assembly or the President, as the case may be, as provided for in the Remuneration of Public Office Bearers Act, 1998 (Act 20 of 1998)) of such salary shall for the purposes of paragraph (d) be deemed to be an allowance granted to such person.” In that instance section 23(m) will not apply.  

In all instances the allowance granted to the holder of any public office to enable him or her to defray expenditure incurred by him in connection with such office is for the purposes of section 8(1)(a) deemed to have been expended by him or her to the extent that expenditure relevant to such allowance and not otherwise recoverable by him has actually been incurred by him for the purposes of his office in respect of—

(i) secretarial services, duplicating services, stationery, postage, telephone calls, the hire of office accommodation and the maintenance of such accommodation;

(ii) travelling;

(iii) hospitality extended at any official or civic function which the holder of such office is by reason of the nature of such office normally expected to arrange.  

The emphasis is on the phrase "actually incurred …”.

3.  Objecting to penalties and interest levied by SARS on provisional tax top-up payment being late due to late processing of payment by a bank

Q: Our client’s provisional tax top-up payment was not processed by the bank on time therefore payment was received by SARS on the 1st October instead of 30 September. This resulted in penalties and interest being levied by SARS. Please advise the best channel to follow to have this amount reversed as clearly it was not the client’s fault.

A: It is possible that the penalty that was levied in this instance is the understatement penalty – refer to paragraph 20 of the Fourth Schedule. We submit that the reason then is that the final estimate was less than the required 80% of taxable income. The only ground for objection would then be to satisfy SARS that the estimate "was seriously calculated with due regard to the factors having a bearing thereon and was not deliberately or negligently understated”.  

4.  Employee using private vehicle (fuelled by the employer) for work purposes 

Q: If an employee uses his private vehicle for business purposes e.g. for deliveries, meeting with clients etc. and the company provides the fuel for these trips, will this be an expense for the company? Furthermore, will this expense be taxable in the vehicle owner’s name? Note that he doesn't receive a travel allowance or other allowances. 

A: The table on page 14 of the SARS guide for employers in respect of allowances (2015 tax year) shows in which circumstances a travel allowance is subject to Employees' Tax and the relevant code under which it must be reflected on the IRP5/IT3(a) certificate.  Against the item "Fuel and expenses paid by the employer (e.g. petrol, garage and maintenance cards)” it states that employees’ tax must be withheld and it must be reflected against code 3701.  

The employee will make a deduction (on assessment) and if that is less than the amount so reflected it will be taxed.  

The employer will make a deduction under section 11(a).  

5.  What is meant when a Double Tax Agreement (DTA) is signed but not ratified?

Q: I would like to provide an opinion on investing in Chile. The DTA between SA and Chile is however only signed but not ratified. What does this mean?

A: This is dealt with in section 108 of the Income Tax Act (and of course the Constitution allows for it). The process is as follows:

The two countries sign the agreement after it has been negotiated.  It must then be ratified by both countries. In terms of the RSA ratify means ‘approval by Parliament of any such agreement, as contemplated in section 231 of the Constitution’. The next step would then be to notify, by publication in the Gazette, the arrangements thereby made. The arrangements so notified shall thereupon have effect as if enacted in the relevant Act.  

The agreement with Chile is therefore not effective yet.  

6. Interest-free loans donated to a special trust – section 7 attribution

Q: At SAIT’s 2014 Trust Back to Basics seminar, it was suggested that donors should charge interest on loans to a trust otherwise a disposition would arise which would be taxable in the donor’s hands. Kindly confirm if this is the case for a special trust.

A: The courts have held that an interest-free loan can indeed constitute an "other disposition” for the purposes of section 7 of the Income Tax Act and would therefore apply to a special trust as well.  

SARS states in their Draft Guide on the Taxation of Special Trusts that "section 7(2) to 7(8) may have the effect that the income of a trust is taxable in the hands of the person who made a donation, settlement or other disposition to a trust. In some situations this rule will apply even if the amounts have been vested in a beneficiary, such as when the beneficiary is a spouse and tax avoidance is involved or when the beneficiary is a minor child or when the donation is revocable at the instance of the donor.”  

7.  Objection involving the section 10(1)(gC) exemption  

Q: I have a client who rendered services both inside SA and outside SA. During the period outside SA he continued to contribute to his SA pension fund. He retired on 31 January 1999 and receives a pension and an annuity from his retirement fund. The retirement fund withholds PAYE on the full pension and annuity, and issues IRP5s at year end showing the pension and annuity income as fully taxable. When completing his tax return, I have always apportioned the pension and annuity income and claimed a deduction for that portion of his pension and annuity which relates to services rendered offshore. SARS has always in the past allowed this deduction.

In the 2013 tax year, the same procedure as above was followed, except that the IRP5 figure on the IT12 tax return had to be amended as there is no longer a place on the IT12 to claim the deduction for the exempt portion of the pension and annuity. SARS initially raised an assessment as per the return submitted, but then raised an additional assessment to tax the exempt portion of the pension and annuity.

A letter requesting reasons for the taxation of the exempt portion of the pension and annuity was sent to SARS. SARS responded to advise me that the Notice of Objection was invalid as the requirements of section 10(1)(gC)(ii) have not been met. A  NOO was submitted on e-filing objecting to the disallowance of the deduction for the exempt portion of the pension and annuity. SARS responded to advise that the Notice of Objection was invalid as the requirements of section 10(1)(gC)(ii) have not been met. A further NOO was submitted on e-filing objecting to the "Invalid" notice above from SARS. SARS responded to advise that the Notice of Objection was disallowed as section 10(1)(gC)(ii) had not been met.

A Notice Of Appeal (NOA) was submitted on e-filing. SARS responded to advise that the "Invalid" notice from SARS had been withdrawn and the objection would be considered. In a further letter SARS advised that the NOA submitted on efiling was invalid as the objection still had to be considered. SARS advised "Disallowance of Objection" as section 10(1)(gC)(ii) had not been met, and advised that a notice of appeal could be lodged. A second NOA was submitted on e-filing. No correspondence received from SARS but on e-filing if I click on the second NOA it states "Rejected by SARS" and a message pops up to state "Dispute process not followed. Request for objection not lodged."

Please advise if my understanding of section 9(2)(i) and section 10(1)(gC)(ii) is correct. I also request assistance on how I take this matter further with SARS as in my opinion I have exhausted the options available to me in terms of e-filing.

A: In our view your interpretation of the law is correct and the pro-rata exemption would apply to resident taxpayers who have rendered foreign services which created the relevant pension amount. However the letter from SARS states two requirements namely the foreign service and that the fund paying the pension must be foreign which in your case it is not. The latter they seem to use as a requirement for foreign source. You have not addressed this latter requirement in your objection or appeal. In this regard it would be useful to address this matter by citing the source rule in the CIR v Lever Bros case which is the originating cause (i.e. the foreign service contributions) and not where the fund is located. 

 In respect of the practical matter of filing the appeal, should the eFiling system not allow you to file, we would advise you to file manually. We would furthermore advise that you concurrently lay a complaint to the Call Centre that the eFiling system is unlawfully prohibiting you from filing the appeal. Following the call centre complaint and escalation to SSMO, should you still not succeed please contact us so that we can attempt to escalate the matter to head office prior you filing a formal complaint to the Tax Ombud. We understand that the proposed route is laborious and frustrating but it is however required that you follow the internal remedies first.

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.


Antonie P. Goosen says...
Posted Thursday, 30 October 2014
The answer to question 3 is WRONG1



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