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FAQ - 7 April 2015

Wednesday, 08 April 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. What is the tax treatment for a licence fee paid for operating a petrol station? 

Q: One of my clients has paid a licence fee to a petrochemical company for the operation of a petrol station for an indefinite period. How do I handle a transaction like this? Am I able to write this amount off over a period of time?

A: There is in our view not a capital allowance for this licence fee and it will only be deductible if it is revenue rather than capital in nature and deductible per s11(a) ITA. In CSARS v BP SA Pty Ltd 2006 ZASCA 61 (25 May 2006) the court held that a prepaid rental payment which was incurred to secure petrol stations selling its petrol for 20 years, which in our view sounds similar to the purpose of the license fee paid, was connected to the capital structure and not income operations, thus being capital in nature.

As noted you would have to apply the various capital v revenue test to conclude on this matter after determining exact purpose and intention for the payment.

2. Is PAYE of 35 per cent deductible from the payment to a sub-contractor?

Q: One of my clients, who is a member of a CC, is working at a TV station doing subcontracting in sound. The accounts department there has told him that if he invoices the station in the CC’s name they will deduct 35% tax. Apparently if he invoices in his personal name then he will need to obtain a tax directive. Is this correct? 

A: We assume that the close corporation is contracted to do the work, i.e. the client is not doing the work in his own name.  The obligation to deduct employees’ tax would then only arise for the TV station if the CC is a personal service provider as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act.  Based on the facts provided we are not sure why they consider the CC to be one. 

We are not sure where the 35% comes from – it may well be based on an old SARS guide.  As a personal service provider that is a company (the close corporation would be one) is only taxed at 28% the tax to be deducted cannot exceed that.  The rate of 28% can be reduced if a tax directive is obtained. 

We assume that the new agreement will be entered into in terms of which the services are no longer rendered by the CC (i.e. the proviso to paragraph (c) of the definition of gross income in section 1(1) of the Income Tax Act doesn’t apply), but by the member.  The issue of employees’ tax would then only arise if the individual is an employee – i.e. not carrying on a trade independently or deemed not to be carrying on one.  A directive would then be necessary if the employee can make deductions that are not prohibited by section 23(m).  

3. How do I re-submit a corrected IRP6? 

Q: I have recently discovered, whilst going through my calculations for provisional tax period 201502, that the profit used at that stage was understated. It was based on a net profit "year-to-date” from pastel that a clerk obtain for me (which was incorrect). What is SARS view on correcting this and can SARS waive the potential penalties for understatement?

A: Yes, you may request for the correction of an IRP6.

 See 5.4 of the document on this link:

The penalty for the underpayment of provisional tax is dealt with in para 20 of the 4th Schedule to the ITA.

Para 20(2) states:

"Where the Commissioner is satisfied that the amount of any estimate referred to in subparagraph (1) was seriously calculated with due regard to the factors having a bearing thereon and was not deliberately or negligently understated, or if the Commissioner is partly so satisfied, the Commissioner may in his or her discretion remit the penalty or a part thereof.”

Based on this provision, you may request SARS to remit the penalty by writing a letter and sending it either to the pcc email address for your region, or by dropping it off at a SARS branch.

Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.



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