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FAQ - 9 December 2015

Wednesday, 09 December 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is a donation received by a trust gross income?

Q: A trustee donates R100 000 per year to a family trust by physically paying over the R100 000 into the trust’s bank account.Will this R100 000 received by the trust be seen as income of a capital nature for income tax purposes or as gross non-taxable income?

A: Our guidance is limited to the request.  

The tax consequences of donations (for the donee (recipient)) are not specifically dealt with in the Income tax Act.  As there is a receipt one must apply the principles of the definition of gross income (in section 1(1) of the Income Tax Act) to determine if it will have tax consequences.  Our courts have laid down the law in this regard.  According to Judge Smalberger (in CIR v Pick ‘n Pay Employee Share Purchase Trust) "... any receipts accruing to the Trust were not intended or worked for, but purely fortuitous in the sense of being an incidental by product.  They were therefore non-revenue. That makes them accruals of a capital nature falling outside the definition of "gross income" in the Income Tax Act, and therefore not subject to tax.”  Judge Southwood in CSARS v Wyner agreed with this and stated the principle as follows: "This means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were designedly sought for and worked for...”   

The taxpayer (the trust) bears the burden to prove that it was a donation and of a capital nature if it is disputed by SARS.  

2. Can SARS increase a provisional estimate even after we’ve supplied reasons for a lower estimate?

Q: SARS increased our 2016 1st provisional estimation based on paragraph 19 of the Fourth Schedule after we provided them with accurate management accounts and explanations on how we calculated our estimated profit.  Can paragraph 19 be applied if we have provided SARS with fair reason?

A: Unfortunately the wording of para 19(1)(c) is rather clear: the first provisional tax payment cannot be lower than the basic amount unless the Commissioner agrees to accept a lower amount. The provision still leaves it up to the Commissioner to decide where or not to accept a lower amount, even if the taxpayer has provided very good reasons. But the discretion to accept a lower amount is still the Commissioner’s.

We can appreciate the fact that this obviously puts your client in a difficult position, as far as cash flow is concerned. There’s been some lobbying efforts to amend para 19 precisely to deal with matters such as yours but they have not succeeded as yet. You may also like to know that the recently issued SARS Draft Interpretation Note 1on Provisional Tax Estimates has some interesting comments in this regard:

"If, after requesting a provisional taxpayer to justify an estimate, the Commissioner is dissatisfied with the taxpayer’s estimate and decides to increase the estimate, an additional assessment will be issued. In certain circumstances the Commissioner may base that additional assessment on an estimate. Provisional taxpayers who are aggrieved with the additional assessment may object to the assessment. A provisional taxpayer may only object against the additional assessment issued and not to the Commissioner’s decision to require the provisional taxpayer to justify the estimate or to furnish related particulars. 

The additional provisional tax payable on an increased estimate must be settled within a period determined by the Commissioner. The obligation to pay the increased amount within this period exists even if the provisional taxpayer lodges an objection or appeal and is subject to a late payment penalty if not paid within the period permitted” (See page 12 of )

But we are not too confident that this will work, especially given the fact that the Interpretation Note is still in draft form.  

3. If SARS requests bank statements as proof of PAYE paid, should I supply it to them? 

Q: Our client is a salaried employee and has been selected for audit.  Since the IRP5 was prepopulated on eFiling, we did not upload the original certificate as the taxpayer did not receive one. After the audit, without requesting the original IRP5, SARS disallowed the tax credits. The taxpayer objected and submitted the original IRP5 to SARS. SARS then asked for all the client’s pay sheets and bank statements. The taxpayer got a letter from his employer confirming the PAYE was paid over to SARS and that he does not have the pay sheets and bank statements as he was not aware that he must keep such records.  Does the taxpayer have to supply SARS with the requested documents to prove his tax was paid to SARS?

Note the underlined part of section 46(1) of the TAA:

"SARS may, for the purposes of the administration of a tax Act in relation to a taxpayer, whether identified by name or otherwise objectively identifiable, require the taxpayer or another person to, within a reasonable period, submit relevant material (whether orally or in writing) that SARS requires.

Though it is understandably cumbersome for you and the taxpayer, for the purposes of tax administration it is not unreasonable for SARS to request the pay sheets and bank statements to really make sure the tax credits ought to be given. 

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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