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FAQ - 6 December 2017

Tuesday, 05 December 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is a Homeowners Association required to submit tax returns?

Q: Does Home Owners Associations need to apply for tax exceptions, file an IT14 return each year and have to register for VAT if annual turnover exceeds R1million?

A: In terms of SARS’s current practice generally prevailing, “the qualifying associations of persons referred to in section 10(1)(e)(i)(cc) (for example, home owners’ associations) are required to apply for exemption to the SARS Tax Exemption Unit in order to qualify for exemption from income tax under section 10(1)(e).” 

The home owners’ association will, even where it is a company, have to submit an IT12EI.

From 1 April 2014 the exemption under section 12(f) of the Value-Added Tax Act was extended by the insertion of paragraph (iv) to include homeowners’ associations.  So, to the extent that a homeowners’ association supplies services to its members and the costs for these services are paid from levy fund contributions received from members, the provision of those services is exempt from VAT.

2. What are the tax implication for a bursary awarded for pre-school fees?

Q: Please advise if there is a tax implication if a bursary is given to an employee for pre-primary school fees. Section 10(1) (q) only refers to grade R to grade 12, that an annual amount over R 20 000.00 is taxable as a fringe benefit. Pre-primary school fees are not mentioned.

A: It is our understanding that grade R, or the reception year, is the year before a child starts formal schooling in Grade 1.  The 2015 Explanatory Memorandum provided the following explanation when it was introduced into the Act:

“Under the NQF Act, NQF level 1 begins at grade 9. Grades R to 8 do not qualify as receiving an NQF level. Effectively, the 2013 amendments inadvertently excluded grades R to 8, which is most of basic education from qualifying for the bursary or scholarship exemption.”

We submit that study assistance at a level before grade R would not qualify for the section 10(1) (q) exemption. 

3. Under what circumstances can a taxpayer claim legal fees?

Q: How much can a taxpayer claim for legal fees? And are they prorated according to winning or losing the court case? And if the judge reimburses the legal costs can the taxpayer still claim legal costs? Do legal costs include all types of trading and rental income too?

A: Please note that the policy relating to the service offered by SAIT prescribes that only guidance should be provided in relation to requests submitted.  Opinions or interpretations carry risks against which SAIT is not indemnified and would effectively cause SAIT to compete with its own members.  Guidance implies that sources or references relevant to your request are provided, but that ultimately your professional judgment is required to be applied to the specific circumstances. 

Ultimately the taxpayer will have to prove that the amount(s) is (are) deductible – refer to section 102(b) of the Tax Administration Act. 

From the facts provided the legal expenses were incurred in respect of a claim, dispute or action at law.  ITC 1419 (49 SATC 45) ... the word 'dispute' covers 'any disagreement as a result of which parties require legal assistance'.  On the face of it section 11(c) will then apply. 

Deductions may however only be made (against income) if the income was derived from a trade.  Section 11(c) expands on this by requiring that the claim, dispute or action at law must have arisen “in the course of or by reason of the ordinary operations undertaken by him in the carrying on of his trade”.   Judge van Reenen, in ITC 1837, said:

“The prevailing view of authors on the subject (See eg: D Meyerowitz: Meyerowitz on Income Tax (2007-2008) p12-6; De Koker & Urquhart: Income Tax in South Africa, p11-8) appears to be that legal expenses are so deductible if the existence of a causal connection between the ordinary operations undertaken by a taxpayer in the carrying on of his trade, on the one hand, and the claim, dispute or action in respect of which such expenses have been incurred, on the other hand, has been established. 

That view is consonant with the view that when the concept ‘by reason of’ is used elsewhere in the Act (eg s 7(3)) it has been interpreted by our courts as signifying ‘some causal relationship’ and would be met not only if a taxpayers’ ordinary operations are the proximate cause of the institution of an action in respect of which the legal expenses have been incurred but also where it is the efficient cause thereof…”

With regard to the capital in nature of the expenses (proviso (i) to section 11(c)) the following is relevant.  In Smith v CIR Judge Hiemstra said the following in relation the word capital in the context of legal expenses:

“In the absence of any indications to the contrary - and I have found none – the word 'capital' has to be given its ordinary meaning. Broadly speaking and for present purposes, it may be said to connote money and every form of property used or capable of being used in the production of income or wealth. Such a commercial or business sense is the sense in which one expects it to be used in the context here in question, and it is to capital in that sense that, for the purposes of sec. 11 (2) (b) bis at any rate, expenditure is to be related in order to determine whether or not it is expenditure of a capital nature.”

Judge Ponnan’s decision in BPSA (Pty) Ltd v CSARS may also be of assistance in determining this issue:

“The purpose of expenditure is important and often decisive in assessing whether it is of a capital or revenue nature.  Expenditure incurred for purposes of acquiring a capital asset of the business is capital expenditure whereas expenditure which is part of the cost incidental to the performance of the income-producing operations as distinct from the equipment of the income-producing machinery is revenue in nature. A distinction is thus drawn between expenditure made to acquire an income-producing concern (in respect of which the outlay is usually non-recurrent) and money spent '... in working the concern for the present production of profit'…”

It is also not a loss or expense, the deduction of which would otherwise be allowable, which it is recoverable under any contract of insurance, guarantee, security or indemnity.  If it is finally, on conclusion of the court case recovered by way of a cost order, it will be treated as a recoupment. 

We are not sure what you mean with “Do legal costs include all types of trading and rental income too?”

Section 11(c) does have a limit, but not with regard to the amount – see the provisos to this section.  We mentioned the capital nature above, but the other one links the outcome of the court case to deduction of or inclusion in gross income of the amount to be paid or received respectively.  

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.



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