Workshop content 08:30 – 09:10 The taxation of withdrawal benefits 09:10 – 10:00 Employees tax and related issues 10:00 – 10:30 Capital allowances 10:30 – 11:00 Tea 11:00 – 11:45 Dividends tax 11:45 – 12:30 Micro businesses 12:30 – 13:00 Court cases and sundry Sundry matters • Taxable benefits • Employee use of cellular phones and computers • Repayment of receipts • Medical • Donations to public benefit organisations • Employee tax considerations Taxable benefits Employee uses a cellular phone How must History and laptop computer also for private use be private purposes determined? An employee has been granted the employee The cash equivalent the right to use an asset uses it (the of the private use of asset) mainly AN for the purposes the asset will have D of the no value the asset consists telephone or employer’s computer equipment business A service has at the expense of the service is the employer been rendered to used by the the employee employee the service will have mainly for the no value AN purposes of the D employer’s the service is any business communication service Example A restraint of trade agreement in terms of which an employee received R500,000 was concluded on the first day of year 1. Facts: The restraint was for a period of 5 years, but was cancelled at the end of year 3. The employee repaid R200,000. Gross income Payment of Can this be Employee deducted? of R500,000 R200,000 Year of 1 2 3 4 5 assessment Allowed to be deducted or set off under the provisions Employer of section 11(cA) at R100,000 per year of assessment Recoupment of R200,000 Refund after receipt – deduction allowed in three instances any amount received or accrued: The amount refunded qualifies to be deducted in respect of services rendered or to be rendered (includes a voluntary award) AND in respect of or by virtue of any is employment or the holding of any office refunded as was included in the taxable income by that is not prohibited by of that person person section 23(m) as compensation for any restraint of trade imposed on such person sections 11(nA) and (nB) Not for purposes of employees tax General • Section 18 allows a deduction in respect of expenses that would otherwise have been prohibited (in terms of section 23 – maintenance of the taxpayer or his family). Not available if recoverable • The deduction is made from income, but, in part it derives its value from taxable income • What qualifies to be deducted? • Contributions made by the taxpayer to a medical scheme in respect of • The taxpayer or any dependent (includes a spouse) • Amounts paid to duly registered • Medical practitioners for professional services rendered or medicines supplied • Nursing home or hospital in respect of illness or confinement • Pharmacists for medicines supplied on prescription • Any expenditure necessarily incurred in respect of any physical disability suffered by the taxpayer, spouse, child or dependent “physical impairment or disability” expenditure The requirements of the section 18(1)(d) expenditure: prescribed by the Commissioner necessarily incurred and paid by not recoverable by the taxpayer or the taxpayer his or her spouse in consequence of any physical the taxpayer, his or her spouse or child, impairment or disability suffered or any dependant of the taxpayer by the dependant must, at the time such amounts were paid, be admitted as a dependant of the taxpayer in terms of the medical scheme or fund of the taxpayer ‘‘disability’’ – defined in section 18(3) a moderate to severe limitation of a perform daily function or person’s ability to activities as a result of a physical, sensory, communication, intellectual or mental impairment IF the limitation has is diagnosed by a duly registered lasted or has a AND medical practitioner in accordance prognosis of lasting with criteria prescribed by the more than a year Commissioner The taxpayer has made contributions to a medical scheme and (or) paid amounts to medical practitioners etc? Contributions by employer Deduction for 2009 Was the taxpayer 65 years of age or older on the last day of the year or Claim contributions assessment? and medical expenses Yes in full Is the taxpayer, his or her spouse or child is a handicapped person? No Contributions made up to a capped amount The The aggregate of the contributions (above the to the extent that it exceeds deduction limit) and the other 7,5% of taxable income is allowed in two expenses parts Balance of remuneration – “payroll giving” Item Compulsory – employer At the option of must deduct the employer any contribution to when employer deduct any pension fund from remuneration when employer deduct when paid by the retirement annuity fund employee from remuneration any contribution by the if the employer if the employer does employee to a medical effects payment of not effect payment scheme the contribution of the contribution Balance of remuneration – “payroll giving” Item Compulsory – employer At the option of must deduct the employer any premium in terms of an paid by the insurance policy (cover employee against the loss of income) any donation made by the employer on behalf of the employee Employees tax is calculated on this balance of remuneration amount Tax cases • Fourie Beleggings v CSARS (168/08)  ZASCA 37 (31 March 2009) • Confirmed the decision in WJ Fourie Beleggings CC v C:SARS • Tax case 11410 to contrast with Tax case 12399 • Bester Trust v C: SARS (282/2007)  ZASCA 55 WJ Fourie Beleggings CC v C:SARS The facts Owner of the The value of the contract Elgro hotel was R8 791 913,70 WJ Fourie Beleggings agreed to accommodate a number of students Naschem Lessee and officers and to (WJ Fourie supply them with Beleggings) meals from 1 April 2001 for 791 days The students were to A few days after the attack on, inter alia, the twin be trained by Naschem towers in New York (United States of America) in South Africa on 11 September 2001 the students left the Elgro Hotel without any rhyme or reason. students from the United The hotel was also damaged by the students Arab Emirates WJ Fourie Beleggings CC v C:SARS The facts - continued WJ Fourie WJ Fourie Beleggings CC viewed Beleggings the conduct of the students as a Naschem CC breach of the agreement. There was still R4,7 million outstanding on the contract WJ Fourie Beleggings CC lost a lot of clients After WJ Fourie Beleggings CC threatened to sue Naschem the parties agreed to settle the matter out of court. WJ Fourie Beleggings received an amount of R1,292,760 from Naschem. This amount was not computed with reference to any damages suffered by the CC WJ Fourie Beleggings CC waived its right to institute any claim against Naschem. WJ Fourie Beleggings CC v C:SARS The test applied by the court When considering the nature of a compensation receipt the court should seek to answer two fundamental questions. Is the compensation a If the receipt of the trade? answer Is it a capital or a is YES revenue receipt? If the WJ Fourie Beleggings CC answer alleged that the amount is a is NO receipt of trade and that it is There must capital. then it cannot be said that the money was therefore be a received as part of the close connection profit-making structure between the trade of the business. Neither being carried on and the cause of In this matter it is clear that can it be said to be the the compensation was fruit of the profit-making the payment of the compensation. indeed a receipt of the trade. structure. The capital nature of the receipt • The above ‘tests’ are not always helpful when one is dealing with compensation for cancellation of trading contracts. • An amount paid by way of damages or compensation takes on the character of the loss in compensation for which it has been paid. If the payment is made in respect of a loss of income, the receipt will be of a revenue nature. A receipt arising on the cancellation or variation of a trade agreement is normally of a revenue nature. • Where, however, a contract is so crucial that its loss would cripple or destroy the business it may transcend the status of an ordinary commercial contract. • “…Income received for the termination of such a contract may – depending on the facts and circumstances of the particular case – be capital…”. The method does not determine the nature • If it is shown that the cancellation of a commercial contract affected the profit-making structure of the business or that it affected the whole manner in which the business is conducted and that compensation has been paid therefore then that compensation would be of a capital nature. • If the amount to be paid is computed with reference to future loss of profits the receipt will remain of a capital nature. The method used to compute the sum therefore does not necessarily determine the nature of the sum. Decision • The sum of money received by the appellant was not in a material sense received as compensation for not being allowed to make profit by not hiring out rooms at the hotel, i.e. • it was not received in respect of the termination or sterilisation of any part of the appellant’s business. • it was also not received in respect of a capital asset. The capital asset (the hotel) could forthwith be harnessed to produce profit by hiring out rooms. • Expenditure to restore or maintain an asset to its normal function is not capital. It is revenue and is deductible as a revenue expense. An accrual or compensation to effect the necessary repairs would therefore also be of a revenue nature. Decision continued • It is clear to me that the appellant was compensated for the loss of profit that it would have made had the students not moved out. It was paid to help with its cash flow problems. • In my view, the appellant has not succeeded in proving on a balance of probabilities that the compensation was of a capital nature. Tax case 11410 The facts sold shares to the value of The ABC R2,628,340 to Familie trust Mrs. A on a loan account, interest was charged and the loan was repayable on demand Mrs. A died the loan account was left as a bequest to the trust has a debt owed by a person to a creditor been The issue reduced or discharged by that creditor Tax case 11410 The decision The creditor, the testatrix, disposed of an asset by discharging the trust’s debt for no consideration. This created the situation where the claim against the trust was extinguished by operation of law, by way of set-off between the estate and the beneficiary, the trust. It is not the occurrence (or “act”) of set-off which renders the result thereof in the hands of the debtor taxable, but the act which amounted to a discharge of the debt: The drawing up of the last will and testament and its coming into operation at the date of death. Tax case 11410 The decision Paragraph 11(1) of the Eighth Schedule expressly includes any operation of law which results in the extinction of an asset. The estate’s asset was extinguished by the operation of law, namely the set-off, which in turn was created by a disposition by the testatrix. This transaction consequently falls squarely within the provisions of paragraphs 12(5) and 40(2) of the Eighth Schedule to the Act Tax case 12399 The facts the testatrix and certain personal items The surviving her husband are bequeathed to spouse executed a joint will in terms the residue of the estate whereof they subject to the usufruct in favour of the surviving The XXX Trust disposed of their (the sole heir) estate as follows spouse and the son to the testatrix died the debt owed by the trust to the testatrix had The issue been discharged for no consideration and that the trust had acquired that claim for no consideration (paragraph 12(5) of the Eighth Schedule) Tax case 12399 - continued Established from the facts What is therefore clear from the wording of the will, is that it was the intention of the testatrix that her claim against the trust (her loan account) was to form part of the residue in the estate. This claim was not separately bequeathed to the trust as a legacy The decision Besides the unambiguous wording of the will, there are probabilities indicative thereof that it was not the intention of the testatrix to specially bequeath the debt represented by her loan account to the appellant as a legatee. I therefore conclude that the claim of the testatrix under her loan account formed part of the residue of the estate, and that it was not her intention to dispose of this claim in favour of the appellant for no consideration as contemplated in paragraph 12(5) of the Eighth Schedule to the Act. Tax case 12399 Comments in the decision Could the manner in which the executor administered the estate be decisive for the question whether a capital gain arises on such an award? The answer is to be found in the wording of paragraph 12(5) of the Eighth Schedule What is required in terms of this paragraph is an act by a creditor whereby he/she consciously intended to discharge a debt for no consideration. The determining factor is the intention of the creditor whereby he/she disposed of a debt or an asset, and not the subsequent manner in which that creditor’s estate may be administered. Bester Trust v C: SARS (282/2007)  ZASCA 55 • The second question concerns the taxpayer’s entitlement to an opening stock deduction. • There is no suggestion that sand was, after separation, allowed to lie or accumulate on the farm. From these facts and inferences two conclusions are inevitable. • First, that in the overwhelming majority of cases (the only possible exception being separation at the end of a year of assessment and removal a day or two later) separation and disposal took place within the same year and therefore s 22 was of no application to the separated stock. • Second, because separation and transfer of ownership were, to all intents and purposes, if not simultaneous, then at least part of one continuous process, the taxpayer never intended to create or hold trading stock in the separated sand for the short time preceding removal from the farm. For this reason too, s 22 would not have become a relevant factor in the financial history of the sand. Bester Trust v C: SARS (282/2007)  ZASCA 55 • Counsel was unable to refer us to any statutory provision which bound us to enforce or empowered us to adopt or sanction this practice (of which no evidence was in any event adduced). Nor is the formulation capable of enforcement, since what is ‘normal’ within the understanding of SARS is beyond the scope of judicial notice. In any event, as I have already found, no ascertainable part of the sand deposit could fairly be described as trading stock held by the taxpayer.
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