CGT exit charge

Tax , ,

In terms of section 1 of the Income Tax Act[1] a natural person will be a “resident” for tax purposes if that person is ordinarily resident in the Republic of South Africa (“the Republic”). Persons who are not at any time during the relevant year of assessment ordinarily resident in the Republic, will also qualify as “residents” if they meet the so-called physical presence test. The definition of “resident” furthermore specifically excludes any person who is deemed to be exclusively resident of another country for purposes of the application of any double tax agreement entered into between South Africa and that other country.

 

When leaving the Republic to go work and live in another country, it may therefore result in such person ceasing to be a “resident”. In these circumstances, careful consideration should be given to the possible capital gains tax (“CGT”) consequences which may arise.

 

Section 9H of the Income Tax Act provides that where a person ceases to be a resident for tax purposes, the person must be treated as having disposed of his/her assets for an amount equal to the market value of such assets (the so-called “CGT exit charge”), in other words, a price which would be obtained between a willing buyer and a willing seller on an arm’s length basis. This disposal is deemed to take place the day immediately before the individual ceases to be a tax resident. The person is furthermore deemed to immediately reacquire such assets at a cost equal to this same market value, which expenditure must be treated as an amount of expenditure actually incurred for the purposes of paragraph 20(1)(a) of the Eighth Schedule. In other words, the market value of the assets at the time of the exit will be treated as the base cost of such assets in the future.

 

The CGT exit charge does not apply to immovable property situated in the Republic held by that person or any asset which after cessation of residence becomes attributable to a permanent establishment of that person in the Republic. Also excluded are certain qualifying equity shares received in terms of broad-based employee share plans,[2] as well as qualifying equity instruments or rights to acquire certain “marketable securities”.[3]

 

Persons leaving the Republic either permanently or for extended periods should therefore consider whether or not they cease to be residents in the Republic for tax purposes and whether the CGT exit charges may apply to them.

 

[1] No. 58 of 1962

[2] See section 8B

[3] See sections 8A and 8C respectively

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Additional medical expenses tax credit

Tax , ,

Section 6B of the Income Tax Act[1] provides for an additional medical expenses tax credit (“AMTC”) which is calculated against qualifying “out of pocket” medical expenses. This tax credit reduces the amount of income tax a natural person (hereinafter referred to as the “taxpayer”) is liable to pay. The AMTC is granted in addition to the medical scheme fees tax credit (“MTC”) in respect of fees paid to a registered medical scheme.[2]

 

The AMTC can be claimed by a taxpayer in respect of medical expenses incurred by that individual towards the medical expenses of that taxpayer as well as any of his or her dependants as defined. A “dependant” includes the spouse or partner of the taxpayer, any dependent children of the taxpayer or spouse, any other members of the taxpayer’s immediate family in respect of whom the taxpayer is liable for family care and support as well as any other person who is recognised as a dependant of the taxpayer under the rules of the relevant medical scheme.

 

In order for the expenses to qualify for the AMTC, the expenses must not have been recoverable by the taxpayer from any person (e.g. from the taxpayer’s medical scheme or an insurer under a medical gap cover insurance plan). Qualifying medical expenses can furthermore only be claimed in the year of assessment during which they are actually paid.

 

The types of expenses that would qualify for the AMTC include amounts paid for services rendered and medicines supplied by any duly registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist. Costs incurred for hospitalisation in a registered hospital or nursing home or home nursing by a registered nurse, midwife or nursing assistant will also qualify.

 

Any “over the counter” medicine will not qualify unless it is prescribed by any duly registered physician (as listed above) and acquired from a registered pharmacist. Medical expenses incurred and paid outside South Africa will qualify if it relates to services and medicines which are substantially similar to those listed above. Furthermore, the Commissioner may also prescribe qualifying expenses in respect of physical impairment or disability that could qualify for tax relief.

 

The AMTC amount is based on specific formulas and will depend on the taxpayer’s age (i.e. whether or not the taxpayer is 65 and older) and whether the taxpayer, his or her spouse or any of the taxpayer of his or her spouse’s children has a disability as defined.

 

[1] No. 58 of 1962

[2] Section 6A of the Income Tax Act

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Transfer duty

Property , ,

Transfer duty is a tax levied upon the purchaser of immovable property situated in South Africa.[1] The duty is levied in accordance with the following sliding scale and is based on the value of the property which is the subject of the transfer:

 

Value of the property (R)

 

 Rate

 
0 – 900 000

 

 0%

 
900 001 – 1 250 000

 

 3% of the value above R900 000

 
1 250 001 – 1 750 000

 

 R10 500 + 6% of the value above R 1 250 000

 
1 750 001 – 2 250 000

 

 R40 500 + 8% of the value above R 1 750 000

 
2 250 001 – 10 000 000

 

 R80 500 + 11% of the value above R2 250 000

 
10 000 001 and above

 

 R933 000 + 13% of the value above R10 000 000

 

 

While the sliding scale above previously only applied to natural persons acquiring property, this is no longer the case, and legal persons too are subject to transfer duty based on the above table. (Previously, legal persons were subject to transfer duty simply at the maximum rate in the table being applied to the entire value of transfers where a legal entity bought property).

 

Based on the above table therefore property transfers involving property worth less than R900,000 are effectively exempt from transfer duty, although the tax exposure may quickly thereafter jump to involve significant amounts. From the perspective of individuals buying property financed by way of a mortgage bond registered in favour of a lending bank, the duty quickly becomes a material consideration when purchasing a property, considering that the financing of the duty is typically not covered by financing provided by a commercial bank and which therefore may require the duty to be settled by way of existing cash resources available to prospective buyers.

 

Most notably, property transfers on which the transfer duty may be levied are not limited to transfers of immovable property only, but also includes the transfer of shares of so-called “property rich residential companies”, that is the sale of shares in a company where more than 50% of the value of such a company is derived from residential property owned by that company.[2] [3]

 

Various exemption apply in respect of transfers of property where the transfer duty will not be levied.[4] These include where the transfer involves a transaction where the relevant group relief provisions of the Income Tax Act[5] are applied, or where the transfer is subject to VAT (i.e. where the seller sells the property as part of its VAT enterprise).[6]

 

[1] Section 2(1) of the Transfer Duty Act, 40 of 1949

[2] See paragraphs (d) and (e) of “property” in section 1 of the Transfer Duty Act.

[3] Interestingly, the anti-avoidance provision does not extend to shares transferred in companies which own non-residential property.

[4] Section 9 of the Transfer Duty Act.

[5] 58 of 1962

[6] Section 8(15)

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

 

Welcoming tax news for franchise owners

Tax , ,

The Tax Court has upheld a decision that a tax deduction allowed by section 24C of the Income Tax Act may be applied to franchisee costs. Section 24C permits the deduction of certain expenses in the current tax year assessment, where those expenses are not yet incurred, on the basis that these expenses will contractually be incurred in future years. This tax allowance protects businesses from being taxed on earmarked funds that bloat their annual earnings.

 

Where did this decision come?

 

The appeal involved the taxpayer (restaurant chain) against additional assessments raised by SARS for its 2011 to 2014 years of assessment. They arose from SARS’ refusal of deductions claimed by the taxpayer as allowances in respect of future expenditure in terms of section 24C of the Income Tax Act.

 

The crux of the dispute lies in whether or not the income received by the taxpayer from sales of meals to its customers can properly be regarded as arising directly from – or put differently, accruing in terms of – the franchise agreement itself. The taxpayer maintains that it can whereas SARS maintains it cannot.

 

However, as far as franchisees are concerned, it is clear that where a franchise agreement sets out an obligation to incur future expenditure, such expenditure may very well fall within the beneficial parameters of section 24C of the Act.

 

The Court’s decision

 

The Tax Court held that there need not be one physical contract document to give rise to section 24C’s benefit. Furthermore, while different parties were involved (the franchisor and the restaurant’s customers), the franchisee’s agreements with each were “inextricably linked” and “not legally independent and separate”.

 

The income deducted was, therefore, regarded as earned under the same contract as the taxpayer’s future expenditure, fulfilling the requirements of section 24C.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

 

Reference:

 

B v Commissioner for the South African Revenue Services (IT14240) [2017] ZATC 3 (3 November 2017)

Borrowing to purchase listed shares – 100% tax ineffective?

Tax , ,

Where a person borrows money to purchase shares, the general rule would be that the interest paid on the funds borrowed to fund that acquisition would not be deductible for tax purposes, the reason being that the interest expense is not incurred in the production of “income”.[1]+[2]

 

Similarly, interest paid cannot be said to be a cost incurred in the acquisition of an asset (such as a share) for capital gains tax purposes: by its very nature, interest is a recurring cost only incurred after acquisition of the underlying asset if funded through debt. One would therefore imagine that interest incurred on funds borrowed to acquire an asset can similarly not form part of the “base cost” of the asset for capital gains tax purposes, in other words, used to negate the capital gains tax cost which arises when the asset purchased is eventually disposed of.

 

Leaving aside the commercial wisdom of borrowing money to fund the acquisition of listed shares (and probably giving up assets as security in the process), the Eighth Schedule to the Income Tax Act contains a surprising exception to the general rule against non-capitalisation of interest costs for capital gains tax purposes. Paragraph 20(1)(g) determines that “… one-third of the interest as contemplated in section 24J excluding any interest contemplated in section 24O[3] on money borrowed to finance the expenditure contemplated in items (a) or (e) in respect of a share listed on a recognised exchange…” may be added to the base cost of those listed shares[4] acquired. In other words, whilst all interest incurred on such debt funding will not be taken into account to calculate the base cost of the shares, 33% of all interest incurred at least may be added to the initial cost of acquisition of the shares in determining its base cost, and eventually in calculating the capital gain realised on disposal of those shares in due course.

 

While interest is therefore not deductible for tax purposes on the debt used to acquire shares generally – and interest would moreover typically not rank as a cost to be taken into account for purposes of calculating the base cost of an asset for capital gains tax purposes – interest incurred on the acquisition of listed shares appears to be a definite exception.

 

The exception is definitely one of the lesser-known provisions in the Income Tax Act, and one which is often overlooked when listed shares are sold. Where a listed share portfolio is therefore built up over time, investors should take into account borrowing costs that may have been incurred over the years to shore up further investments in their listed investment portfolios.

 

[1] Section 23(f) of the Income Tax Act, 58 of 1962.

[2] “Income” being defined in section 1 of the Income Tax Act as being “gross income” less “exempt income” (such as local dividends received). Dividends are therefore not part of “income” for purposes of the Income Tax Act, and expenditure incurred to generate such exempt income, not deductible for tax purposes.

[3] Interest incurred typically linked to a corporate restructure, which would generally not find application for an ordinary investor.

[4] These listed shares may be either locally listed, or on a recognised stock exchange outside of South Africa.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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