When shares become assets

Finance News , ,
Many business transactions are concluded in terms of section 42 of the Income Tax Act. The section essentially allows a transfer of an asset by a person to a company, in exchange for equity shares in that company, allowing for tax neutral transaction.The South African Revenue Service has recently issued Binding Private Ruling 339, relating to a transaction in which listed shares are transferred to a collective investment scheme (CIS) in exchange for participatory interests in a collective investment scheme. The parties to the transaction are a resident discretionary investment family trust (herein referred to as the Applicant), and a resident CIS as defined in the Collective Investment Schemes Control Act (herein referred to as the Fund).

The facts

The Applicant holds assets which comprise of fixed properties and listed shares (amongst other things) which are held as long-term investments. In this instance, the current market value of the shares exceeds the base cost. Some shares have been held by the Applicant for more than three years, and some for less than three years. The settlor (also a trustee of the Applicant) of the trust has been managing the investments of the trust, while the administration and stockbroking have been attended to by a separate wealth management company. It has been decided by the trustees to transfer the share portfolio to a CIS to be professionally managed and administered. For this to happen, the Applicant will enter into an agreement to transfer shares to the CIS fund in exchange for a participatory interest in this fund.

Ruling

SARS has confirmed that the transaction in this instance would qualify as an asset-for-share transaction as per the definition in Section 42(1) of the Income Tax Act. It was further confirmed that:

  • Shares held for longer than three years would be regarded as capital assets, and that upon transfer, the participatory interests received in exchange for the shares would be deemed to have been acquired on the dates that the listed shares were acquired.
  • There would be no capital gains tax consequences from the disposal of the listed shares as the Applicant would be deemed to have disposed of the shares for proceeds equal to the base cost, and similarly, to have acquired the participatory interests in the CIS on the dates that the initial shares were acquired, for the same expenditure incurred that is allowable.
  • There would be an exemption on Share Transfer Tax for the proposed transaction.

Observation

If one ignores the potential application of the general anti-avoidance rules which apply to all arrangements, it is unclear why the participants to this arrangement approached SARS for a ruling, since the technical analysis is rather straightforward.

There has recently been an increase in such straightforward rulings issued by SARS. In general (and not suggesting that the parties in this ruling did so) one gets the sense that parties approach SARS for a ruling to avoid any attack on a transaction. SARS is however well within its rights to attack a transaction on anti-avoidance, despite a ruling having been obtained. Parties should, therefore, guard against applying for ruling on seemingly straightforward technical grounds, to avoid any attach on anti-avoidance. Such a strategy may end up being unsuccessful.

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)

Tax season 2019: What can you expect?

Tax , ,

SARS recently released two media statements, in which it notes several improvements made to eFiling for the 2019 tax season, including the issue of customised notices indicating specific documents required in the event of an audit or verification and a simulated outcome issued before a taxpayer has filed.

 

What is the tax season?

 

Tax season is the period in which individual taxpayers file their income tax returns to ensure that their affairs are in order. Although the majority of taxpayers who earn a salary have already paid tax through monthly pay-as-you-earn tax (PAYE), which was deducted from their salary by their employer and paid over to SARS, employees may still have an obligation to file a tax return if they earn above the filing threshold (see in more detail below). Once SARS reconciles what was paid over by the employer with what a taxpayer declares on their tax return, an assessment is issued which may result in the taxpayer needing to pay an additional tax to SARS, or is due a refund, or neither.

 

Taxpayers who are natural persons and meet all of the following criteria need not submit a tax return for the 2019 filing season:

 

  • Your total employment income for the year before tax is not more than R500 000;
  • Your remuneration is paid from one employer or one source (if you changed jobs during the tax year, or have more than one employer or income source, you must file);
  • You have no car or travel allowance, a company car fringe benefit, which is considered as additional income;
  • You do not have any other form of income such as interest, rental income or extra money from a side business; and
  • Employees tax (i.e. PAYE) has been deducted or withheld

 

Although you are not required to submit a tax return if you meet the above criteria, it is always good practice to ensure that you have a complete filing history with SARS. If your tax records do ever become important in future (such as in the case of remission of penalties, tax clearance certificates, etc.), you do not want to be in a position to have to prove that you were not liable to file a return in a particular year. The administrative burden in the current year certainly outweighs the potential issues down the line.

 

Important filing dates

 

  • eFiling opens on 1 July 2019 and closes on 4 December 2019.
  • Manual filing at branches opens on 1 August 2019 and closes 31 October 2019.
  • Provisional taxpayers have until 31 January 2020 to file via eFiling.

 

There is already a steady increase in the number of taxpayers in queues at SARS branches – it is therefore advised that you engage with your tax practitioner as soon as possible, to plan for tax season 2019.

 

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)

Rendering of transport services by employers

Finance News, Tax , , ,

Paragraph 2(e) of the Seventh Schedule to the Income Tax Act[1] deems an employer to grant a taxable benefit to an employee if any service has, at the expense of the employer, been rendered to the employee for his or her private or domestic use.

 

The taxable benefit which arises in this instance is valued under paragraph 10 of the Seventh Schedule and is included in paragraph (i) of the definition of “gross income” and therefore subject to income tax.[2] The taxable benefit will further be included in the employee’s remuneration[3] and the employer will be obliged to withhold employees’ tax on these amounts.[4]

 

Where an employer, that is engaged in the business of conveying passengers for reward by sea or air, enables an employee (or relative) to travel overseas for private or domestic purposes, the cash value of the taxable benefit is an amount equal to the lowest fare less any consideration payable by the employee or relative.[5]

 

The cash value of a taxable benefit with regards to the rendering of any other service is the cost to the employer in rendering that service or having that service rendered.[6] These services may, therefore, be rendered by the employer or some other person.

 

Paragraph 10(2)(b) of the Seventh Schedule, however, states that the taxable benefit will attract no value if a transport service is rendered by the employer to its employees in general for the conveyance of such employees from their homes to the place of their employment (and vice versa).

 

Some uncertainty existed as to the application of the no-value provision. The South African Revenue Service (“SARS”) therefore issued two binding general rulings under section 89 of the Tax Administration Act[7] as well as the recent Interpretation Note 111 to provide clarity on these issues.

 

In BGR 42 (issued on 22 March 2017) it was considered whether the word “homes” should be restricted to the exact position of an employee’s specific dwelling or whether an employer may arrange for employees living within a certain radius to be collected from or dropped off at a common area or central point between the employees’ homes and place of employment.

 

In this regard, it was confirmed that the no-value provision would apply to transport services provided to employees to and from any collection or drop-off point en route to or from the employees’ homes and place of employment or any part of that trip.

 

[1] No 58 of 1962

[2] Section 5(1) of the Income Tax Act.

[3] Paragraph (b) of the definition of “remuneration” in paragraph 1 of the Fourth Schedule.

[4] Paragraph 2(1) of the Fourth Schedule.

[5] Paragraph 10(1)(a) of the Seventh Schedule.

[6] Paragraph 10(1)(b) of the Seventh Schedule.

[7] No 28 of 2011

 

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)

Depreciation vs wear & tear

Tax , , , , ,

Deterioration, obsolescence and wear and tear are among the reasons why assets decrease in value. By realising a deduction on depreciation for tax purposes, your company can recover the costs of certain moveable assets that are used in the production of income.

 

Generally, businesses won’t be able to make use of assets like heavy machinery or computer equipment, for example, for an indefinite period. As assets work together to generate an income for your business, over time these assets will have to be replaced with newer, more efficient ones. This article briefly looks at the basic concepts of depreciation for accounting purposes and wear and tear allowances for taxation purposes.

 

Depreciation – Accounting

 

Depreciation is essentially the decline in the value of an asset over time due to the wear and tear that occurs as a result of the normal use of that asset. For accounting purposes, a company’s assets should be depreciated on a systematic basis over the assets’ useful life. In addition, the depreciation method used should reflect the way in which assets’ economic benefits are utilised by the company and should also be reviewed regularly. The different methods of depreciation include: the straight-line method, reducing balance method as well as the production unit method.

 

For accounting purposes, depreciation is charged as an expense in a company’s income statement and is not deductible for tax.

 

Wear & Tear – Taxation

 

Wear and tear refers to the method in which the South African Revenue Services (SARS) allows companies to write off an asset for taxation purposes over a predetermined period. This wear and tear allowance permits companies to deduct, over a period of time, the amount that was paid for the movable goods that are used in the production of income. This deduction will result in a reduction of your company’s tax liability.

 

The period over which wear and tear can be claimed depends on the type of asset, as each asset will have a different write-off period. SARS has a prescribed schedule (Annexure A of Interpretation Note 47) for all assets, as well as predetermined rates at which companies can claim ‘depreciation’ for taxation purposes.

 

Any assets purchased for less than R7 000 may be deducted in full in the year in which the asset is purchased.

 

Recovering Wear & Tear Allowances

 

When an asset is sold, the wear and tear allowances claimed need to be recouped for that asset. The wear and tear claimed for the periods that the asset was in use is then added back to the taxpayer’s taxable income in the year in which the asset was sold.

 

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)

Taxpayers’ right to have disputes resolved

Tax , , , ,

In a recent Tax Court decision[1], the Tax Court confirmed that taxpayers have a right to have their disputes resolved in a court of law as enunciated in section 34 of the Constitution. However, they cannot rely on this right when they are using delaying tactics to prevent the matter from being heard.

 

In this regard, the South African Revenue Service (“SARS”) issued a revised assessment to the taxpayer in 2013 based on the under-declaration of income. The taxpayer’s objection to this assessment was disallowed and the taxpayer filed a notice of appeal at the end of 2014.

 

An appeal meeting was then held at the beginning of 2017 and in July 2017 SARS filed its statement of grounds of assessment.[2] The taxpayer appointed a representative and requested an extension to April 2018 to file his statement of grounds of appeal.[3] SARS, however, only granted extension until middle December 2017.

 

No further extension was requested by the taxpayer and by February 2018 SARS informed the taxpayer of its intention to apply for a default judgement against the taxpayer and thereafter obtained a date for the hearing in November 2018.

 

Days before the hearing the taxpayer (via a new representative) requested that the matter be postponed in order for him to obtain all relevant information. The Tax Court granted such postponement until the end of February 2019 and ordered the taxpayer to file his grounds of appeal on or before the date of the hearing. No such grounds were filed. Also, on the date of the hearing, the taxpayer applied for condonation and a further postponement to obtain information.

 

The Tax Court found that the taxpayer had sufficient information to lodge the objection (in 2014 already) and that he was also not entitled to expand on his grounds of appeal beyond that contained in his objection. The taxpayer also did not make use of the proper rules for discovery of information[4] if he believed that he needed additional information for his grounds of appeal.

 

The Tax Court held that the taxpayer was intentionally delaying the legal process in order to prevent it from being finalised and disobeyed a court order without providing substantial reasons for his non-compliance. SARS’ request for a default judgement was therefore granted.

 

The takeaway is that taxpayers must duly take note of the rules and timelines provided for with regards to dispute resolution and that the courts (and likely SARS) will not tolerate any unnecessary delaying tactics.

 

[1] TCIT 13868 BLF 27 February 2019.

 

[2] In terms of Rule 31(2) of the rules promulgated under section 103 of the Tax Administration Act, No. 28 of 2011. See Public Notice 550 (GG37819 of 11 July 2014).

 

[3] In terms of Rule 32.

 

[4] Rule 36.

 

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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