NEWSLETTER 15 OF 2007

Newsletter Archive

The following newsletter covers aspects of exemptions and deductions for individuals or companies.

Partial exemptions

Alimony and maintenance – S10(1)(u)	After 21/3/62 exempt
Purchased annuity – S10A	Capital portion is exempt Y=A/B X C A – total cash consideration paid B – total expected return C – annuity received A man aged 39 purchased an annuity for R50000. Annuity pays R3600 per annum. Life expectancy is 30.41 Y = 50000/(3600X30.41) X 3600 = 1644.19 of the 3600 is exempt
Authors – S10(1)(m)	Payment for work i.r.o. copyright is exempt if taxed in foreign country. Only applies to first owner of copyright. Not for companies
Bursaries and Scholarships S10(1)(q)	3 requirements to be met Bonafide scholarship not a salary sacrifice Granted to assist person to study Recognised educational institute Award bursary to employees relative: 2 provisions before exemptions can apply: If employee remuneration exceeds R60000 per annum – no exemption Max bursary – R2000 per relative
Clubs, societies and associations S10(1)(e)	· Levies exempt if it is a o Body corporate o Shareblock o Section 21 company
Dividends S10(1)(k)	SA dividends exempt excl: · From a portfolio of collective investment schemes · From a portfolio of collective investment schemes in properties · Share buy back dividends
Employment – relocation benefits S10(1)(nB)	Expenses in consequences of Transfer from one place to another Appointment of new employee Termination of employee Amount exempt Transport for employee & goods to new place Accommodation upto 183 days School uniforms, curtains, registration of mortgage bonds, legal fees Transfer duties, motor vehicle registration, water & lights and telephone connection Cancellation of mortgage bond and agent fees
Retirement awards – S 10(1)(x)	· Up to R30000 a lifetime exempt · Retrenchment, prorate bonus, gratuity · Requirements: o Over 55 years or o Infirmity or superannuation o Retrenched or to be retrenched o Company closing down within 5 years
Seafarers S10(1)(o)(1)	· Officer or crew member on ship engaged in international transportation of goods and passengers or · Involved in prospecting or mining of minerals from the seabed Outside SA for more than 183days in a tax year
Offshore workers S10(1)(o)(11)	Renders services outside SA 183 days including 60 days continuous in any 12 month period not applicable to government employees
Non resident employment S10(1)(p)	Exempt if: · Received by a non resident · Services rendered outside SA · On behalf of government or local authority · the amount must be taxed in another country
Export – state incentive schemes – s 10(1)(zA)	Rebate in respect of export received by approved person is exempt
Fimowners- state subsidy S(10)(1)(zG)	After 15/5/89 received /accrued by or to film owners by way of a subsidy from the state under a scheme designed to promote the production of films is exempt
Foreign banks S10(1)(j)	Receipts/accruals by banks exempts if: · bank is non resident · entrusted by the government of a territory outside SA · minister of finance agrees to exempt bank for a particular year
Foreign gold dealing companies S10(1)(s)	· Income from realisation of assets consisting of gold bullions in companies are exempt if: o Assets acquired but company with funds transferred to the Republic from outside republic or funds raised by realisation of similar assets o Treasury given approval that income is exempt Only up to 1/1/2004
Interest S10(1)(i)	Maximum first R1000 exempt for foreign dividends and foreign interest Balance to interest from SA (under 65 – R10000 in total) (over 65 – R15000 in total)
Interest non residents S10(1)(h) – FROM GOVERNMENT	Interest from stock or securities issued by government i.e. SATS, ESKOM, SABS etc is exempt if: · Natural person - non resident and does no carry on trade in SA, and is outside SA exceeding 183 days per tax year or · Company – non resident – not trading in SA Exemption not available on interest on or after 1/1/87 if the following: · Natural person, ordinarily resident in neighbouring country · Company managed or controlled in a neighbouring country
Interest to non residents S 10(1)(hA) – NORMAL INTEREST	Not exempt if: · Natural person, is a resident, carries on trade in sa · Non resident in SA more than 183 days · Non resident – interest connected to business carried on by company in RSA
Salaries and emolument – S10(1)(c)	· Hold office in RSA as official of a foreign government i.e. ambassadors · Domestic servants to the above that is non resident Pensions payable to president or vise president and their surviving spouse are exempt prior to 10/5/94
UIF S10(1)(mB)	· Exempt
Uniforms S10(1)(nA)	· Clearly distinguishable – exempt
War Pensions and awards for diseases s10(1)(g)	· War pensions, disability pensions, workman's compensation and occupational injuries and diseases pensions are exempt
Foreign pensions	· Social securities overseas
Royalties Sec 10(1)(l)	· Non residents that was subjected to with holding tax
Pensions, provident, RAF find income	· Certain funds exempt if approved by minister. Other funds 25% tax.

ABSOLUTE EXEMPTIONS

Environmental rehabilitation – s10(1)(cA)	Sole objective is to rehabilitate environment – exempt
Housing association S10(1)(cC)	Section 21 companies · Sole objection build/buy dwellings for occupation by employee of employers who is a member of housing association · Minimum profit
Housing home loan finance bodies – Sec 10(1)(cJ)	Certain housing facilities are exempt
Housing for low income communities S10(1)(cI)	Section 21 company – sole objective is to provide housing for low income communities
Housing retirement complexes Sec 10(1)(cF)	Sole objective to provide residential accommodation for persons over 60 years of age or hat are retired due to ill health
Political parties S 10(1)(cE)	Registered under S36 of electoral act is exempt
Government and local authorities	Exempt
Religious, educational, charitable institutes	Now exempt in terms of S10(1)(cN) or Sec 30(3)
Ships and aircrafts foreign owners and charters S10(1)(cG)	Person – non resident – owner of ship/aircraft – exempt Similar exemption by other countries for SA ship owners in that country
Small business development corporation	Subsidies from state exempt
Specific research and ancillary entities s 10(1)(cA) or (cB)	Exempt unless all shares are held by qualifying shareholder. Sole objective · Conduct scientific, industrial or technical research, provide medical, blood,dental, hospital or nursing services. Nature conservation or animal protection · Not permitted to distribute any profits · Use fund only for investment or sole objective
Sporting association S10(1)(cP)	Now exempt in terms of Section 10(1)(cN) and 30(3)
Public Benefit Organisations	Now exempt in terms of Section 10(1)(cN) and 30(3) · Section 21 company · Sole objective – carry on benefit activities in non profit manner · 85% of activities for benefit of public

EXPENSES

Expenses that may be claimed can be split into two categories:

· General expenses – Section 11(a)

· Specific expenses – Sections 11(b) - 19

GENERAL EXPENSES

Section 23 prohibits a deduction for various deductions, and must be read with section 11(a).

1. EXPENDITURE AND LOSSES

Expenditure refers to something that the trader chooses to pay out. A loss on the other hand, is an involuntary deprivation.

2. ACTUALLY INCURRED

This refers to an amount paid, or where there is a liability to pay.

In the case of a liability, there must be an absolute liability. There should be no conditions imposed on the future payment of the debt. (Cross reference to section 23(e))

3. IN THE PRODUCTION OF INCOME

Expenditure incurred for the purpose of producing income must be allowed. In this case, it is irrelevant that the income may be earned in the current or future years.

The expenditure must be considered to be an inevitable concomitant of the business.

Generally therefore:

· We would allow normal, recurrent business expenditure

· We would allow expenses arising out of actions that are closely linked to business operations, if the likelihood of such an action arising is high considering the nature of the business.

4. NOT OF CAPITAL NATURE

· Expenditure to acquire or create an income producing asset = Fixed Capital, And

· Expenditure in actually working the income producing asset = Floating Capital

· Payments creating an enduring benefit or the business are capital in nature.

Other rules:

· Payments for the use of a capital asset = revenue in nature;

· Payments for the right to use an asset (one-off) payment = capital in nature.

EXCESSIVE EXPENDITURE

· Not entirely in the production of income.

· Inspired by other motives ( i.e. wife is working for the husband)

· Take note of:

· The nature of the services rendered ( i.e. wife is the receptionist)

· Nature of the business

· Employer / Employee relationship

· Remuneration paid in relation to the net profit

· Whether there are large increases between years

ADVERTISING (Commission agents)

· Generally deductible if incurred for trade purposes ( i.e. to attract revenue, to advertise a sale, to recruit employees)

· Not allowed if the expenses is connected with capital assets

· If the advertising results in the acquisition of an asset of a permanent nature, then it is not allowed

· If the expenditure is to create an enduring benefit, it will be of a capital nature

PRODUCT LAUNCH: To alert consumers to a new product name, the intention must be to create an enduring benefit – not deductible.

BILLBOARDS: Permanent advertising or affixed to a motor vehicle – not allowed

TV AND RADIO: Production cost incurred in producing an advertisement which will be screened for a prolonged period are of a capital nature. The actual cost of screening such adverts is clearly revenue. If the advert is screened for a short period – production cost will be allowed

COMPUTER COST

· Acquiring cost – capital

· Cost of hardware – Section 11(e)

· Cost of software – Section 11(e) and Practice note 19

· Cost of attending a conference to update knowledge of computer products – Section 11(a)

FINES

· According to ITC 1490, it is not allowed

· It is not an inevitable concomitant of trade

RECURRENT EXPENDITURE

· Although the act does not allow this, revenue practice is to allow it

· This will include audit fees, insurance premiums, security fees, accounting fees, etc.

TRAVELLING EXPENSES

· To acquire assets / in connection with creating / improving assets is not allowed

· In connection with the income earning operations, will be allowed.

Travelling between taxpayers home and place of business is private – not deductible

1. CALCULATION – ACTUAL EXPENSES = Total expenses x Business kilometres / Total kilometres = Deductions

Practice Note 24 provides that self employed taxpayers who uses their vehicles for both business and private purposes may, use the provisions of paragraph 7(4) of the 7^th Schedule to determine their private travel cost

Determine total cost for the year, + reducing it by 1,8% per month times the determined value (excluding VAT) LESS R120 per month for fuel and R85 per month for maintenance cost .

2. FIXED COST METHOD. Two ways to claim with or without logbook. Determine the fixed cost value

Fixed cost / total km x days/365 = ?????

+ maintenance cost = ???

+ fuel cost = ???

total cost per KM ???

business km x cost per km = claim limited to allowance

if less than a year and no logbook – prorate. Use 32000km per annum as basis to determine whether 14000km private will be used or 18000km business will be used.

If total km exceed 32000km per year deem business to be 18000 and excess is private.

If total km is less than 32000km per year then deem private to be 14000km and excess is business.

EMPLOYMENT COSTS

· Salaries & wages - Commission agents secretary

· Fringe benefits - If capital asset, allow the wear and tear or lease payments

INSURANCE

· Allow if in respect of the business ( i.e. motor vehicle)

ENTERTAINMENT

· Allow in full in terms of section 11 (a) if incurred in the production of income

DAMAGES AND COMPENSATION

If a close connection is between the expenses and the income earning capacity of the business then allow.

GOODWILL – Capital nature therefore not allowed

INTEREST – if close connection between expense and income earning capacity exist then allow. However will be limited to income if it is allowed and if the person is not a money lender by trade as per practice note 31.

INTEREST ON LOANS TO ACQUIRE SHARES – not allowed as shares give rise to dividend income that is exempt.

INTEREST ON LOANS TO ACQUIRE CAPITAL ASSETS – if the asset is acquired for business purposes then the finance costs will be allowed

INTEREST RAISED ON A LOAN TO PAY DIVIDENDS – no allowed

SECTION 11(c) – LEGAL EXPENSES

This is allowed if it is incurred in connection with trade.

· The expenses must not be of a capital nature.

· If it is connection with claims made by/against the taxpayer, first apply the section 11(a) criteria with regard to the deductibility or taxability of compensation and damages paid / received.

· If the compensation and damages paid are allowed (or would have been allowed) as a deduction or the compensation, the expenses must be allowed.

· If the damages received are taxable (or would have been taxable), the legal expenses must be allowed.

LOSSES – FIRE, THEFT AND EMBEZZLEMENT – trading stock – the taxpayer will automatically get a deduction as the closing stock figure will not take the missing stock in to account. Fixed asset – not allowed as a deduction as it is a capital asset. Cash – by managing director or owner of business then it is not allowed as a deduction. If by employee then you can allow as a deduction.

PROPERTY - DOMESTIC PREMISES – not allowed as a deduction if not used for trade purposes.

SUBSCRIPTIONS – entrance fees (annual subscriptions to trade to societies) is not allowable as it is a capital expense. Subscriptions to an association i.e. SAMCA, SAICA is allowable.

PROHIBITED DEDUCTION

Section 23(a)	Private maintenance expenses – maintenance of taxpayer or his family or establishment
Section 23(b)	Domestic and private expenses - Rent or cost of repairs or expenses in connection with premises not occupied for the purpose of trade and the duties are mainly performed there.
Section 23( c)	Recoverable expenses – Any expense / loss allowed to the extent that is recoverable under an insurance will not be allowed
Section 23 (d)	Interest, penalties and taxes – No interest, penalties or taxes payable under the following acts are allowable: ITA, VAT, RSC, KZNJS
Section 23(e)	Provisions and reserves – Provisions for contingent liabilities – disallowed (if income not tax then expenses not allowed)
Section 23(f)	Expenses incurred to produce exempt income. Exempt income is not taxed – deductions not allowed (dividend income)
Section 23(g)	Non trade expenses – money must be laid out in the expense of trade – Explanatory Memorandum on the Income Tax Bill, 1992
Section 23(h)	Notional expenses – Cannot claim hypothetical interest i.e. interest that he might incur.
Section 23(j)	Bursary cost – If an employees salary is in anyway reduced or forfeited by means of a bursary – no deduction for employer
Section 23(k)	Expenses incurred by labour brokers, personal service companies etc. Limits the deductions allowable for expenses incurred by a labour broker who does not possess an employees tax exemption certificate to the amount of the remuneration paid or payable to the employee for services rendered.
Section 23(l)	Restraint of trade – prohibits expenses incurred in restraint of trade except those in section 11(cA)
Section 23(m)	Expenses relating to employment income – salary earner can only claim: Pension contributions RAF contributions Travelling if have an allowance Wear and tear Medical and donations
Section 23(n)	Government grants – no deduction of expenses allowed if such amount was given by government and was tax free
Section 23B	Prohibition of double deduction – A deduction cannot be claimed under more than one section i.e. Depreciation can not be claimed under Section 11(e) and Section 12C
Section 23C	Cost of assets + VAT- IN certain circumstances VAT should be excluded from the cost of an item if the taxpayer is a VAT vendor or has previously become entitled to a deduction of input VAT

Regards

Teresa Louw
Worldwide Tax Solutions
Cell: 083 303 4974
Tel: 031 - 767 3430
Tel: 031 – 764 2889
Fax: 031 - 5701161

Tel: +27(0)31 767 3430 Tel: +27(0)31 764 2889 Cell: +27(0)83 303 4974 Fax: +27(0)31 5701161
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