Author: Andre Vermeulen – ENSafrica During December 2013, SARS released a draft discussion paper in which it set out its application of the relevant tax law, in relation to the tax treatment of the purchaser and seller, with regard to the assumption of contingent liabilities as part settlement of the purchase price of assets acquired as part of a going concern. SARS states that the document was prepared in light of recent judgments delivered by local and foreign courts as well as numerous requests for clarity regarding the income tax treatment, of both the seller and the purchaser, in respect of the assumption of contingent liabilities as part settlement of the purchase price of assets disposed of and acquired.
Category: Corporate Tax
Pitfalls arising from the financial provision for mining rehabilitation
Author: Gerdus van Zyl – Tax Advisor at ENSafrica Mining companies generally make financial provision for rehabilitation by virtue of rehabilitation trusts or financial guarantees through a financial institution or lately, insurance policies. Although a deduction can be claimed for contributions to a rehabilitation trust and the income derived by such rehabilitation trust is exempt from tax, cash strapped mining companies in the current economic environment are finding it tough to contribute the required amount of cash to the rehabilitation trusts.
Foreign property investments: controlled foreign company issues
Authors: Gary Vogelman and Alexa Muller – ENSafrica In terms of the ordinary business practices of property companies, it is not uncommon for such companies to outsource property and asset management functions to third party property and asset managers. In this regard, to the extent that a South African property investment or development company or group (“SA PropCo”) may hold property investments or developments in offshore jurisdictions, SA PropCo would usually establish a subsidiary in the offshore jurisdiction concerned or some other holding jurisdiction to hold such investment (“Foreign SubCo”).
SARS must choose its remedies
The decision of Rogers J, in Commissioner for the South African Revenue Service v Tradex (Pty) Ltd and others (9 September 2014, case no 12949/2013, as yet unreported) has raised a number of issues pertaining to the circumstances under which the South African Revenue Service (SARS) is entitled to obtain a preservation order against a taxpayer in terms of s163 of the Tax Administration Act, No 28 of 2011 (TAA). Ultimately it was found that SARS was not entitled to a preservation order as it was not ‘required’ to secure the collection of the taxes that could have become due in that instance.
Tax Administration – SARS's power to recover tax
The Tax Administration Act No. 28 of 2011 (TAA) came into effect on 1 October 2012 (save for certain provisions that are still to come into force). This important piece of legislation seeks to incorporate into one Act all those administrative provisions (except for customs and excise) that are generic to all tax Acts and that were previously duplicated across all the different tax Acts. Significantly, the TAA provides the South African Revenue Service (SARS) with substantial powers in relation to important administrative aspects of tax, such as the collection of information and the imposition and recovery of tax.
Tax Administration – Understatement penalties before 1 October 2012
The promulgation of the Tax Administration Act No. 28 of 2011 (the TAA), which came into effect on 1 October 2012, brought into effect a basis for the imposition of penalties in respect of “understatements”. An understatement arises where a return is not submitted, amounts are omitted from or deductions are erroneously claimed in a return submitted to SARS. The understatement penalty is a percentage-based penalty applied to the “shortfall”. The shortfall is defined in the following terms in section 222(3):
Tax deductions of Audit Fees
On 7th March 2014 the Supreme Court of Appeal delivered judgment in the case of Commissioner for the South African Revenue Service v Mobile Telephone Networks Holdings (Pty) Ltd, [2014] 76 SATC 205 which dealt with the deductibility of audit fees incurred for a dual or mixed purpose and the apportionment thereof for tax purposes in the light of section 11(a) of the Income Tax Act No. 58 of 1962 (the Act ), as amended read with sections 23(f) and 23(g) of the Act.
Concerns about reduction in interest deduction limitation rate
Author: Andrew Lewis Interest deduction limitation provisions have been enacted in terms of s23N of the Income Tax Act, No 58 of 1962, which apply to so called ‘reorganisation and acquisition transactions’. These provisions have been in effect since 1 April 2014. The purpose of these provisions is to limit interest deductions in respect of certain debt arrangements that National Treasury consider as being susceptible to excessive gearing.In addition, a new s23M of the Act will have effect from 1 January 2015, which will essentially apply to debts owed by a debtor to a creditor in a ‘controlling relationship’ and the amount of interest incurred by the debtor is not subject to tax in the hands of the creditor (e.g. a non-resident creditor). National Treasury contends that these interest deduction limitation provisions are necessary to avoid the erosion of the South African tax base.
UDZ tax incentive extended for six years
By: Graeme Palmer In 2003 the Urban Development Zone (UDZ) tax incentive was introduced under section 13quat of the Income Tax Act, 1962 to promote urban renewal in demarcated areas. The UDZ incentive provides for an allowance for the taxpayer which when claimed, reduces his taxable income. This deduction was initially only available until March 2014 but has now been extended to March 2020.Any person who meets the requirements of section 13quat is eligible to claim the UDZ incentive. Firstly, the person must have erected, extended, added to or improved a commercial or residential building. If only part of a building is erected, extended, added to or improved then the floor area must be at least 1,000m2 to qualify. The person may, subject to certain requirements having been met, also qualify if the building was purchased from a developer who has not previously claimed the UDZ deduction.
Improvements effected on land not owned by the taxpayer
Author: Emil Brincker (DLA Cliffe Dekker Hofmeyr) On 1 October 2014, the South African Revenue Service (SARS) released Binding Private Ruling 180 (Ruling) dealing with the question of whether a taxpayer, who is a party to a Public Private Partnership (PPP), would qualify for a deduction under s12N of the Income Tax Act, No 58 of 1962 (Act) in respect of improvements effected on land not owned by the taxpayer.In respect of PPP’s, Government often undertakes to provide underlying land to a private party for the construction of buildings or the improvement of the land, without parting with ownership of such land.