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No tax deduction for damages paid for deliberate breach of supply contract

Authors: Ben Strauss and Jerome Brink. South African courts have held, on a number of occasions, that taxpayers are entitled to deduct damages or compensation paid to third parties. However, this principle does not apply in all cases. Share page The case of Kangra Group (Pty) Ltd v Commissioner for SARS (Case number A20/18) was recently heard by the full bench of the Western Cape division of the High Court. Facts and background The salient facts were relatively simple: The taxpayer, Kangra Group (Pty) Ltd (Taxpayer) was a coal mining company linked to the well-known entrepreneur and philanthropist, Mr Graham Beck. It supplied coal to AMCI under a set of agreements. The price of the coal was fixed under the contract at about US$25 per ton. During the term of the contract, the price of coal in the international market increased considerably to about US$40 per ton. The Taxpayer unilaterally Read More …

Disallowance of the utilisation of an assessed loss

Author: Gigi Nyanin. In the recent case of Commissioner for the South African Revenue Service v Digicall Solutions (Pty) Ltd (927/2017) [2018] ZASCA 137 (28 September 2018), the Supreme Court of Appeal (SCA) was requested to consider whether the Commissioner for the South African Revenue Service (Commissioner) was correct in disallowing the utilisation by Digicall Solutions (Pty) Ltd (Taxpayer) of certain assessed losses, in terms of s103(2) of the Income Tax Act, No 58 of 1962 (Act). Share page By way of background, in order to determine the taxable income of a taxpayer from its trade, s20(1) of the Act provides that a taxpayer may set off (i) a balance of the assessed loss brought forward from the previous year of assessment, and (ii) any assessed loss incurred in the current year in carrying on any other trade. The following requirements must be met for a taxpayer to set off an Read More …

What costs can taxpayers deduct in pursuance of installing solar energy systems?

Jerome Brink Tax and Exchange Control Alert It is beyond doubt that South Africa enjoys sunshine more than most places on earth. The South African Department of Energy (DoE) states on its website that the majority of regions in South Africa average more than 2,500 hours of sunshine per year, and average solar-radiation levels range between 4.5 and 6.5kWh/m2 in one day.  Share page The DoE further states that the annual 24-hour global solar radiation average is about 220 W/m2 for South Africa, compared with about 150 W/m2 for parts of the United States of America, and about 100 W/m2 for Europe and the United Kingdom. Given these statistics, South Africa is undoubtedly “resource rich” when it comes to the ability to exploit sunshine for energy purposes. With this background, various tax “incentives” pertaining to renewable energy (including especially solar energy) have been introduced over the years. One of the Read More …

Good news for lenders? Further proposed amendments to the doubtful debt provisions

Author: Louis Botha. On 17 October 2018, National Treasury (NT) and the South African Revenue Service (SARS), appeared before Parliament’s Standing Committee on Finance (SCoF) to provide it with a further update regarding some of the proposals contained in the 2018 draft Taxation Laws Amendment Bill (Draft TLAB), that was published earlier this year. One of the key proposals related to the doubtful debt provisions in s11(j) and s11(jA) in the Income Tax Act, No 58 of 1962 (Act), regarding which NT received substantial input from the public. The proposed amendments to these provisions were also robustly debated during the workshops hosted by NT and SARS for all stakeholders, which were well attended by members of the tax profession, on 4 and 5 September 2018. We discussed the proposed amendments in our Tax and Exchange Control Alert of 3 August 2018. Share page In terms of the presentation document reflecting Read More …

New electronic services regulations: Widening the invisible VAT net

Authors: Varusha Moodaley and Gerhard Badenhorst. In the wake of the ever-increasing world of e-commerce and cross-border digital trade, South Africa introduced legislation with effect from 1 June 2014, requiring foreign suppliers of ‘electronic services’ to register as VAT vendors in South Africa. National Treasury stated at the time that the amendment did not impose a new tax, but it merely shifted the tax liability for e-services from the local recipient to the foreign supplier. South Africa was one of the first countries in the world in taxing e-services in this manner Share page Foreign suppliers of e-services are required to register for VAT in South Africa if at least two of the following circumstances are present: the recipient of the services is a South African resident; the payment for services originates from a South African bank account; or the recipient has a business, residential, or postal address in South Africa. A Read More …

No tax on interest? Ruling pertaining to DTA between South Africa and Brazil

Author: Louis Botha. On 24 July 2006, the Convention between the Government of the Republic of South Africa and the Government of the Federative Republic of Brazil for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (DTA), came into force. The DTA, similar to other such double tax agreements, determines the taxing rights of each country where a resident of one contracting state earns income from a source in the other contracting state. On 4 July 2018, the South African Revenue Service (SARS) issued Binding Private Ruling 307 (BPR 307), which deals with relief from double taxation of interest in terms of the DTA. Facts and proposed transaction The applicant, a South African resident company, proposes to enter into trades in respect of bonds issued by the Brazilian government (bonds). The applicant will: enter into a purchase and resell agreement with Read More …

Income tax exemption for body corporates, share block companies and associations: Clarification in SARS’ latest issue of Interpretation Note 64

Author: Jessica Carr. Income tax exemption for body corporates, share block companies and associations: Clarification in SARS’ latest issue of Interpretation Note 64 On 13 November 2018 the South African Revenue Service (SARS) published the fourth issue of Interpretation Note 64 (Interpretation Note) which seeks to provide guidance on the application and interpretation of s10(1)(e) of the Income Tax Act, No 58 of 1962 (Act). Share page The exemption The section exempts from income tax the levy income generated by a body corporate, a share block company, and an association of persons. It also provides these qualifying entities with a basic exemption from income tax on receipts and accruals outside of levy income, to the extent that the aggregate of the income does not exceed R50,000. The Interpretation Note makes it clear that this exemption is applied to the total receipts and accruals, excluding the levy income, which are taxable Read More …

In the end, there can be only one contract – the SCA considers section 24C of the Income Tax Act

Author: Louis Botha. On 3 December 2018, the Supreme Court of Appeal (SCA) handed down judgment in CSARS v Big G Restaurants (Pty) Ltd (157/18) [2018] ZASCA 179 (3 December 2018), concerning s24C of the Income Tax Act, No 58 of 1962 (Act). Share page In terms of s24C of the Act, a taxpayer can, under certain circumstances, claim an allowance in respect of future expenditure incurred against income received by or accruing to a taxpayer, which income will be utilised wholly or partly to finance the future expenditure. The matter was initially heard by the Tax Court, which found in favour of Big G Restaurants (Pty) Ltd (Taxpayer). SARS appealed the Tax Court judgment to the SCA. We discussed the Tax Court judgment in our Tax & Exchange Control Alert of 2 March 2018. Facts The matter came before the Tax Court as a special case in terms of Read More …

Cruel accrual? An important judgment for taxpayers in the property development industry

Authors: Louis Botha and Heinrich Louw. It is an established tax law principle that an amount will form part of a person’s gross income, in the year of assessment in which the amount accrues to that person. However, as illustrated by a recent judgment, where property-related transactions are concluded, the parties must consider whether s24(1) of the Income Tax Act, No 58 of 1962 (Act) applies to their agreement. Share page On 20 November 2018, the Supreme Court of Appeal (SCA) handed down judgment in the matter of Milnerton Estates Ltd v CSARS (1159/2017) [2018] ZASCA 155 (20 November 2018). The SCA had to consider whether Milnerton Estates Ltd (Taxpayer) had to include the purchase price of immovable properties sold in its 2013 or 2014 tax year of assessment. The Taxpayer was appealing against the Tax Court’s judgment, which court found that the purchase price of the properties accrued to Read More …

Treasury clarifies the clogged-loss rules

Author: Jessica Carr. Amendments to paragraph 39 of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act) have been proposed in National Treasury’s draft Taxation Laws Amendment Bill (draft TLAB), as published in July 2018 for public comment. Per the Explanatory Memorandum on the draft TLAB, the proposed amendment seeks to clarify that capital losses between connected persons will be ring-fenced, where a person redeems its interest in the other person (such as a company) and the two persons are connected persons, in relation to each other.  Share page The clogged-loss rule Paragraph 39 of the Eighth Schedule to the Act is a capital gains tax (CGT) anti-avoidance provision which requires a capital loss to be treated as a “clogged loss” where a person disposes of an asset to a connected person and incurs a capital loss. The clogged-loss rule comes into play when determining the Read More …