In the dynamic world of corporate taxation, section 42 of the Income Tax Act 58 of 1962 (ITA) stands as a beacon for persons looking to restructure without immediate tax consequences. This provision provides a mechanism for tax-neutral asset-for-share transactions in terms of which a person can transfer an asset to a resident company in exchange for shares in that company without immediate tax consequences, provided certain conditions are met.
Category: Income Tax
When a grant isnt free: Understanding the tax treatment of government grants under section 12P
Government grants play an important role in supporting South African businesses, particularly in sectors targeted for development or transformation. However, the assumption that such grants are automatically tax free is incorrect. In terms of the Income Tax Act 58 of 1962 (Act), government grants could be included in gross income unless a specific exemption applies or they are of a capital nature.
Avoiding unexpected tax liabilities in property investment
Property investment is a popular topic of discussion, often accompanied by various anecdotes, tips, and cautionary tales. However, while the potential for profit is frequently emphasised, the importance of tax implications is often overlooked. This article explores some of the different property investment options available in South Africa, their associated tax treatment, and common pitfalls to avoid.
SARS Company Income Tax Return changes
16 September 2024 The following Corporate Income Tax enhancements were implemented based on legal and form changes: Tax treatment of an asset acquired as government grant in kind: If a taxpayer acquires an asset as or with a government grant, wear and tear cannot be claimed on the asset. This also means that even if the taxpayer uses the grant to buy another asset, that something cannot be depreciated either (for tax purposes). Credit Agreements and Debtors Allowance: A new field for Credit agreement and debtors allowance (lay-by) (s24) will be added to the ITR14 return. This is an allowance that can be claimed in the current year, but it needs to be reversed in the following year. Additional deduction in respect of learnership agreements: A deduction for learnership agreements can only be allowed if the agreement was entered into before 1 April 2024 and therefore a new validation question Read More …
A new enhanced Corporate Income Tax Return with new challenges
On 16 September 2024 SARS released an enhanced Corporate Income Tax Return (ITR14) on its website. This new version of the ITR14 must be submitted by all companies with effect from this date. Amongst a number of changes to the ITR14 is the requirement that all companies are now required to provide detailed information of the individuals that are regarded as their beneficial owners. Failure to comply with these requirements can result in penalties and compliance notices. The aim is to enhance transparency and combat money laundering and terrorism financing by ensuring the identity of ultimate beneficial owners is known. The concept of beneficial ownership has been integrated into the corporate income tax return process to enhance transparency and combat illicit activities such as money laundering and terrorism financing. The following key points should be noted: a. Definition – Beneficial ownership in respect of a company means, an individual who, Read More …
Bad and doubtful debts – income tax issues
In the current economic climate, especially given the high interest rates, businesses often experience financial difficulties. This often results in an inability to settle outstanding debts owed and conversely, to recover debts due by customers. Irrecoverable or doubtful debts owed by or to a taxpayer may respectively result in an additional or reduced income tax liability. It is important to bear income tax principles in mind when dealing with these situations. This article focusses on the key income tax considerations for taxpayers relating to irrecoverable and doubtful debts. Banks and other types of moneylenders will generally be subject to other forms of tax treatment that are not covered here. A taxpayer may become entitled to a section 11(i) deduction for bad debts when a debt owed to that taxpayer becomes irrecoverable. Such a deduction can only be claimed in the year of assessment that the debt first becomes irrecoverable. This Read More …
Capital vs Revenue: Swapping assets doesnt swap their nature
Section 42 of the Income Tax Act 58 of 1962 (ITA) is a cornerstone of the so called corporate rules in the ITA. Should certain conditions be met, this section provides roll-over relief to a taxpayer where that taxpayer exchanges an asset for shares in a company. At a glance Section 42 of the ITA provides that where a taxpayer holds an asset as a capital asset and disposes of this asset to a company in exchange for that company issuing the taxpayer equity shares. In order for section 42 to apply, the taxpayer must hold at least 10% of the equity shares in the company to which the taxpayer transfers the asset following the transaction. Section 42 also provides that where a taxpayer holds an asset as a capital asset, the company acquiring that asset in exchange for issuing shares to the taxpayer will acquire that asset as a Read More …
At it again: Capital v revenue
The capital versus revenue debate is as old as tax law itself. The benefits, advantages or consequences of an amount being considered capital or revenue in nature has motivated taxpayers and the South African Revenue Service (SARS) alike to characterise amounts as one or the other. More often than not, the task of distinguishing between the two has fallen to the courts, as it did once again in the case of A Taxpayer v Commissioner for the South African Revenue Service (IT45638) [2023] ZATC 13, where judgment was handed down on 19 July 2023 (IT 45638). At a glance In IT 45638 ZATC CPT (19 July 2023) the Tax Court had to once again address how to determine if expenditure is capital or revenue in nature. In this instance the Tax Court found that a new company established to export grapes to a European retail chain through the taxpayer was Read More …
Tempers continue to cool: Are uniform allowances (for nurses) taxable?
The inclusion of any part of an allowance paid or payable in an employees taxable income is governed by section 8(1)(a) of the Income Tax Act 58 of 1962 (Act). At a glance It has recently been reported in the news that the Department of Health has agreed to pay a temporary allowance of R3,153 to nurses in the public sector to enable them to buy uniforms. From a tax perspective, this amount will potentially not be subject to tax. In terms of section 10(1)(nA) of the Income Tax Act 58 of 1962, where an employee is, as a condition of their employment, required while on duty to wear a special uniform which is clearly distinguishable from ordinary clothing, the value of such uniform, or any allowance provided in lieu of any such uniform, given to the employee by his employer, will be exempt from normal tax and therefore not Read More …
New tax dispute resolution rules come into effect immediately
New tax dispute resolution rules provide for, amongst others, 80 days to submit an objection and more independence of an ADR facilitator. On 10 March 2023, the Minister of Finance published new dispute resolution rules in the Government Gazette in terms of the Tax Administration Act (TAA). These rules describe the procedures for objections and appeals, for the alternative dispute resolution (ADR) mechanism and for the conduct and hearing of appeals before a Tax Board or Tax Court.