Broadly speaking, in their ordinary business operations, certain entities are entitled to claim certain deductions for income tax and value-added tax (VAT) purposes. In this article we discuss the tests used by South African courts and in practice, for income tax and VAT purposes, in order to determine whether a taxpayer will be entitled to such deductions. Consideration will be given specifically to the deduction of legal expenses incurred by a taxpayer in terms of section 11(c) of the Income Tax Act No. 58 of 1962 (the Act) and the deduction of input tax in respect thereof in terms of section 1 read with section 7 of the Value-Added Tax Act No. 89 of 1991 (the VAT Act).
Category: Income Tax
Taxation of Income protection policies
By Doné Howell, Tax Partner Grant Thornton Johannesburg The latest in the wave of changes that affect the taxation of insurance policies that exist for the benefit of an employee, but are paid by the employer, is the recent legislation regarding the taxation of income protection policies. Although the effective date of this legislation is 1 March 2015 (the 2016 tax year), it is important for employers to be aware of the impending changes to the PAYE system and to consider the possible review and renegotiation of your policies in the next year.
Surbonation agreements: The Section 8F trap on debt instrument
Author: David Warneke (BDO SA) Section 8F of the Income Tax Act, dealing with hybrid debt instruments was substituted by the Taxation Laws Amendment Act of 2013. In its substituted form the provision is considerably broader in scope than its predecessor. In particular it appears that certain subordination agreements may render the subordinated debt subject to reclassification as hybrid debt with potentially costly consequences. The new treatment applies to amounts incurred on or after 1 April 2014. In terms of section 8F if a debt instrument falls into classification as a hybrid then the effect is that interest incurred in respect of the hybrid debt instrument:
Tax Administration Act – Criminal investigation in relation to a serious tax offence
The Tax Administration Act, No. 28 of 2011 (the TAA) took effect on 1 October 2012. In light of SARS’s strong emphasis on compliance, this article considers the procedures SARS should follow where it believes that a serious tax offence might have been committed. A “serious tax offence” is defined as “a tax offence for which a person may be liable on conviction to imprisonment for a period exceeding two years without the option of a fine or to a fine exceeding the equivalent amount of a fine under the Adjustment of Fines Act, 1991 (Act No. 101 of 1991).”
Tax deductions – Expenditure on repairs
Interpretation Note 74(the Note), issued by SARS on 6 August 2013, is a collation of fundamental principles regarding the deductibility of expenditure on repairs (and the recoupment of such expenditure) in terms of section 11(d) of the Income Tax Act 58 of 1962 (the Act) and the principles, as laid down in case law, regarding the distinctive features of a repair as contrasted with other categories of expenditure. The Note commences with the general observation that – “expenditure on repairs to an asset not comprising trading stock is likely to be of a capital nature, particularly when it is not incurred at regular intervals”.
Protecting your reputation: Deductibility of legal expenses
Authors: Nicole Paulsen and Danielle Botha (DLA Cliff Dekker Hofmeyer) The question of deductibility of legal expenses incurred to protect one’s reputation or the goodwill of a business seems to be a recent hot topic of conversation, especially when following the news. Interestingly, two international cases relating to the deductibility of legal expenses, both related to reducing reputational risk and challenging alleged unfounded allegations against the taxpayer, have recently been handed down in Australia and England, respectively.
Income Tax and VAT consequences of E-Tolls
Introduction The levying of tolls for the use of certain highways in Gauteng, the so called e-tolls, took effect on 3 December 2013. It is therefore appropriate to consider the income tax consequences arising from the payment of e-tolls in those cases where an employee is reimbursed for business travelling or is provided with a vehicle owned by their employer or where an employee receives a travelling allowance to finance the expenditure incurred whilst travelling on the employer’s business.
Firms seeking tax benefits face legal repercussions
THE tax consequences of decisions made in the boardroom have been highlighted in some recent court cases, where judgments were made against parties who had entered into transactions that were motivated by the potential tax benefits it would bring rather than the profits they would generate. A judgment laid down in the case of ABC vs the South African Revenue Service (SARS) heard in the Western Cape Tax Court last year reiterated the importance of paying attention to the details of a transaction as reflected in the financial statements, including related taxes. ABC acquired land with a forest on it and carried on forestry activities on the land. It then sold the land together with the forest for a specific amount, of which R144.7m related to the forest. The question before the court was whether the R144.7m should be included in ABC’s gross income.
Income Tax Act 58 of 1962 – Deemed exchange gains & losses
Section 24I(10) of the Income Tax Act 58 of 1962 (ITA) has been replaced by a new provision for years of assessment commencing on or after 1 January 2013. Section 24I(10) of the ITA deferred unrealised exchange gains and losses on exchange items between connected persons and groups companies until they were realised. However, section 24I(10) has been deleted and replaced with section 24I(10A)with effect from years of assessment commencing on or after 1 January 2013.
Assumption of contingent liabilities
The South African Revenue Service (SARS) recently released its discussion paper (Discussion Paper) on the tax implications of the assumption of contingent liabilities in the context of a sale of business as a going concern and where the assumption of the contingent liabilities is in part settlement of the purchase price of the assets. Whereas the purchase price can generally be settled by, for example, a cash payment, the assumption of unconditional liabilities, loan account, or the issue of shares, the Discussion Paper specifically deals with the assumption of contingent liabilities.