Income Tax Planning lecture 6

Question 1

Taxation of married couples

Answer 1

1. Each spouse is taxed separately unless one of the deemed inclusion rates apply
2. These deemed inclusion rules center around anti avoidance
3. However marriages in community of property have certain rules
4. Income not split

Question 2

Rules of Community of property

Answer 2

1. income derived from carrying on a trade is deemed to accrue to the spouse who is carrying on that trade
2. income derived from letting fixed property is deemed to accrue to spouses in equal shares
3. interest, dividends also accrue to spouses in equal shares
4. where spouse disposes of an asset falling into joint estate, the
   capital gain shall accrue to each spouse in equal shares ( each entitled exclusions)

Question 3

Income not split

Answer 3

Benefits from retirement funds / Income specifically excluded from joint estate / purchased annuity

Question 4

PROVISIONAL TAX

Answer 4

1. all provisional taxpayers must submit two provisional tax returns a year.
2. A third voluntary payment may be made to avoid interest being charged
3. Also not separate tax but means of collecting from self-employed individuals, companies and CC’s

Question 5

Provisional taxpayer

Answer 5

1. any person who derives income which is not remuneration as defined;
2. any company; and
3. any person who is notified by SARS that they are a provisional taxpayer

Question 6

FIRST payment

Answer 6

1. Estimate total taxable income for the year from all causes including business, interest, rentals and employment.
2. Determine the tax payable on the estimate taking into account the tax rebates for individuals.
3. Divide the tax payable by two.
4. Deduct any taxes already paid (such as foreign tax, PAYE, SITE) in determining the tax liability.
5. Pay the amount thus determined to SARS

Question 7

SECOND payment

Answer 7

determined in the same way except the amount is not divided by two and any provisional tax already paid as a result of the first payment can also be deducted in determining the amount due.

Question 8

Persons over 75 years

Answer 8

taxable income does not exceed R136 750, are exempt from provisional tax provided such income consists exclusively of remuneration, rental, interest or foreign dividends

excludes directors of companies and members of close corporations

Question 9

Persons over 65 years but below 75

Answer 9

taxable income does not exceed R122 300, are exempt from provisional tax provided such income consists exclusively of remuneration, rental, interest or foreign dividends.

excluding directors of companies and members of close corporations

Question 10

Persons under 65 years

Answer 10

who do not carry on business and whose taxable income does not exceed the tax threshold, or whose interest, foreign dividends and rental income do not exceed R79 000 are exempt from provisional tax.

Question 11

Types of taxpayers

Answer 11

1. An Individual – also referred to as a natural person (0% - 45%)
2. A Company 27%
3. Closed Corporation 27%
4. A micro business as defined (0% - 3%)
5. A small business corporation as defined (0% - 27%)
6. Trust (45%)
7. Deceased Estate (20%: 25% >R30m)
8. Insolvent Estate (20%: 25% >R30m)

Question 12

Ordinarily resident

Answer 12

1. is so resident in the country they call home, the country to which they naturally and as a matter of course return from their wanderings.
2. If more than one home, must determine the permanent or principal home
3. May be ordinarily resident even though in a given tax year, they have not spent any days in SA during that tax year.

Question 13

Principles developed to establish ordinary residence

Answer 13

1. If it is part of a person’s ordinary regular course of life to LIVE IN A PARTICULAR PLACE with a degree of permanence, the person is regarded as ordinarily resident
2. A person is ordinarily resident in the country to which he would naturally and as a matter of course RETURN FROM HIS WANDERINGS and would call home
3. A person can be ordinarily resident even if he is physically absent
4. The place of residence must be SETTLED AND CERTAIN, not temporary and casual
5. A person is ordinarily resident where his PERMANENT PLACE OF ABODE is situated, where his BELONGINGS ARE STORED which are left behind during temporary absences and to which he regularly returns after these absences

Question 14

Physically resident

Answer 14

1. person who is not ordinarily resident may be a resident if he is physically present in the Republic for certain periods
2. So regarded based on the number of days spent in SA (PHYSICAL PRESENCE TEST)

Question 15

physically present test requirements

Answer 15

Performed over a 6-year period)
1. Not ordinarily resident at any time during current YOA
2. > 91 days in aggregate in the current YOA
3. > 91 days in aggregate during each of the preceding 5 YOA
4. > 915 days in aggregate in the 5 years preceding the current YOA

Question 16

When will a person cease to be a resident

Answer 16

1. if he is outside SA for continuous period of at least 330 full days after he ceases to be physically present
2. Absence from SA for continuous presence of 330 days TERMINATES residence in terms of physically resident test from day one of 330 days period

Question 17

Section 10(1)(o) exemption

Answer 17

1. employee must be outside SA for a period exceeding 183 days in aggregate during 12 month period
2. for a continuous period exceeding 60 days during that 12 month period
3. for services that were rendered during the period of absence from SA

Question 18

GROSS INCOME (Section 1)

Answer 18

1. The total amount;
2. Received by, or accrued to a taxpayer;
3. Who is a SA resident;
4. Whether it is in cash or in a form other than cash;
5. Excluding receipts and accruals of a capital nature, unless it falls within the ‘special inclusions’ definition of gross income
6. During the Year of Assessment

Question 19

Special Inclusions

Answer 19

1. Annuities Including living annuities (a)
2. Payments in respect of services rendered (c)
3. Restraint of trade payments (cA)
4. Lump sums from termination of employment (d)
5. Lump sums from pension, provident and RA funds (e)
6. Pension and provident fund surpluses (eB)
7. Fringe benefits (i)

Question 20

Annuities Including living annuities

Answer 20

An amount received or accrued by way of an annuity

 1. Any fixed amount paid annually
 2. The payments are repetitive
 3. Chargeable against a person

Question 21

Payments in respect of services rendered

Answer 21

Definition of ‘in respect of services rendered’:
1. Any amount linked to service performed
2. Not necessarily related to your everyday job

Example: Payment to one person in respect of services rendered by another; Rewards (E.g. police reward); A prize won by an employee for excellent services rendered; Voluntary payments

Question 22

Restraint of trade payments

Answer 22

1. Capital in nature – effectively freeze income-earning structure
   1.1. Not really for services rendered, but . . .
   1.2. For undertaking NOT to render services
2. Include in gross income
   2.1 Please note the taxability:
   2.2 Person who receives, must include in gross income
   2.3 Person paying is entitled to a tax deductibility over period of restraint
   2.4 If less than three years, spread over three years

Question 23

Lump sums from termination of employment

Answer 23

1. Any amount received as a result of losing or resigning from job
2. Deemed to have received immediately before death
3. Include in gross income
   3.1 Payments for loss of employment
   3.2 Payments for loss of office – loss of directorship
   3.3 Accumulated leave pay on termination of employment
   3.4 Retrenchment payment

Question 24

Lump sums from pension, provident and RA funds & Pension and provident fund surpluses

Answer 24

1. Annuities are included in gross income as a result of para (a)
2. This paragraph refers to the lump sum received
3. Dealt with under paragraph 2 of the Second Schedule
4. Calculated according to the Retirement Tax Tables

Question 25

Fringe benefits

Answer 25

1. Acquisition of asset @ < actual value
2. Right of use of a motor vehicle
3. Residential accommodation
4. Medical scheme contributions paid by an employer

Question 26

Acquisition of asset @ < actual value

Answer 26

Cash equivalent taxable benefit when an asset is acquired by an employee from the employer

Question 27

special valuation rules

Answer 27

Movable property acquired by employer in order to dispose of it to the employee will be at
Cost to employer EXCEPT:
if asset consists of marketable securities (shares & bonds) = use MV employer owned asset prior to giving to employee = use MV
OR
trading stock = use lower of cost or market value

LESS: Amount paid by the employee for the asset Amount taxed in employee’s hands

Exemptions …long service/Bravery award (15 unbroken years and subsequent 10 unbroken years) award is reduced by the lesser of the cost or R5000 and property and fuel

Question 28

Right-of-use of a motor vehicle

Answer 28

Private use of company owned vehicle
“Determined value” ( actual retail market value) – from 1 March 2011
– INCLUDES VAT but excludes finance charges and interest
3.5% of determined value per month Maintenance plan??
reduced to 3.25%
Vehicle under operating lease
Rental + fuel cost to employer

Amount will be apportioned if the right of use is less than a full month

Question 29

Travel allowance of motor vehicle

Answer 29

Accurate record kept of business kilometers, value of private use reduced by amount bearing same ratio to value of private use as the number of business km’s bears to total km’s travelled

Question 30

taxable amount of motor vehicle will be reduced by

Answer 30

1. Depreciation @15% on the reducing balanced method
2. Any consideration paid by the employee
3. Accurate records are kept for private and business

Question 31

Residential Accommodation

Answer 31

1. is calculated by using a formula
2. Essentially based on earnings or salary of employee
3. To determine the value:
   3.1 Determine the rental value using the formula
   3.2 Subtract from rental factor any consideration paid by employee
   3.3 The result to be included in gross income

Question 32

Formula to calculate Residential accommodation

Answer 32

(A – B) x C /100 *D/12

750 or NIL if control vests with employee
C = 17%; [4 rooms; no additional information] or
= 18% – [4 rooms, unfurnished, power or water supplied by employer] or furnished with no power & no water
= 19% – [4 rooms, furnished , power & water]
D = Number of months

Question 33

Retirement fund contributions

Answer 33

1. Paragraphs 2(l) and 12D of the Seventh Schedule
2. As per retirement reform effective 01/03/2016
3. ALL employer contributions to pension, provident and retirement annuity funds taxed as fringe benefits in the hands of the employee for defined contribution funds.

Question 34

Medical fringe benefits

Answer 34

The amount the employer contributes will be included as a fringe benefit, except:

   1. Pensioner (retired due to old age, poor health or disability)
   2. Dependents of a person, after such person’s death
   3. Dependents of a pensioner, after such person’s death