Tax Planning lecture 7

Question 1

exemption

Answer 1

can only be exempt if it forms part of gross income

Question 2

Two categories of exemptions

Answer 2

1. Entities which are exempt from tax
2. Income which is exempt from tax

Question 3

INCOME PARTIALLY EXEMPT FROM TAX

Answer 3

1. Interest (SA)
2. Interest by non-residents
3. Scholarships or bursaries
4. Dividends
5. Government and provincial receipts and accruals
6. Receipts and accruals from any registered PBO
7. Receipts and accruals from any pension, provident or retirement annuity fund
8. Tax free investments (section 12T)

Question 4

Interest (SA)

Answer 4

under 65: R23 800
over 65: R34 500

Question 5

Interest by non-residents

Answer 5

1. exempt if absent from SA for at least 183 days and did not carry on business in SA
2. interest from SA source to non-resident subject to 15% withholding tax (certain sources of interest not subject to the tax)

Question 6

Scholarships or bursaries (Voluntary annuities)

Answer 6

1. To enable any person to study are exempt
2. Restrictions towards employees and their relatives
3. Only exempt with respect to employees if employee obliged to repay if fail to complete studies
4. With respect to relatives – limited to R20 000 up to matric and R60 000 for further studies
5. Employee must earn less than R600 000 p.a

Question 7

Dividends (SA)

Answer 7

from SA companies completely exempt

Question 8

foreign dividends (Section 10B)

Answer 8

1. if person receiving dividend holds at least 10% of equity or voting rights in the foreign company
2. if dividend is received by foreign company which is resident in same country as company paying dividend
3. if SA resident is receiving foreign dividend, exempt to the extent that it does not exceed the total of all amounts included in income in terms of section 9D ( CFC)
4. if foreign dividend is received by resident in respect of JSE listed share – it will be exempt
5. to the extent that it is not exempt in terms of points above, can be exempt in terms of ratio exemption: 25/45 OR 8/28

Question 9

Tax free investments (section 12T)

Answer 9

1. Taxpayer allowed to contribute up to R36 000 each year with lifetime contribution of R500 000 Penalties once limits are exceeded
2. Returns are exempt from income tax, dividends tax and capital gains tax
3. Effective 1 March 2015 – marketed by banks, long term insurers and collective investment schemes

Question 10

Voluntary annuity income

Answer 10

1. The capital portion of purchased voluntary annuities are exempt from tax
2. Only annuities purchased by a natural person from an insurer “in the course of their insurance business” for a lump sum cash consideration and payable to the purchaser, or beneficiary
3. Where an annuity pays out for the remainder of the annuitants life expectancy, the a(55) mortality tables used to determine life expectancy
4. Current age is used or age immediately preceding the commencement of the contract

Question 11

Voluntary annuity income exemption equation

Answer 11

Exemption = 𝐴/𝐵 𝑋 𝐶

A= Lump sum paid by purchaser
B= The total expected annuity income
C= The annuity income received in the current tax year

Question 12

General deduction

Answer 12

1. reflected in section 11(a) read together with section 23
2. It is general because no specific expense is specified
3. Generally only available to self employed taxpayers who carry on business or trade
4. If it meets the criteria, the expense is 100% deductible
5. Section 11(a) sets out the requirements for what may be deducted; and
6. Section 23 stipulates what may NOT be deducted

Question 13

General Deduction Formula

Answer 13

For the purposes of determining the taxable income derived by any person from CARRYING ON A TRADE, there shall be allowed deductions from the income of such person so derived . . . EXPENDITURE AND LOSSES ACTUALLY INCURRED in the YEAR OF ASSESSMENT in the PRODUCTION OF INCOME, provided such expenditure & losses are NOT OF A CAPITAL NATURE

Question 14

Examples of expenses that do not qualify as deductions

Answer 14

1. Fines or bribes
2. Theft
3. Social responsibility
4. Recurrent expenses (apportioned over taxable and exempt income)
5. Ex gratia payments (money paid as a favour or gift)

Question 15

Examples of expenses that qualify as deductions

Answer 15

1. Advertising costs
2. Salaries & Wages
3. Interest incurred as part of a business
4. Rentals of property and equipment
5. Lease payments
6. Cost of trading stock
7. Traveling expenses
8. Electricity and water

Question 16

Home expenses deductible if

Answer 16

1. a part of the home is occupied for purposes of trade
2. it is regularly and exclusively used for trade
3. it is exclusively equipped for trade
4. If trade is employment, no deduction unless more than 50% of income is derived from commissions and provided that work is not usually performed at office provided by employer and duties are performed mainly at home
5. Includes rent, interest on bond, rates and taxes, telephone and electricity

Question 17

Section 23 disallows the following

Answer 17

1. Prohibits deduction of private expenditure
2. Any loss or expense is not deductible to the extent that it is recoverable under contract of insurance , guarantee.
3. To the extent that expenditure does not relate to trade, it is not deductible
4. There are also certain ring fencing provisions and provisions relating to suspect trades that impact upon the potential deductibility of expenses

Question 18

Retirement contributions (Section 11F)

Answer 18

1. The retirement reform with regards to deductibility of retirement fund contributions comes in affect as of 1 March 2016.
2. Under the new legislation there is no differentiation between pension, provident and
   retirement annuity funds.
3. All employer contributions regarded as Fringe benefits.

Question 19

Section 11F allowed based on

Answer 19

the lessor of:
a) R350 000;
b) 27.5% of the greater of:
Remuneration (excludes SB and Retirement fund lump sums); or
Taxable income (includes capital gain but excludes lump sums) before any S11F deductions; or
c) Taxable income (includes lump sum benefits: 80% of travel allowance or car fringe benefit) before:
any S11F or 18A deductions and
the inclusion of any capital gain

Question 20

Donations to PBO – s18A

Answer 20

1. In cash or kind, made to any PBO approved by the SARS in terms of Section 30
   1.1 any institution, board or body as defined in s10(cA)(i)
   1.2 Income Tax Act contains list of organisations that qualify
2. Limited to 10% of taxable income before this deduction but excluding any retirement fund lump sum benefit / withdrawal benefit
   2.1 Any amounts in excess of the 10% is carried forward to the next year ( again subject to
   10% rule)

Question 21

TAXABLE BUSINESS ALLOWANCES

Answer 21

Travel allowance
Subsistence allowance (out of town)

Question 22

Travel allowance

Answer 22

1. these allowances are subject to PAYE (20% upfront if 80% is used for business purposes)
2. Any part not so spent on business must be included in gross income
3. The business portion can be deducted (balance in TI)
4. To determine the business portion, a logbook must be used
5. SARS allows either actual costs or deemed cost (table)
6. there is no deemed business or private travel
7. if travel does not exceed 398 cents per kilometre = not included in taxable income.
8. If the reimbursive allowance exceeds this amount, the excess is included.

Question 23

Subsistence Allowance

Answer 23

1. Amount actually incurred in respect of accommodation, meals or other incidental costs
2. Where recipient unable to provide proof of actual expenditure, following amounts will apply

Question 24

Travel in SA

Answer 24

R161 per day if allowance granted to defray incidental costs only
R522 per day if allowance granted to defray incidental costs & cost of meals

Question 25

Rebate (cumulative)

Answer 25

Primary tax rebate (<65): R17 235 Plus: Secondary rebate (65 - 74): R9 444 Plus: Tertiary rebate (75+): R3 145

Question 26

Medical credit

Answer 26

New medical scheme fees tax credit introduced in 2012 As of 1 March 2014, fixed tax credit system reduces the actual tax payable- section 6A and section 6B credits

Question 27

3 categories of taxpayers under 6B

Answer 27

taxpayers 65 and older ; taxpayers with disability factor and all remaining taxpayers; i.e younger than 65 with no disability

Question 28

taxpayers 65 and older on the last day of the tax year

Answer 28

medical scheme fees tax credit plus an additional tax credit equal to: a) 33.3% of any qualifying contributions that exceed three times the medical scheme fees tax credit; and b) 33.3% of all qualifying medical expenses

Question 29

Medical scheme contributions tax credit for 65 and older

Answer 29

contributions and other qualifying medical expenses may be claimed as a credit

Question 30

taxpayers spouse or child with disability

Answer 30

medical scheme fees tax credit plus an additional tax credit equal to: a)33.3% of any qualifying contributions that exceed three times the medical scheme fees tax credit; and b) 33.3% of all qualifying medical expenses

Question 31

Medical scheme contributions tax credit for Younger than 65 if disabled family member

Answer 31

1. Contributions claimed as medical schemes fees tax credit as above 2. Excess contributions and other qualifying expenses may be deducted against taxable income as above but without the 7.5% limit

Question 32

all remaining taxpayers; i.e younger than 65 with no disability

Answer 32

The medical scheme contributions tax credit plus an additional tax credit equal to 25% of the sum of the following: 1. Any qualifying contributions that exceed four times the medical scheme contributions tax credit; and 2. Any qualifying medical expenses but only to the extent that the sum of (i) and (ii) exceeds 7.5% of taxable income ( excluding retirement and severance lump sum benefits)

Question 33

Medical scheme contributions tax credit for younger than 65

Answer 33

1. R364 per month for each of the taxpayer and the first dependent 2. R246 per month for each additional dependent 3. A credit may also be claimed against taxable income in respect of - so much of the contributions paid as exceeds 4 times the medical scheme fees tax credit and other qualifying expenses 4. Amount claimed is limited to the extent that it exceeds 7.5% of taxable income before this deduction and any lump sum benefits

Question 34

Section 6B stipulates who qualifies as a dependent

Answer 34

Spouse Child or child of spouse Member of immediate family in respect of whom taxpayer is liable for family care and support Any other person recognized as dependent of that person in terms of rules of medical scheme

Question 35

“Child” means

Answer 35

Any person who was unmarried and was not or would not have been: Over the age of 18 years Over the age of 21 years (wholly or partially dependent, no tax payable) Over the age of 26 years (wholly or partially dependent, no tax payable, full-time student)

Question 36

Disability also defined

Answer 36

moderate to severe limitation of person’s ability to function or perform daily activities as a result of impairment and if limitation lasts more than a year and has been diagnosed by a medical practitioner

Question 37

Qualifying medical expenses

Answer 37

as sum of all amounts paid – not recoverable by medical aid

Question 38

Medical credit CLAIM for taxpayers 65 years and older

Answer 38

contributions and other qualifying medical expenses may be claimed as a credit

Question 39

Medical credit CLAIM for taxpayers younger than 65 years

Answer 39

1. R364 per month for each of the taxpayer and the first dependent 2. R246 per month for each additional dependent 3. A credit may also be claimed against taxable income in respect of 3.1 so much of the contributions paid as exceeds 4 times the medical scheme fees tax credit and other qualifying expenses 4. Amount claimed is limited to the extent that it exceeds 7.5% of taxable income before this deduction and any lump sum benefits

Question 40

Medical credit CLAIM for taxpayers younger than 65 years if disabled family member

Answer 40

1. Contributions claimed as medical schemes fees tax credit as above 2. Excess contributions and other qualifying expenses may be deducted against taxable income as above but without the 7.5% limit