Presented by:Daylan Staude

CA (SA), MCom (taxation)

A practical seminar on the filing of the 2018 return of income.

2018 Tax Issues for Individuals (ITR12)

Sponsored by

Upcoming CPD Events Refer to our website for all upcoming dates

September

• Trusts & Deceased Estates

October

• Tax Admin and Disputes in Practice

November

• 2018 Year-end Tax Update

2018 SAIT CPD Requirements:

SARS Registered Tax Practitioners:

• 15 verifiable output Tax CPD hours

• 5 verifiable output Ethics and Standards CPD hours

• 10 non-verifiable Tax CPD hours

Commerce, Industry, Academia and Public Sector:

• 15 verifiable input Tax CPD hours

• 5 verifiable output Ethics and Standards CPD hours

• 10 non-verifiable Tax CPD hours

Agenda

09.00: Seminar commences 10.30 – 10.50: Tea Break13.00: Seminar concludes

Well, young lady you may well not have to file one …

Paragraph 3 in the notice

… does not apply to a natural person who was—(a) paid or granted an allowance or advance … section 8(1)(a)(i) …

other than an amount reimbursed or advanced … simplified method …; or

(b) granted a taxable benefit described in paragraph 7 of the Seventh Schedule to the Income Tax Act.

Income tax returns must be submitted within the following periods:(a) … ; or(b) in the case of all other persons (which include natural persons, trusts and other juristic persons, such as institutions, boards or bodies)—

(i) on or before 21 September 2018 if the return is submitted manually; (ii) on or before 31 October 2018 if the return is submitted by using the SARS eFiling platform or electronically through the assistance of a SARS official at an office of SARS;(iii) on or before 31 January 2019 if the return relates to a provisional taxpayer and is submitted by using the SARS eFiling platform; or (iv) where accounts (in terms of section 66(13A) … are drawn to a date after 28 February 2018 but on or before 30 September 2018, within 6 months from the date to which such accounts are drawn.

Paragraph 4 in the notice Periods within which income tax returns must be furnished

Tax Practitioners

Tax Practitioners, whose primary filing channel is eFiling, are using branches to file taxpayers’ returns.

During 2016, a total of 132 000 returns were submitted by tax practitioners at SARS branches, while in the 2017 tax season, 120 000 were.

NEW INITATIVE BY SARS:Tax practitioners will be requested to strictly use eFiling for submitting taxpayer returns and avoid doing so at a branch.

Verification letters will be more specific in terms of the supporting documents that we require from taxpayers who may have been flagged for a specific risk.

Tax returns for the current year of assessment will take priority over outstanding returns filed for prior years.

Where an assessment on one return may reflect a refund due, there may be instances where prior returns may reflect that the taxpayer needs to make a payment. These amounts will be offset against each other and the taxpayer will be notified of the outcome.

Initiatives:

SARS is continuing to refine its risk engine to specifically limit repeat audit cases where no risk was found in previous years.

This year SARS is running a pilot in the background to auto assess taxpayers with a view in future years of issuing assessments to taxpayers who need not submit returns.

While not directly linked to the filing season for individuals, SARS is seeking to reduce the burden of filing other returns this year by not requiring tax returns for companies that are dormant and have no assets.

Initiatives:

Period to be assessed is less than 12 months

Date of birth is the first day of the child’s year of assessment.

Estate is reported to SARS.

Executor is appointed.

“representative taxpayer” means a natural person who resides in the Republic and … in respect of … the income received by or accrued to the estate of any deceased person, the executor or administrator of the estate of such deceased person …

1 March 2016

Date of death

28 February 2017

Liquidation and distribution account

Year(s) of assessments

Last year of assessment for the deceased

A new and separate taxpayer

Executor winds up the estate.

A deceased estate must,

be treated as if that estate were a natural person.

other than for the purposes of section 6, section 6A and section 6B,

Taxation of deceased estates – 25(5)

… where a person (other than a company) that is a resident ceases during any year of assessment … to be a resident … that year of assessment must be deemed

to have ended on the date immediately before the day on which that person so ceases to be a resident; and … the next succeeding year of assessment of that person must be deemed to have commenced on the day on which that person so ceases to be a resident.

Practice generally prevailing (IN03 – issue 2)

A natural person becomes “resident” in the Republic effective from a specific date which, …, is the date on which that person became “ordinarily resident”.

Generally, if a natural person emigrates from the Republic to another country, that person ceases to be a resident of the Republic from the date that person emigrates.

An individual can become, or cease to be, a resident of the RSA (for tax purposes) in one of three ways:

… not ordinarily resident in …

… person who is deemed to be exclusively a resident of another country …

Amounts considered not to be ‘taxable’.

Already there – provided by the employer (IRP5 or IT3)

Examples (from the RSA / Singapore treaty):

13.5: Gains from the alienation of any property other than that referred to in the preceding paragraphs of this Article, shall be taxable only in the Contracting State of which the alienator is a resident.

20.1: Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State.

When will the amount be a ‘foreign pension’?

RSA source, but accruing to a resident of New Zealand: This amount is declared as an amount accruing to a person exclusively deemed to be a resident of New Zealand. It is not a ‘foreign pension’.

17.1: … pensions and annuities paid to a resident of a Contracting State shall be taxable only in that State.

Section 10(1)(gC)(ii)

Past employment outside the RSA

There shall be exempt from normal tax

… lump sum, pension or annuity

received by or accrued to any resident

from a source outside the RSA

as consideration for past employment outside the RSA

other than from

any pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund as defined in section 1(1)

or a company that is a resident and that is registered in terms of the Long-term Insurance Act as a person carrying on long term insurance business

excluding any amount transferred to that fund or that insurer from a source outside the Republic in respect of that member

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017

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When the source is outside the RSA and the fund is not one approved by SARS.

The taxpayer, a resident of the RSA, worked in Brazil and contributed to a fund (SARS approved) in the RSA.

The section 10(1)(gC) exemption is not available.

Judge Leach in Road Accident Fund v Mphirime

(a) It is declared that the cost of employment of a domestic assistant to the plaintiff is an expense that the defendant is entitled to pay in terms of an undertaking under s 17(4)(a) of the Road Accident Fund Act 56 of 1996;

(b) The defendant is ordered to furnish the plaintiff with such an undertaking.

Section 10(1)(gB)(iv) exempts from normal tax “any compensation paid in terms of section 17 of the Road Accident Fund Act, 1996”.

And what do you capture here?

Dividends – declared by RSA resident companies.

Foreign dividend – person holds at least 10% of the total equity shares and voting rights in the company.

Foreign dividend - received by or accrues to the person in respect of a listed share.

S 10(1)(k)

S 10B(2)(a)

S 10B(2)(d)

Exempt local and foreign dividends

Some comments relating to the foreign dividends:

Where ta person holds an interest in a controlled foreign company the interest may be less than 10% (second item). The foreign dividend will then be exempt to the extent that it does not exceed the aggregate of all amounts included in his or her income in terms of section 9D in any year of assessment (section 10B(2)(c)).

The term “listed share” is defined in section 1(1) and means a share that is listed on an exchange as defined in section 1 of the Financial Markets Act 19 of 2012 and licensed under section 9 of that Act.

The JSE, ZARX (Pty) Ltd and 4 Africa Exchange (Pty) Ltd are the only exchanges currently licensed under section 9 of the Financial Markets Act.

Some comments relating to this:

The person is ‘not a resident’ of the RSA (that is).

The person was also NOT physically present in the RSA for a period exceeding 183 days in aggregate during the twelve-month period preceding the date on which the interest is received or accrues by or to that person.

The section 50D(3)(a) exemption from the withholding tax on interest would then also not have been available.

Section 12T

… any financial instrument or policy as defined in section 29A …

… exempt from normal tax any amount received by or accrued to a natural person …

… or deceased estate or insolvent estate of …

… transfer … to another …

Some comments relating to this:

These amounts would not appear on an IRP5.

These individuals had to make provisional tax payments.

All amounts received by or accrued to the individual in any currency other than the currency of the RSA, may (at the election of the individual) be translated to the currency of the RSA by applying the average exchange rate for the relevant year of assessment – section 25D(3).

If spot rate on accrual date is used, no foreign exchange gain or loss is available to the individual – section 24I(2).

Amounts received by (or accrued to) the individual in respect of: • Services rendered (or to be) • Any employment (or the holding

of any office).

Paragraph (c)

… in respect of services rendered … or

employment or the holding of any office

Paragraphs (cB), (d), (f)

… in respect of or by virtue of … employment … holding of any

office…

Section 8(1)

… principal … recipient … public office …

and paragraph (i)

The Seventh Schedule merely provides valuation rules.

The principal includes an employer

All of these amounts will be pre-populated on the return.

Dealing with errors on the IRP5

Check your IRP5 and verify if all the information is correct before attempting to submit the return. If you notice any errors which might need to be corrected, kindly advise your employer to rectify it. You will not be able to change these prepopulated fields on the return.

http://www.sars.gov.za/FAQs/Pages/2258.aspx

Should an employer or service provider revise a taxpayer’s IRP5 data after an ITR12 has been declared and assessed, the taxpayer has the ability to file a Request for Correction

Contrary to popular belief, the employer must “deliver to each employee or former employee … an employees’ tax certificate” –paragraph 13(1) of the Fourth Schedule.

It is the duty of the employee who has not received one to apply to the employer for such certificate – paragraph 13(5).

The employees’ tax certificate must be delivered after the employer reconciliation was rendered.

Facts and background information pertaining to query:Client is working in UAE on a five-year contract and also receives rental income from a property situated in the RSA. Client only visited the RSA in December 2017 for his annual break. Request:• Is the new Act for South Africans already in force for the

2018 tax year? • To proof he is non-resident must he get a certificate from

UAE (tax residence certificate)? • In absence of this certificate must he be taxed on both

salary and rental income?

The amendment to section 10(1)(o)(ii) will come into operation on 1 March 2020 and will apply in respect of years of assessment commencing on or after 1 March 2020 (the R1 million one).

There is a perception that a person ‘ceases to be a resident’ if he or she works in a foreign country.

What is true is that just about everyone ignores the double tax agreements when the resident status of the taxpayer is an issue.

Judge Allie in Income Tax Case 14218 said:

“… the respondent himself (that is of course SARS) pleaded that the appellant (the taxpayer) was a United States national and tax resident, yet it failed to have regard to the provisions of the DTA which clearly establish the appellant as being exclusively resident in the United States …”

Some comments:

Let’s apply the law to this:

It is important to remember that the section 10(1)(o)(ii) exemption is only relevant to income derived as an employee and only as long as the individual is still a resident of the RSA.

This is primarily to determine if the individual may be deemed to be a person who is deemed to be exclusively a resident of the United Arab Emirates.

Under Article 4(1)(b)(i) the term “resident of the United Arab Emirates” means “any individual who, under the laws of the United Arab Emirates is considered a resident thereof by reason of that individual’s domicile, residence, place of management or any other criterion of a similar nature”.

Because there is a double taxation agreement between the RSA and the UAE and the individual will be there for a period of time (in addition to having UAE sourced income), one must consult the agreement.

Some comments:

Let’s apply the law to this: It is understood that the authorities in the UAE issues a letter to individuals confirming that they are residents in the UAE on a year by year basis.

It is submitted that this letter would mean that the individual, under “the laws of the United Arab Emirates is considered a resident thereof by reason of that individual’s domicile, residence, … or any other criterion of a similar nature”.

This term “resident of South Africa” does not include any person who is liable to tax in South Africa in respect only of income from sources therein – the rental (a source in the RSA).

If the person has not formally left South Africa, (emigrated or no longer ordinarily resident in), the tiebreaker clause will have to be considered.

For purposes of the tiebreaker, in the first instance, the country where a permanent home is available to the individual, will then be important (or may be the deciding factor).

Let’s apply the law to this:

Let’s assume that the person has a permanent home in the RSA and is therefore a person who is deemed to be exclusively a resident of the RSA.

Under paragraph 1 of Article 14 both countries have a right to tax “remuneration derived by a resident of a Contracting State (the RSA in this instance) in respect of an employment”.

For the 2018 year of assessment, the RSA still gives an exemption for this remuneration (> than 60 and 183 days).

The individual must therefore declare the amounts in his (or her) RSA return of income.

What if the employer was a resident of the RSA?

The code 3651 will then have been used on the IRP5 and the employer may, or may not, have withheld employees tax.

If employees’ tax was withheld (in the RSA), the taxpayer (employee) must then ‘make a deduction’ – the amount of the deduction will be the amount qualifying for the exemption.

The focus of this seminar is on taxpayers (employees) who are residents of the RSA.

More than 60 full days

More than 183 full days

The days must be days in employment

entitled to look both forwards and backwards over any period of 12 months … may overlap

… during any period of 12 months …

any period of 12 months

year of assessment

any period of 12 months

exceeding 183 full days in aggregate

a continuous period exceeding 60 full daysand

Are days you leave or arrive in the RSA ‘full days’?

And leave days?

Yes, use calendar days?

… where remuneration is received by or accrues to any employee during any year of assessment in respect of services rendered by that employee in more than one year of assessment, the remuneration is deemed to have accrued evenly over the period that those services were rendered …

When can SARS apply apportionment?

The practice generally prevailing:

However, if the services rendered inside the Republic by a person are merely casual and accidental, or subsidiary and incidental, then the originating cause of the employment income will be fully outside the Republic and no apportionment will be necessary.

The general rule is that “any bona fide scholarship or bursary granted to enable or assist any person to study at a recognised educational or research institution” is exempt from normal tax.

The Act was amended in 2017 to provide for study assistance to employees or relatives of employees with a disability. Those amendments will only apply from 1 March 2018 onwards.

Section 10(1)(q)

… if … granted by an employer (associated institution) … to enable or assist … an employee … ONLY IF … the employee agrees to reimburse the employer … if that employee fails to complete his or her studies …

A taxable benefit will arise if the debt is waived or doesn’t carry interest as long as the employee doesn’t repay it.

if … granted by an employer or an associated institution … to a relative of such employee, the exemption … shall not apply

(aa) if the remuneration proxy derived by the employee in relation to a year of assessment exceeded R600 000, and

(bb) to so much of any scholarship or bursary … as in the case of any such relative, during the year of assessment, exceeds …

(A) R20 000 in respect of grade R to grade twelve … or … a qualification to which an NQF level from 1 up to and including 4 has been allocated

(B) R60 000 in respect of a qualification to which an NQF level from 5 up to and including 10 has been allocated

Section 10(1)(q)(ii)

Current law

Uniforms

Section 10(1)(nA) exempts from normal tax ‘a special uniform’. It must be “a condition of employment … while on duty to wear” it and must be “clearly distinguishable from ordinary clothing”.

Paragraph 6(4)(a) of Seventh Schedule provides for a no value to be placed on the private or domestic use of an asset by an employee if such use is incidental to the use of the asset for the purposes of the employer’s business.

A proviso to paragraph 6(4)(a)

Provided that this item shall not apply in respect of clothing.

… comes into operation on 1 March 2018.

… non-special uniforms will not qualify for a no value … nor will an allowance for such qualify for exemption under section 10(1)(nA)

Non-taxable Subsistence allowance for local and foreign travel not exceeding the daily limits

3764

3714

3704

3754

GUIDES FOR CODES APPLICABLE TO EMPLOYEES TAX CERTIICATES 2018

Accommodation, meals and other incidental costs

obliged to spend at least one night away from

Why is the allowance or advance

paid or granted?

the recipient is by reason of the duties of his or her office or employment

his or her usual place of residence in the RSA

excluding any portion of any allowance or advance actually expended by that recipient on any accommodation, meals and

other incidental costs, as contemplated in paragraph (c),

Where an allowance is granted to the holder of any public office the Act refers to ‘subsistence and

incidental costs’.

the amount of the expenses actually incurred proven to

the Commissioner by him or her (the recipient)

limited to the amount of the allowance or advance paid or granted to meet those expenses

in respect of meals and other incidental costs,

the amounts determined by the

Commissioner

in respect of accommodation, meals or other incidental costs

How is “the portion actually expended by the recipient” determined (in

order to be excluded)?

It can be determined in

one of two ways:

or incidental costs only

Accommodation, meals and other incidental costs

Accommodation, meals and other incidental costs … actually expended …

… where that recipient proves to …” SARS “… the amount of the expenses incurred by him or her …”

Section 8(1)(c)(i)

… other than any amount of expenditure borne by the employer …

There is no “meals only” deemed expenditure amount.

Accordingly a recipient, who receives such an allowance, would also have to apply the actual method to calculate the allowable deduction.

… when a recipient receives an allowance or an advance for accommodation, the recipient must apply the actual method to determine the amount that will be allowed to be deducted from that allowance …

Accommodation, meals and other incidental costs … in the Gazette …

Section 8(1)(c)(ii)

In practice, accommodation service providers often levy a single charge for bed and breakfast, whether or not the guest eats breakfast.

The amounts are per diem amounts.

Convert to Rands – section 25D – spot or average rate.

Amounts determined by SARS for a country or region - by way of notice in the Gazette

amounts deemed to have been actually expended

the accommodation, to which that allowance or advance relates

in respect of

incidental costs only

in respect of meals and

other incidental

costs

is outside the RSAis in the RSA

to defray the cost of meals and incidental

costs

R397 per day R122 per day

amount per day in accordance with the table for

the country in which that accommodation is located

Section 8(1)(c)

Foreign currency amount

In respect of the year of assessment

commencing 1 March 2017

Inclusive of VAT and SARS is now requesting proof.

Very important – 7 years – so you really need the date of acquisition.

When actual cost is used, the limits apply.

Not ‘determined value’, but the cost of the vehicle.

Limited to R595 000

Codes 3701 and 3702 on

the IRP5.

Expenditure per kilometre may be determined using actual costs … or according to the deemed rate per kilometre as determined by the Minister of Finance by notice in the Gazette …

From the practice generally prevailing:

A logbook must support these.

Accurate data furnished

“…borne the full cost of the fuel used in the vehicle…”.

4. As contemplated in paragraph 2(b) of Interpretation Note 14.

applies in respect of years of assessment commencing on or after 1 March 2017.

… motor vehicle … was acquired by that recipient under a bona fide agreement of sale or exchange concluded by parties dealing at arm’s length, the original cost thereof to him/her, including any value-added tax but excluding any finance charge or interest payable by him/her in respect of the acquisition thereof …

Code: 3802

The motor vehicle was acquired by the employer

… more than one motor vehicle is made available by an employer to a particular employee …

Paragraph 7)6) of the Seventh Schedule.

The practice generally prevailing refers to “employees of dealers in new and used motor vehicles and employees of employers in the motor vehicle rental industry” and when the individual “may use several “company motor vehicles" over short periods.”

In these circumstances, as an alternative to determining the actual cost of the particular motor vehicle used during each period, SARS will accept that the cost of the motor vehicle is equal to the average cost of all stock in trade or rental vehicles on hand at the end of the immediately preceding year of assessment of the employer.

SARS, on review, often requests a letter from the employer with regard to the value (average cost) used.

The private or domestic kilometres travelled will of course follow from this and is required for this reduction – paragraph 7(8).

A logbook must support these.

It is only where the employee bears the full cost of insurance, license or maintenance that a ‘deduction’ is available. It is also only the part related to private travel that is ‘deducted’.

… and the employee bears the full cost of fuel for private use: the total kilometres travelled for private purposes by applying the rate per kilometre for fuel fixed by the Minister in the Gazette …

Paragraph:

7(8)(a)(ii)

7(8)(a)(i)

7(8)(a)(iii)

7(8)(b)

Code: 3816

The taxable value is the ‘actual cost incurred by the employer under that operating lease’ and the ‘cost of fuel in respect of that vehicle’. The employee can then only reduce the taxable benefit based on the ‘number of kilometres travelled for business purposes’ – paragraph 7(7).

The motor vehicle was held by the employer under a lease

In terms of section 23(g) domestic or private expenses (or a part thereof) will not be ‘moneys laid out or expended for purposes of trade’. With regard to these premises, section 23(b) makes an exception to the denial of the deduction.

SARS issued a revised assessment … and disallowed • home office expenses as no contract from municipality

provided to motivate why taxpayer has a home office and • disallowed depreciation as no relevant substantiating

documents provided.

When can ‘home offices expenses’ be deducted?

Is a contract required? Let’s look at the relevant law:

But section 23(m) may also apply …

Not the holder of a public office.

The general prohibition – section 23(m)

Rule No deductions shall in any case be made in respect of…

any expenditure, loss or allowance

which relates to

the turnover attributable to him or her

contemplated in section 11

in respect of which he or she derives any remuneration

any employment of, or office held by,

any person

other than an agent whose remuneration

is normally derived

mainly in the form of

commissions based on his or her sales

or

… is not a common law employee.

It is … accepted that no control or supervision is exercised over the manner in which such NED performs his or her duties, or the NED’s hours of work.

it is … accepted that because the amounts received by an NED are not “remuneration”, the prohibition under section 23(m) will not apply in respect of such fees.

… applies from 1 June 2017 until it is withdrawn, amended or the relevant legislation is amended.

This ruling does not apply in respect of non-resident NEDs.

Section 23(m) is not applicable.

Didn’t the position change with respect to directors?

Applying the law – commission or turnover cases

Section 23(m) refers to “… any remuneration, as defined in paragraph 1 of the Fourth Schedule …”

The definition of ‘remuneration’ includes ‘commission’.

The practice generally prevailing – when code is 3606 (IN13)

The term “mainly” is interpreted to mean more than 50% of the taxpayer’s gross remuneration. This means that the total income of the taxpayer (including 100% of all allowances) must be compared to his or her commission income.

“Commission” – a percentage of sales or turnover of the person on behalf of whom the agent or representative is acting.

Code 3606

It is then excluded from ‘remuneration’ if the person carries on a trade independently.

Will be discussed later

Directors’ fees received by a RSA Non-Executive Director with a voluntary PAYE withholding (not ‘remuneration’) – code 3620

Exceptions Deductions that are permitted

any contributions to:

any allowance or expense which may be deducted from the income of that person in terms of:

pension fund, provident fund or retirement annuity fund - section 11F

section 11(c) - legal expenses

section 11(e) - wear and tear

section 11(i) or (j) - bad / doubtful debt

The relevant law – the section 23(m) prohibition doesn’t apply

any deduction allowable under section 11 (nA) or (nB)

any deduction which is allowable under section 11(a) or (d) in respect of any rent of, cost of repairs of or expenses in connection with any dwelling house or domestic premises, to the extent that the deduction is not prohibited under section 23(b);

Applying the law – section 23(b)

Great, now we know that the individual can potentially make the deduction. All we need to determine is whether “the deduction is … prohibited under section 23(b)”.

Section 23(b) refers to: “domestic or private expenses, including the rent of or cost

of repairs of or expenses in connection with any premises … (or) part … occupied for the purposes of trade…”

Section 23(b) is further qualified.

Provided that:

(a) such part shall not be deemed to have been occupied for the purposes of trade, unless such part is specifically equipped for purposes of the taxpayer’s trade and regularly and exclusively used for such purposes; and

Proviso (a) to section 23(b):

Practice generally prevailing - Interpretation note 28:

… in order for a part of a private home to be considered “specifically equipped” for the purposes of trade, that part must be fitted with the instruments, tools and equipment required to conduct that trade.

… taxpayers who meet clients at their homes would not be permitted a deduction under this head if they meet their clients in their dining or sitting rooms.

The first one (in item (i) of paragraph (b)) has two requirements:

The taxpayer’s “income from … employment …” must be “derived mainly from commission or other variable payments which are based on the taxpayer’s work performance…”

Practice generally prevailing - Interpretation note 28:

AND the taxpayer’s duties must be “mainly performed otherwise than in an office which is provided to him by his employer… ”

The second one (in item (ii) of paragraph (b)) is easier to meet.

The taxpayer’s “… duties are mainly performed in such part…”

Employees who … spend the majority of their time on the road visiting clients perform their duties mainly at their clients’ premises and as a result they do not qualify for a deduction under section 23(b).

Proviso (b) to section 23(b) – applying the law:

Section23(b) introduces two specific circumstances where the deduction would not be allowed (or can be made).

A section 11(a) deduction permitted, but in terms of a practice note.

The fee charged by the tax practitioner for completing the ITR12 can’t be deducted, unless the taxpayer carried on a trade other than employment.

So, when does practice note 37 make an exception and provide for the deduction to be made?

The practice note predates the section 23(m) prohibition, but agrees with it – no deduction of fees against remuneration income.

The R2 000 has since changed to R23 800 or R34 500.

… was found liable as an employer under section 60 of the Employment Equity Act … for having failed to take reasonable steps to protect the respondent, Ms M, on it becoming aware of her sexual harassment at work by her manager, Mr S.

In the result, the following order is made: 1. The appeal is dismissed with costs. 2. The appellant pays to the respondent the sum of R250 000 as

damages within 10 days of the date of this judgment.

Can the taxpayer, the employee (Ms M) in this instance, make a deduction in respect of her legal expenses in the following court case?

Extracts from the relevant judgement:

Can the taxpayer, the employee (Ms M) in this instance, make a deduction in respect of her legal expenses in the following court case?

Applying the law – sections 11(c) and 23(m)

In the first instance it must be determined if the legal ‘cost’ are an “expense which may be deducted from the income of that person in terms of section 11(c)”.

On the face of it, the cost meets all the requirements, but for proviso (iii) to section 11(c).

“…is not incurred in respect of any claim made by the taxpayer for the payment to him (or her of course) of any amount which does not or would not constitute income of the taxpayer …”

As the R250 000 is clearly capital in nature and not in respect of services rendered, it would not constitute ‘income’ of Ms M. That then means that no deduction can be made under section 11(c).

Wear and tear – section 11(e)

Computers

Cost exceeds R7 000

A person carrying on a trade independently –code 3616 if an IRP5 or IT3 was made out.

… trade independently …

Not a registered micro business, but can be derived in partnership.

Commission earners – other ‘deductions’

Exclude amounts included in an IPR5. Code 3616

Because the amounts are derived from a trade carried on independently, or mainly from commission (turnover), the section 23(m) prohibition doesn’t apply.

The return makes provision for a number of expenses (in detail). The expenses must of course qualify to be deducted in terms of the Act.

The taxpayer completes the relevant part (the ‘local business, trade and professional income’ part) of the ITR12.

An example of a mistake made in this respect:

It cancels out the double inclusion of the amounts.

Dear Taxpayer: REQUEST FOR SUPPORTING INFORMATION

Your Notice of Objection dated … refers.

To assist … SARS to process your objection within 60 days, you are requested to submit supporting information mentioned below within 30 business days from the date of this letter. Failure to do so may lead to your Notice of Objection being rejected. • The fixed cost calculation method for travel expenses is only

allowed and available for a person to claim against a travel allowance, you can only claim actual vehicle expenses, kindly submit the detail thereof and perform the correct calculation method

• Business kilometres / total kilometres x actual vehicle expenses = allowable portion

Please ensure you attach this letter to your supporting information as it contains a unique bar-coded reference linking it to your dispute case with SARS.Note that SARS only accepts supporting information in A4 format and no other formats will be accepted.

Commission earners – other ‘deductions’

What did the taxpayer do here?

The taxpayer (or practitioner) used the Gazette (or deemed costs) amounts.

With regard to business travel, the deduction must be based on the actual cost, which would include expenditure on fuel, insurance, finance, maintenance and wear and tear (in other words, under section 11(a), 11(e) (five year period), 11(d) and 24J where applicable). The total must then be adjusted for private use (based on the logbook) – section 23(a) or (g).

It was then presented on the ITR12 as follows:

Did you derive income from local business, trade or profession other than rental income from the letting of fixed property(ies)?

Can I make deductions against a distribution from a REIT? And if so, how do I do it?

In principle the answer is ‘yes’. This is how I’ve done it.

I didn’t declare the amount of the distribution here:

I answered yes to the following question:

Of course there were challenges with the SARS request for supporting documents and they initially wanted to include the REIT distribution again (as above = 4238).

The aggregate amount distributed by the REITs.

The section 24J(2) deduction. My client obtained finance, secured by a bond over the REIT’s, to finance the acquisition cost of the REIT’s.

The income that must be added together:

To not declare the aggregate of both spouses’ amounts in the ITR12.

otherwise than from the carrying

on of a trade

from the letting of fixed

property

deemed to haveaccrued in equal shares to both

spouses

Income which does not fall into the joint estate of the spouses

is deemed to be income accrued to the spouse who is

entitled thereto

Income derived:

i.e. dividends, foreign dividends, interest and REITs

Marital status Married in Community of Property

Section 7(2A)(b)

Note: All the investment income must be declared (even if you are married in community of property).

SARS will do the required apportionment(s) and / or apply the applicable exemptions.

Marital status Married in Community of Property

Comments:

The following note appears on the ITR12:

This means that on assessment, SARS will only take 50% of the aggregate into account.

Unless, of course, the income does not fall into the joint estate of the spouses.

Facts and background information pertaining to query:Client is working in UAE on a five-year contract and also receives rental income from a property situated in the RSA. Client only visited the RSA in December 2017 for his annual break.

Remember the person who worked in the UAE

Note: if the property was in the UAE – complete this part:

Remember proviso (b) to section 20(1).

Paragraph 1, of Article 6, deals with “income derived by a resident of a Contracting State from immovable property … situated in the other Contracting State” and provides that it “may be taxed in that other Contracting State.”

Let’s apply the law to this:

In terms of Article 6(3), the provisions of paragraph 1 of Article 6 must apply to income derived from the direct use, letting, or use in any other form of immovable property.

That gives a taxing right to both countries (and therefore means that the rental income can be ‘taxed’ in the RSA even when the individual is no longer a resident of the RSA.)

With respect to the rent derived, ‘trade’ as defined in section 1(1) of the Act, “includes … the letting of any property…”

The taxpayer would be entitled to make the deduction in respect of all expenses incurred to produce the rental (trade) income.

With respect to deductions, it is found mainly in section 11(a), 11(e) (possible), 11(d), 13sex (more than 5 Units) and 24J(2).

The relevant law:

And if the expenses exceeds the rental income?

Section 20A(8):Where the provisions of subsection (2) apply during any year of assessment in respect of any trade carried on by a person, that person must indicate the nature of the business in his or her return contemplated in section 66 for that year of assessment.

From the ITR12 it is clear that SARS expects the taxpayer to deal with it by saying it applies or doesn’t apply.

DEFINITION:Assessed loss: An amount by which the deductions under s11 exceed income. Arises where, for a year of assessment, taxable income is a negative amount

Section 20 and 20A

Assessed Losses

RING-FENCING of Assessed lossesOnly natural persons are subject to ring-fencing under s20A. As a result a loss incurred from a trade subject to s20A provides that:

• A natural person is prohibited from setting off an assessed loss from that trade against other income (trade or not)

Remember: Natural persons can carried forward an assessed losses even when no income is received

Rin

g Fe

nci

ngMaximum Tax

Bracket?

Ring fencing is not applicableRing fencing is

applicable

Suspect trade?

YES No

YES No

Is the Escape Hatch available?

YESNo

Were losses for this trade incurred for last 3 of 5 years?

NoYES

Section 20A

Taxpayer must be taxed at the maximum marginal rate2018 YOA: 45%2017 YOA: 41%

Ring Fencing

Is the trade considered to be a suspect trade?

Losses incurred for three-out-of-five-years, or

Trade is listed on the suspect trade list (s20A(2)(b))

THREE-OUT-OF-FIVE-YEAR trade loss:• Current year of assessment is

included in the five year period• Losses for three years will

automatically result in a suspect trade

SUSPECT TRADE LIST:Various as per the list. Take note of:• Residential accommodation rental

unless 80% is not used by a relative• Rental of vehicles /boats / aircraft

unless 80% is not used by a relative• Farming unless on a full time basis

Relative is: spouse, parent, child, step-child, brother, sister, grandchild or grandparent

Ring Fencing

ESCAPE HATCH:• Applies where there is a reasonable expectation that

a suspect trade will start to generate a loss within a reasonable period of time

• There are 6 objective factors to consider:

Ring Fencing

BUT there is a limitation to the escape hatch• Does not apply to a trade on the suspect trade

list where:• The taxpayer has incurred an assessed loss

in at least SIX of the last TEN years (including the current year)

• Farming is however excluded from the 6 of 10 limitation rule

REMEMBER:A natural taxpayer with a suspect trade must indicate the nature of the business in his annual tax return and under this rule, a taxpayer is obligated to report a suspect trade

Now in the present case the appellant clearly, in my view, undertook a venture in the above sense. He laid out the money required to obtain a bank guarantee, and risked the amount of the guarantee, in the hope of making a profit. It was a speculative enterprise par excellence.

To remind ourselves of the ‘gross income’ principle, the following statement by Judge van der Merwe in CSARS v Capstone 556 (Pty) Ltd, is appropriate:

Thus the mere intention to profit is not conclusive. There must be “an operation of business in carrying out a scheme for profit-making‟ for a receipt to be income.

Judge Grosskopf in Burgess v CIR:

If no “scheme for profit-making‟ is carried out the receipt will be capital in nature and a capital gain or loss will follow.

The taxpayer is then carrying on a trade and carries the bitcoins as trading stock until disposed of. Other expenses are rolled over until income is derived - section 11A.

Dividends and foreign dividends

… a company that is a resident …

… a foreign company …

Doesn’t matter if it is listed or not.

Gross income – paragraph (k)

Listed Not listed

Exempt from tax –section 10(1)(k)(i) before proviso’s

> 10%

Exempt from tax –section 10B(2)

Subject to dividends tax

Taxes withheld at source

2545

4112

4112

The formula exemption (25 / 45) is automatically granted on assessment.

6 159.05

The gross amount before the R23 800 or R34 500 exemption.

2017 YoA

The gross amount before withholding taxes.

Detail taken from the 2017 IT34.

The taxpayer got exemption for the full amount of the foreign tax in respect of the foreign dividends.

Section 6quat(1B):… the rebate or rebates … shall not in aggregate exceed an amount which bears to the total normal tax payable the same ratio as the total taxable income attributable to the income, proportional amount, taxable capital gain or amount, … bears to the total taxable income …

Proviso (ii) to section 6quat(1A):… for the purposes of this subsection, the amount … included in such resident’s taxable income must be determined without regard to section 10B(3).

Section 6quat(1): … the rebate shall be an amount equal to the sum of any taxes on income proved to be payable to any sphere of government of any country other than the Republic

Section 6quat(4) and (4A): … the amount of any foreign tax … shall be translated to the currency of the Republic on the last day of that year of assessment by applying the average exchange rate for that year of assessment … rounded off to the nearest rand.

Co

mm

en

ts:

fore

ign

ta

x

Must be completed for each trust separately.

The amounts to be declared are both amounts vested (section 25B) and (or) deemed (the section 7 amounts).

According to that SARS guide, code 3611 refers to the “taxable portion of a voluntary purchased annuity (including a provident fund voluntary purchased annuity) paid by a long-term insurer”.

These amounts will appear on an IRP5 or IT3(a) – pre-populated.

Extract from the SARS guide to complete the ITR12T (for a trust)

A beneficiary of a trust can of course also be entitled to an annuity from the trust.

In his will he bequeathed to his widow certain movable property as well as the right to occupy the upper or lower portion of his immovable property in Sea Point, Cape, and thereafter directed the administrators (who were appointed as such in terms of the will) to "stand possessed" of the whole of the residue of his estate in trust and from the income to pay certain annuities to named beneficiaries, including the deceased's widow and stepdaughter. Any surplus income was to be used to pay annuities to certain other members of his family.

Judge Scott in Administrators in the Estate of the late John Herbert Richards v Nichol and Another

The amounts of these annuities would then be entered in the space below:

… by way of an annuity…

The exemptions from tax provided by subsections (2) and (3) do not apply in respect of any portion of an annuity or extend to any payments out of any foreign dividend received by or accrued to any person.

Notwithstanding the exemptions provided for in paragraphs (h) and (k) of subsection (1)—(a) …(b) the said exemptions shall not apply in respect of any portion

of an annuity.

… dividends …

Section 10(2)

Section 10B(5)

… interest … not a resident …

Full exemptionFormula

Note: not only relevant to annuities from a trust.

Capital gains: paragraph 80 (beneficiary) gains vested and gains attributed to the donor are declared here.

What is a primary residence?

“primary residence” means a residence—(a) in which a natural person or a special trust holds an

interest; and (b) which that person or a beneficiary of that special trust or

a spouse of that person or beneficiary—(i) ordinarily resides or resided in as his or her main

residence; and (ii) uses or used mainly for domestic purposes;

“residence” means any structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person, together with any appurtenance belonging thereto and enjoyed therewith.

What does “an interest” mean?

(a) any real or statutory right; or (b) a share owned directly in a share block company as

defined in the Share Blocks Control Act or a share or interest in a similar entity which is not a resident; or

(c) a right of use or occupation,but excluding—(i) a right under a mortgage bond; or (ii) a right or interest of whatever nature in a trust or an asset

of a trust, other than a right of a lessee who is not a connected person in relation to that trust;

A real right (jus in rem) is a right in a thing, which is enforceable against all persons, or put differently, against the whole world.

A personal right (jus in personam) is a right in or against a particular person or group of persons.

A lessee who hires a residence has an interest in that residence under the last item despite not owning the residence.

“an interest” means:

The primary residence exclusion

a natural person or a special trust

must disregard

as does not exceed R2 million;

so much of a capital gain or capital loss

determined in respect of the disposal of

the primary residence

of that person or that special trust

or a capital gain … if the proceeds from the disposal of that primary residence do not exceed R2 million

Asset jointly owned by spouses

Neil and Marlane are married in community of property. On 1 October 2002 they purchased a primary residence for R1 million which formed part of their joint estate.

During the 2018 year of assessment they sold it for R4 million.

If the spouses didn’t dispose of any other assets in the 2018 year of assessment, what will the capital gain be in respect of this disposal?

The important principle here is, where more than one natural person (or special trust) jointly holds an interest in a primary residence at the same time, the amount to be disregarded must be apportioned in relation to each interest so held.

Total R

Neil R

MarlaneR

Proceeds (paragraph 14)Base cost

4 000 0001 000 000

2 000 000500 000

2 000 000500 000

Capital gain 3 000 000 1 500 000 1 500 000

Exclusion (paragraph 45(2) – apportion in relation to the interest held)

2 000 000 1 000 000 1 000 000

Annual exclusion 40 000 40 000

Aggregate capital gain 460 000 460 000

Taxable capital gain (R470 000 × 40,0%) 184 000 184 000

50%, because they are married in community of property.

Asset jointly owned by spouses –apportioned

The R1.8 million capital gain exclusion on disposal

Taxpayer is 70 years old. She bought a guesthouse in 2004 for R1,851,360. She is a sole proprietor of the business had a turnover of less than R1 million per annum and she didn’t register as a VAT vendor.

Facts:

Since acquisition she occupied a part of the guesthouse permanently as her residence.

Can the taxpayer disregard R1,8 million of the gain made on this disposal?

She sold the guesthouse, as a going concern, for R4 800 000. Agent commission and other costs with sale is R328 320.

The furniture and other personal use assets used in this part were acquired by her before 2004 and were not disposed of.

A natural person

The taxpayer The asset

an active business asset

owned by that natural person as a sole proprietor

an interest in each of the active business assets

upon … withdrawal from that partnership

an entire direct interest in a company (at least 10% of the equity of that company)

to the extent that the interest relates to an active business asset of that company

for a continuous period ofat least five years AND

substantially involved in the operations of …

has attained the age of 55 years

in consequence of ill-health, other infirmity, superannuation or death

of a small business

Not a 12E SBC!!!

The relevant requirements

Applying the law: From the facts, the taxpayer is older than 55.

The assets were held for a continuous period of at least five years prior to the date of the disposal thereof.

The taxpayer was substantially involved in the operations of the business of the small business corporation during that period.

A “small business” (as defined) means a business of which the market value of all its assets, as at the date of the disposal of the asset does not exceed R10 million.

The gross income of the business is irrelevant.

Re

me

mb

er:

It is important to note that paragraph 57(6) provides that the paragraph does not apply when a person owns more than one business either by way of a sole proprietorship, a partnership interest or a direct interest in the equity of a company consisting of at least 10%, and the total market value of all assets in respect of all those businesses exceeds R10 million.

Applying the law: The only issue then is whether the sale of the guesthouse “as a going concern”, where a part was not used for business purposes, constitutes “the disposal of an active business asset”.

For purposes of paragraph 57, “active business asset” means an asset which constitutes immovable property, to the extent that it is used for business purposes.

The Act then doesn’t require the immovable property to be used 100%, or mainly, for business purposes.

The SARS guide explains it as follows:“This requirement means that the exclusion will not apply to the part of the immovable property used for non-business purposes, and an apportionment will be required. It follows that the presence of a farmhouse on a farm will not debar the farmer from claiming the exclusion in respect of the rest of the farm. A person who operates a shop on the ground floor of a double-storey building and lives on the first floor will be entitled to the exclusion in respect of the gain attributable to the area used for the shop.”

Solution R R

Proceeds on disposal 1 600 000 3 200 000

Base cost – acquisition costs 851 000 1 000 000

Expenses directly related to the disposal 109 440 218 880

Capital gain 639 560 1 981 120

A part of the residence was used for the purposes of carrying on a trade (9/10) 1 783 008

Used for domestic purposes and mainly for purposes other than the carrying on of a trade.

No personal use of these assets 198 112

Capital gain (as above) 639 560 1 981 120

Primary residence exclusion 198 112

Paragraph 57 exclusion 639 560 1 783 008

Capital gain after exclusion Nil Nil

Income Protection and retirement annuity certificates

I received a request from SARS to provide them with the following:

I was under the impression that no deduction can be made in respect of income protection policy premiums.

I re-call that the pay-outs from these policies are exempt from tax. Is that correct?

any amount received or accrued

in respect of a policy of insurance

the taxpayer is the policyholder

the policy relates to the death, disablement or illness

of an employee or director (or former employee or director) of the taxpayer

including by way of any loan or advance

reduced by the amount of any such loan or advance which is or has been included in the taxpayer’s gross income

Paragraph (m) ‘gross income’ … but including, …

any amount … received or accrued

by or to a person,

in respect of proceeds from a policy of insurance

or dependant or nominee of the person

where the person is or was

an employee or director

of the policyholder

in respect of any policy of insurance

other than a risk policy with no cash value or surrender value

that has been ceded to

by the employer or former employer or company of which the person is or was a director

directly or indirectly

the person or a dependant or nominee of the person

or for the benefit of

Paragraphs (d)(ii) and (iii)

(ii) (iii)

Exempt from tax - section 10(1)(gG)

There shall be exempt from normal tax

(gG) any amount received by or accrued to a person as contemplated in subparagraph (ii) or (iii) of paragraph (d) of the definition of “gross income”:

(i) in the case of a policy that is a risk policy with no cash value or surrender value, if the amount of premiums paid in respect of that policy by the employer of the person has been deemed to be a taxable benefit of the person in terms of the Seventh Schedule since the later of—

(aa) the date on which the employer or company contemplated in those subparagraphs became the policyholder of that policy; or (bb) 1 March 2012;

(ii) in the case of any other policy, if an amount equal to the aggregate of the amount of any premiums has been included in the income of the person as a taxable benefit in terms of the Seventh Schedule since the date on which the policy was entered into

Exempt from tax -Section 10(1)(gH)

There shall be exempt from normal tax

any amount received or accrued in respect of a policy of insurance where:

(i) the policy relates to death, disablement or illness of an employee or director, or former employee or director, of the person that is the policyholder; and

(ii) no amount of premiums payable in respect of that policy on or after 1 March 2012 is deductible from the income of that person for the purposes of determining the taxable income derived by the person from carrying on any trade;

Exempt from tax -Section 10(1)(gI)

There shall be exempt from normal tax

any amount received or accrued in respect of

of any person who is insured in terms of that policy of insurance,

a policy of insurance relating to the death, disablement, illness or unemployment

including the policyholder or an employee of the policyholder in respect of that policy of insurance

to the extent to which the benefits in terms of that policy are paid as a result of death, disablement, illness or unemployment other than any policy of which the benefits are paid or payable by a retirement fund;

Deduction in respect of contributions to retirement funds

… for the purposes of determining the taxable income of a natural person in respect of any year of assessment there must be allowed as a deduction from the income of that person any amount contributed during a year of assessment to any pension fund, provident fund or retirement annuity fund in terms of the rules of that fund by a person that is a member of that fund.

The total deduction allowed … must not in a year of assessment exceed …

The general rule – section 11F(1)

Before we look at the limitations, we need to know what the amount is that qualifies for the deduction.

The detail would normally be pre-populated on the return.

Complete for each fund contributed to:

Contributions to funds: what can be deducted?

… any amount contributed …

… in any previous year of assessment

… in the current year of assessment

which has been disallowed solely by reason of the fact that the amount that was contributed exceeds the amount of the deduction allowable in respect of that year of assessment …

Provident funds contributions?

Sections 11(k), 11(n) and 11Fis deemed to be an amount contributed in the current year of assessment, except to the extent that …

Section 10C, paragraph 5(1)(a) or 6(1)(b)(i) of the Second Schedule

Plus contributions in this year of assessment

The amount before applying the limitations

Section 10C

Extract from a 2017

Example of the treatment of the amount carried forward

From 2016

To 2018

2017 contributions

Section 10C

Retirement annuity fund contributions - 4029

Other deductions - 4003

Amount c/f to next year

Extract from a 2017

The excess amounts are carried on the IT34 and is not included in the current year’s contribution.

Contributed before 1 March 2016

Taxpayer 1

Both of them:

Taxpayer 2

are residents of the RSA.

The taxable income of taxpayer 1, before taking the contribution into account, is R100 000. The taxpayer also has a taxable capital gain of R900 000.

contributed R180 000 to a retirement annuity fund.

The taxable income of taxpayer 2, before taking the contribution into account, is R200 000. The taxpayer also has a taxable capital gain of R800 000.

Section 11F deduction R(100 000) R(180 000)

The medical scheme fees tax credit

… you are not entitled to the employer’s contribution …

The ability to make a deduction has not been available for a number of years. It relates to the availability of the rebate where the “fees” have “been paid by … an employer of the person”. The relevant law is found in section 6A(3) of the Act.

Comment:

The medical scheme fees tax credit

The relevant legislation (Section 6A(3)(b)):

to the extent that the amount has been included in the income of

For the purposes of section 6A, any fees paid to a medical scheme

that has been paid by … an employer

paid by that person.

of the person

is deemed to have been

as a taxable benefit in terms of the Seventh Schedule,

that person

Code 3810

Code 4005

In the example, the taxable benefit of the individual had a ‘no value’ benefit – code 4493.

Comment:

Taxable benefit = ‘nil’ deemed amount paid = ‘nil’.

Can a client claim medical aid contributions on his return? The client's spouse is the main member and he is a dependent and not a member. However, he pays the full contribution.

If I am paying my mother's medical aid, which is separate from mine, do I still get the medical tax credit?

Let’s apply the law to this:

In terms of section 6A(2)(a)(i) of the Income Tax Act, the medical scheme fees tax credit applies in respect of fees paid by the natural person (the taxpayer) to a medical scheme registered under the Medical Schemes Act.

The amount of the rebate then depends on whether or not it was paid in respect of the person (the taxpayer) or a dependant (the spouse or the mother).

Who is then a ‘dependant’?

Who are dependants?

the spouse or partner, dependant children or other members of the member’s immediate family in respect of whom the member is liable for family care and support; or

Section 1 of the Medical Schemes Act:

“dependant” means -

any other person who, under the rules of a medical scheme, is recognised as a dependant of a member;

or

Section 6

B h

as a

diffe

rent

definitio

n.

Note: it is not required that the person paying the contributions must be a member of the scheme.

For the purposes of section 6A a ‘dependant’ in relation to a person means a ‘dependant’ as defined in section 1 of the Medical Schemes Act

Please furnish this office with the receipts of actual payments made (not accounts) for medical expenses claimed of R39695 (as per the medical certificate) and additional expenses claimed of R73596; group receipts in date sequence and reconcile with a schedule.

SAIT member request: SARS note on the system says they disallowed all medical expenses as the ITRDD was completed by a GP-General Practitioner Not a Specialist. Can a General (medical) Practitioner not complete the form? Or is this different to a duly registered medical practitioner?

Response: Section 6B(1) of the Income Tax Act, when it defines the word ‘disability’ for purposes of the rebate, prescribes that it must be “diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner”. The next important point is that it must be ‘in accordance with criteria’ prescribed by SARS. The SARS guide, relevant to the 2017 year of assessment, explains that the ITR-DD “needs to also be completed and endorsed by a duly registered medical practitioner …” who must be registered with the Health Professions Council of South Africa “and specially trained to deal with the applicable disability”. It also states that “Part B of the ITR-DD must be completed by a duly registered medical practitioner who is qualified to express an opinion regarding the person’s disability. The practitioner needs to complete the appropriate diagnostic criteria.”

When is a person is entitled to a rebate under section 6(2)(b) or with a disability?

A person is entitled to the section 6(2)(b) rebate (or the secondary rebate) if the person was or, had he or she lived, would have been 65 years of age or older on the last day of the year of assessment.

(a) has lasted or has a prognosis of lasting more than a year; and(b) is diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner;

‘disability’ means a moderate to severe limitation of any person’s ability to function or perform daily activities as a result of a physical, sensory, communication, intellectual or mental impairment, if the limitation—

Section 6B(1)

When will expenses be “qualifying medical expenses”?

Section 6B(1)

‘qualifying medical expenses’ means

any amounts

other than amounts recoverable by a person or his or her spouse

which were paid

to any duly registered

by the person during the year of assessment

‘medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopedist

for professional services rendered or medicines supplied to the person or any dependant of the person

Section 6B(1)

‘qualifying medical expenses’ means

any amounts

other than amounts recoverable by a person or his or her spouse

which were paid

to any duly registered

by the person during the year of assessment

nursing home or hospital or any duly registered or enrolled nurse, midwife or nursing assistant (or to any nursing agency in respect of the services of such a nurse, midwife or nursing assistant)

in respect of the illness or confinement of the person or any dependant of the person

When will expenses be “qualifying medical expenses”?

When will expenses be “qualifying medical expenses”?

pharmacist for medicines supplied on the prescription of any person mentioned in subparagraph (i)

for the person or any dependant of the person

Note

any amounts which were paid by the person during the year of assessment in respect of expenditure incurred outside the RSA on services rendered or medicines supplied to the person or any dependant of the person, and which are substantially similar to the services and medicines contemplated in paragraph (a);

‘qualifying medical expenses’ means

any amounts

other than amounts recoverable by a person or his or her spouse

which were paid

to any duly registered

by the person during the year of assessment

Section 6B(1)

‘qualifying medical expenses’ means

any expenditure that is prescribed by the Commissioner

other than expenditure recoverable by a person or his or her spouse

necessarily incurred and paid

by the person during the year of assessment

in consequence of any physical impairment or disability

by the person or any dependant of the person.

Section 6B(1)

When will expenses be “qualifying medical expenses”?

The important first requirement is that it is only expenditure prescribed by SARS that qualifies - Annexure B to their guide.

A common error

School fees must be “limited to the amount in excess of the fees that would have been payable if the person attended the closest fee-paying public school not specialising in learners with special educational needs.” That is where the public school ten becomes relevant.

Transportation costs … in instances where such school is not available within the 10 km radius from where the person lives.

Lump sums

A taxpayer retired, due to medical reasons, effective 31 December 2017. The taxpayer was then 62 years old.

The taxpayer’s employer at the time, on 31 December 2017, paid an amount of R100 000 to the taxpayer. This amount was paid in respect the termination of employment with the employer.

Early in January 2018, the taxpayer received, by way of a lump sum, an amount of R760 000 from the pension fund following upon his or her retirement.

On 31 March 2012 the taxpayer had received a severance benefit from a previous employer. The gross amount of this benefit was R550 000 and the tax on that was R42 300.

As employee

As a member of the pension fund

Previous lump sums

3901

3915

Comments:Note that, with respect to the R100 000, the individual received a ‘severance benefit’.

It is important to note that there are two lump sums and then that there is a separate table that must be used to determine the relevant rate of tax that must be used where a ‘severance benefit’ accrued to the individual.

Whilst this table is the same as the one for a ‘retirement lump sum benefit’, one table should not be used for both.

A reminder:

A ‘severance benefit’ is received from the individual’s employer, whilst a ‘retirement lump sum benefit’ comes from the fund itself.

In both instances employees’ tax must be withheld, i.e. by the employer and the fund respectively.

This a term defined in section 1(1) of the Income Tax Act. It is one, principally because the individual attained the age of 55.

Calculating the tax payable

Lump sum or severance benefit received / accrued during the 2018 year of assessment: R100 000 R760 000

Severance Lump sum

Lump sum or severance benefit received / accrued in prior to the above: R550 000 R650 000

Taxable income from lump sum benefits R650 000 R1 410 000

Tax thereon (according to the relevant table – (i)): R27 000 R260 100

Tax thereon (according to the relevant table – (ii)): R(9 000) R(27 000)

Now due (combined R251 100) R18 000 R233 100

Note:Always determine the item (ii) tax from the same table.

Voluntary retrenchments

My client took a Voluntary Separation Package (VSO) last year in

August 2017. The company he worked for requested a tax

directive from SARS and the relevant tax was deducted from his

package. According to SARS and his employer he was not

entitled to the tax benefit on the first R500 000 as SARS

indicated that if an employee took a voluntary separation

package it is fully taxable. However recently there was a article

which states that employees that took voluntary separation

packages are now entitled to the same benefits as those

employees who are involuntary retrenched.

My question is can his employer still change his IRP5 for the

2018 tax year, so that my client can receive the tax back which

he paid on this VSO?

Comments:

Note that “the Commissioner’s determination of the amount to be so deducted or withheld shall be final” - paragraph 9(3)(a) of the Fourth Schedule to the Income Tax Act.

The taxpayer can therefore not object to the amount ascertained.

The amount to be deducted … in respect of employees’ tax from any lump sum to which paragraph (d) … of the definition of “gross income” in section 1 … applies, shall be ascertained by the employer … before paying out such lump sum.

Of course, a request (section 9 of the Tax Administration Act) can be made, but it may be a waste of time if the IRP5 was already issued and the employer reconciliation submitted.

The taxpayer can, once assessed, object the assessment, if the amount was in fact a paragraph (c) of the definition of ‘severance benefit’ (in section 1(1) of the Income Tax Act) amount.

But that would require the employer to amend the IRP5 and that would be advisable to get that changed by the employer now.

Voluntary retrenchments

My client’s previous company now state that they will not

change the IRP5’s for the 2018 tax year, because the tax

directives were completed in line with legislation at the time (i.e.

that voluntary severances did not receive the tax benefit). The

question now is, what can and must my client do if his previous

company refuse to change his IRP5 because they believed that

they acted according to legislation at that time?

… any amount … received by or accrued to a person by way of a lump sum

by way of a lump sum

from or by arrangement with

the person’s employer or

in respect of the

relinquishment,

of the person’s office or employment or

termination,

loss,

repudiation,

cancellation

or variation

of the person’s appointment (or right or claim to be appointed) to any office or employment,

an associated institution in relation to that employer

… person has attained the age of 55 years

… due to the person becoming permanently incapable of holding the person’s office or employment

… employer having ceased to carry on or intending to cease carrying on the trade

… in consequence of a general reduction in personnel

termination or loss

unless the person at any time held more than 5% of the issued shares or members’ interest in the (employer) company

Comments:

All that the recipient will have to prove, is that the termination (or loss) of employment was due to the employer having ceased to carry on (or intending to) the trade or that he or she has become redundant in consequence of a reduction in personnel.

The fact that the recipient accepts the termination voluntarily is irrelevant as this provision doesn’t make that distinction.

This is only relevant where the employee has not reached the age of 55 or did not become incapable of holding employment.

In the SARS guide (not legislation), the following is stated: Under Severance benefit – Involuntary retrenchment:

This reason cannot be used for dismissals or restructuring. Under Severance benefit – Voluntary retrenchment

The reason ‘Severance Benefit – Voluntary Retrenched’ must only be used where a lump sum is paid as a result of restructuring or other termination of employment;

This tax directive reason can be used if a retrenchment lump sum is payable but not in terms of the requirements of section 1(1) “severance benefit” paragraph (c) of the Act.