Monthly Archives: May 2014

SAICA Free State Annual Dinner

Every year the SAICA Free State Region hosts an Annual Dinner to celebrate the preceding year’s accomplishments and successes with great food and even better entertainment.

This year was no exception and a fantastic evening was enjoyed by all who attended the function at Ilanga Estate on 16 May where we were entertained by Fever Trio.

Congratulations once again to our successful PPE candidates, Elske Malan, Sollie Pretorius and  Jo-Mari Kruger who were eligible to attend this event for the first time where they were presented with a gift from SAICA by Mr Azim Omar, Senior Executive: Office of the CEO, on passing their qualifying exams.

Elske MalanElske Jo-Mari KrugerJo-MariSollie PretoriusSollie

Proof required for income tax returns: Individuals

Main04Following the conclusion of the tax year on 28 February 2014 documents are issued to you that must be retained for tax purposes. 

The following documents should, if applicable, be submitted to the accountant who completes your tax return and should be available if the South African Revenue Service (SARS) requests them:

1.  IRP5 and IT3 certificates
IRP5 and IT3 certificates reflecting salary, annuities, pension and other income received.

2.  Interest received – local and foreign
IT3 certificates reflecting the interest received for the year 1 March 2013 to 28 February 2014 relating to savings accounts, cheque accounts, fixed deposits and other investments.

3.  Dividends received – local and foreign
Details and/or proof of dividends received.

4.  Bequests and donations received
Details and/or proof of bequests and donations received.

5.  Capital gain or loss
The following information is required:

–    Was the asset your residential property?
–    Return on the sale of the asset.
–   Base cost of the asset, i.e. the purchase price if purchased after 1 October 2001, or a capital gain valuation of the asset.

6. Other income
Details and/or proof of other income (e.g. partnership income).

7.  Medical fund contributions
– Medical fund contribution certificate.
– Proof of payment of claims not covered by your medical fund and paid by yourself.

8. Annuity fund contributions
Annuity fund contribution certificates.

9. Travel allowance
If you wish to claim expenses against your travel allowance, the logbook for the tax year is required, together with the following information concerning the vehicle for which you received the travel allowance:

–    Make and model
–    Year of manufacture
–    Purchase price
–    Registration number
–    Kilometre reading on 1 March 2013
–    Kilometre reading on 28 February 2014

If you kept a record of travel costs incurred during the year, proof of the following is required:

– Fuel and oil consumption
– Repairs done
– Insurance and licence fees
– Lease/Installment agreement

10. Income protector
Contribution certificates.

11. Donations
Proof of deductible donations.

12. Other information
Details of any other action or event that may influence your tax liability.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

What happens to my bank accounts when I die?

Main03In previous articles we suggested that the best way to ensure that your assets are distributed as you want them to be distributed, is to draw up and maintain a will. Should you die without a valid will, your assets will be distributed in terms of the Intestate Succession Act. This may result in unpractical distribution of assets and may lead to someone inheriting whom you did not want to inherit.

In your will you have the choice to determine what should be done with your assets. You should also appoint an Executor who will distribute your assets and manage the administrative tasks in order to fulfil the stipulations of the will and finalise the administering of your will.

As mentioned in previous articles, the death must first be reported to the Master of the High Court and the original will (or the lack of relevant required documentation) must be sent to him. The Master will then formally appoint the Executor by sending him an Executor’s letter and allocating a unique estate number to the estate. This estate number will then be used in all future correspondence with and enquiries from the Master’s Office.

What happens to my bank accounts?

The Administration of Estates Act determines that all bank accounts in the name of the deceased should be frozen and closed eventually, therefore it is extremely important that you make provision for your loved ones, so that they will have cash in hand when you pass away. Usually the accounts are frozen immediately after word of the passing has been received, so money can still be deposited, but no withdrawals will be allowed. As soon as the Executor has been appointed he/she should open a new bank account in the name of “Estate Late XYZ” according to the stipulations of the Administration of Estates Act. This is because you leave your assets to what forms your “estate”. A new bank account will be opened by the Executor and all monies of the deceased in any other bank accounts (as well as his/her spouse in the case of a marriage in community of property) will be transferred to the new bank account in the name of the estate. All estate funds will then be administrated in the estate’s bank account by the Executor until the Liquidation account (statement of assets and liabilities) is approved by the Master and has been open for inspection and remained unchallenged. The Executor will then be in a position to proceed with the distribution of estate assets and finalising of the administration of the estate.

Support to the next of kin

It may, however, take anything from 3 weeks to 3 months or longer for the Master of the High Court to formally appoint  the Executor. The fact that the Administration of Estates Act requires that all bank accounts be frozen as soon as possible after date of death may result in the next of kin or other financially dependent parties not being able to access the funds of the deceased while awaiting the appointment of the Executor. In case of a marriage in community of property the bank accounts in the name of the surviving spouse will also be frozen and closed, according to the stipulations of the Administration of Estates Act, which may have dramatic consequences. Once the Executor has been appointed, he/she may start administering the estate assets, and only then will he/she be in a position to consider interim advances against inheritance. We therefore urge you to make provision for the time following your passing, so that your next of kin have money available for their immediate needs.

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

What is the cost of my estate duty?

Main02In terms of the stipulations of Article 4 of the Act on Estate Duty No 45 of 1955 certain deductions (known as rebates) from the net value of an estate are allowed in order to determine the final value of the estate which will be subject to estate duty.   

The following two rebates are the most well-known:

  • Article 4(q) – This is the total value of all the benefits bequeathed to the surviving spouse. The value of a usufruct also qualifies as an Article 4(q) rebate; and
  • Article 4A – This is the value of the rebate applied to all estates, which is currently R3.5 million.

Given the value of the Article 4A rebate you can rest assured that your estate will not be accountable for estate duty if the net value (assets minus liabilities) is less than R3.5 million. The amount with which your estate exceeds R3.5 million will, however, be taxable for estate duty at 20%.

The Taxation Laws Amendment Act amended the Article 4A rebate by allowing the part of the R3.5 million rebate not used by the estate of the first deceased to be carried over to the estate of the surviving spouse. This amendment applies to the estates of everyone passing away after 1 January 2010.

The carried over rebate between spouses can be illustrated with the following example:

  • Mr A, who is married to Mrs A, passes away. The net value of his estate is R800 000 after the rebate according to Article 4(q) has been calculated.
  • This amount is bequeathed to his children and therefore not deductible for estate duty.
  • There is no accountability for estate duty as Mr A’s estate only used R800 000 of the Article 4A rebate of R3.5 million.
  • At Mrs A’s passing the net value of her estate is R8 million. The following rebate is applicable to her estate: Article 4A rebate to the value of R7 million minus the R800 000 deduction already utilised in the estate of Mr A.
  • Mrs A’s estate will therefore pay estate duty on R1.8 million (R8 million minus R6.2 million).
  • R1.8 million @ 20% = R360 000.

We have to put the utmost stress on the importance of estate planning and a will which gives you the best benefits regarding the composition of your assets and liabilities should the net value of your estate exceed R3.5 million. This does not mean that the use of trusts becomes obsolete in estate planning due to the larger rebate in the surviving spouse’s estate. There are still valid reasons why the bequeathment of a trust by the first deceased is an excellent option, even though it does not initially effect a saving in estate duty. In case of such a trust the assets can be managed by the trustees to the benefit of the surviving spouse and children. A small effort today for much peace of mind tomorrow!

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Assessed tax losses

Main01We all want to save tax and use every opportunity to utilise our losses in accordance with the income tax act.

When can we carry forward these losses and what does the Act say?

Section 20 of the Income Tax Act, 1962 (ITA). Set-off of assessed losses.—(1) For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall, subject to section 20A, be set off against the income so derived by such person—

(a)   any balance of assessed loss incurred by the taxpayer in any previous year which has been carried forward from the preceding year of assessment:

Section 1 – Definition of “trade”

“trade” includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent as defined in the Patents Act, 1978 (Act No. 57 of 1978), or any design as defined in the Designs Act, 1993 (Act No. 195 of 1993), or any trade mark as defined in the Trade Marks Act, 1993 (Act No. 194 of 1993), or any copyright as defined in the Copyright Act, 1978 (Act No. 98 of 1978), or any other property which is of a similar nature;

The meaning of “assessed loss” and “balance of assessed loss”

The term “assessed loss” is defined in section 20(2), and refers to the tax loss that arises in the current year after deducting the admissible deductions in section 11 from the income against which they are admissible. The definition does not contain either a “trade” or an “income from trade” requirement, but the carrying on of a trade is generally a requirement for deductibility under section 11.

A “balance of assessed loss” refers to the assessed loss that is brought forward from the preceding year.

Application of the law

Carrying forward a company’s tax loss requires a continuity of trading plus the derivation of some income. The general rule of income tax is that a taxpayer’s taxable income is determined for each tax year in isolation. In other words, each tax year is a closed compartment, not affected by tax events that occurred in previous tax years. Thus, the general rule is that, in a given tax year, a taxpayer can claim a deduction in respect of expenditure only if it was incurred in that tax year.

An important exception to this rule is that the Income Tax Act (“the Act”) permits taxpayers, both individuals and companies, to carry forward the balance of an assessed loss incurred in the previous tax year into the current tax year, to be off-set against the income of the latter year.

In so far as companies are concerned, section 20(1)(a) of the Act allows an assessed loss incurred by the taxpayer company to be carried forward and set-off against income of a later year which is derived from carrying on any trade.

By implication, therefore, such a balance of assessed loss cannot be set off against income derived otherwise than from trade. Moreover, if the company has not traded at any time during the current year, there can be no set-off of prior years’’ losses in computing the taxable income of the current year.

It was held in the court case, SA Bazaars (Pty) Ltd v CIR (1952) 18 SATC 240, that section 20(1)(a), properly interpreted, means that where a taxpayer has not traded at any time during the current tax year, there is nothing against which the assessed loss brought forward from previous years can be set-off in that year.

These principles are extremely important in corporate tax planning.

In relation to taxpayers other than companies, section 20(2A) explicitly nullifies the requirement that a taxpayer can only set-off the balance of an assessed loss against income from “trade”, but this restriction is operative in relation to companies.

Consequently, if a company fails to trade for an entire tax year, it loses forever the right to carry forward any balance of assessed loss from a previous year, even if it thereafter resumes trading.

SARS’S Approach

The following extract from Interpretation Note No. 33 provides some prospect of sanity, and demonstrates the approach of SARS to the issue:

“SARS is of the view that section 20 contains a trade requirement and an income from trade requirement. Both these requirements must be satisfied before an assessed loss may be carried forward. SARS does, however, accept that this may have some unintended results.

In dealing with the problem, SARS will accept that as long as the company has proved that a trade has been carried on during the current year of assessment, the company will be entitled to set off its balance of assessed loss from the preceding year, notwithstanding the fact that income may not have accrued from the carrying on of that trade. This concession is limited to cases where it is clear that trade has been carried on. SARS will apply an objective test in order to determine that a trade has in fact been carried on. It will not be sufficient that there was a mere intention to trade or some preparatory activities. The fact that no income was earned during the year of assessment must be incidental or result from the nature of the trade carried on by the company.”

In Interpretation Note 33, SARS gave notice that it took the view that section 20 of the Act imposed both a trading requirement, and an income requirement.

Practice Notes and Interpretation Notes do not have the force of law; they merely indicate how, as a matter of practice, SARS interprets provisions of the Act which interpretation is still uncertain.

It seems clear that, notwithstanding the decisions in the courts, SARS will not universally adopt an “all or nothing” approach on the income requirement, but will be prepared to allow an assessed loss where it may be clearly demonstrated that the lack of income was reasonable in the circumstances, provided that a trade is being carried on.

Integritax, Issue 112
Interpretation Note 33, Issue 2
Income tax act, 1962

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.