Paper P6 (ZAF) Advanced Taxation (South Africa) Friday 5 December Professional Level Options Module

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1 Professional Level Options Module Advanced Taxation (South Africa) Friday 5 December 2014 Time allowed Reading and planning: Writing: 15 minutes 3 hours This paper is divided into two sections: Section A BOTH questions are compulsory and MUST be attempted Section B TWO questions ONLY to be attempted Tax rates and allowances are on pages 2 5 Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper P6 (ZAF) The Association of Chartered Certified Accountants

2 SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the tax year 2014 will continue to apply for the foreseeable future unless you are instructed otherwise. 2. Calculations and workings need only be made to the nearest R. 3. All apportionments should be made to the nearest month. 4. All workings should be shown. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions. Year ended 28 February 2014/31 March 2014 Rebates Primary rebate R12,080 Secondary rebate (over 65) R6,750 Tertiary rebate (over 75) R2,250 Interest exemption Under 65 R23,800 Over 65 R34,500 Foreign dividend exemptions Fully exempt where 10% or more of the equity shares and voting rights are held Fully exempt where received by a company from a foreign company resident in the same country as the recipient To the extent of any controlled foreign company inclusions (net of applicable foreign tax) To the extent that the foreign dividend is from a company listed on the JSE To the extent that the above do not apply For individuals 25/40ths of the dividend is exempt For companies 13/28ths of the divided is exempt Medical rebate rates Single member Member plus one dependant Each subsequent dependant R242 R484 R162 Trusts (other than a special trust) 40% Dividends tax 15% Companies Normal tax rate 28% Donations tax 20% Estate duty 20% Official rate of interest (assumed) 8% Rates of normal tax payable by persons (other than companies) for the year of assessment ended 28 February 2014 Where the taxable income: does not exceed R165,600 18% of each R1 of the taxable income exceeds R165,600 but does not exceed R258,750 R29,808 plus 25% of the amount over R165,600 exceeds R258,750 but does not exceed R358,110 R53,096 plus 30% of the amount over R258,750 exceeds R358,110 but does not exceed R500,940 R82,904 plus 35% of the amount over R358,110 exceeds R500,940 but does not exceed R638,600 R132,894 plus 38% of the amount over R500,940 exceeds R638,600 R185,205 plus 40% of the amount over R638,600 2

3 Tax rates for small business corporations for the year of assessment ended 31 March 2014 Where taxable income: does not exceed R67,111 Nil exceeds R67,111 but does not exceed R365,000 7% of the amount over R67,111 exceeds R365,000 but does not exceed R550,000 R20,852 plus 21% of the amount over R365,000 exceeds R550,000 R59,702 plus 28% of the amount over R550,000 Turnover tax rates for micro business corporations for the year of assessment ended 31 March 2014 Where taxable turnover: does not exceed R150,000 Nil exceeds R150,000 but does not exceed R300,000 1% of the amount over R150,000 exceeds R300,000 but does not exceed R500,000 R1,500 plus 2% of the amount over R300,000 exceeds R500,000 but does not exceed R750,000 R5,500 plus 4% of the amount over R500,000 exceeds R750,000 but does not exceed R1,000,000 R15,500 plus 6% of the amount over R750,000 Car allowance Maximum vehicle cost for actual expenses R480,000 Fringe benefit (company car) Benefit percentage (where no maintenance plan exists) 3 5% Benefit percentage (where a maintenance plan exists) 3 25% General business reduction: Benefit value x business kms/total kms (as per logbook) Private fuel reduction: Private fuel (R) x private kms/total kms (as per logbook) Private maintenance reduction: Private maintenance (R) x private kms/total kms (as per logbook) Subsistence allowances Deemed expenditure for meals and incidental costs (per Government regulation) R319 per day (local travel) Deemed expenditure for incidental costs only (per Government regulation) R98 per day (local travel) Deemed expenditure for meals and incidental costs (foreign travel) (per published tables) will be supplied in the question where relevant Common capital allowances New and unused manufacturing plant and equipment 40%/20%/20%/20% Used or leased manufacturing plant and equipment 20% each year for five tax years Small business corporation manufacturing plant and equipment 100% Small business corporation (other assets) unless wear and tear provides a greater deduction 50%/30%/20% Wear and tear (based on Binding General Ruling 7) will be supplied in the question where relevant Manufacturing building allowance (unless seller s rate supplied) 5% New or unused commercial building (not a manufacturing building) 5% No deduction where another section of the Act applies to the building Where part of a building is acquired, 55% of the acquisition price is cost Where an improvement to the building is acquired, 30% of the acquisition price of the improvement is cost Research and development (R&D) expenditure 100% Additional 50% on expenditure incurred if R&D project is approved by the Minister of Science and Technology and incurred for R&D after such approval 3 [P.T.O.

4 Capital gains tax Annual exclusion (while alive) R30,000 Annual exclusion (in year of death) R300,000 Primary residence exclusion R2,000,000 (where proceeds are R2 million or less, the full gain is excluded for the portion of the property used for domestic purposes as a primary residence) Inclusion rate (natural persons) 33 3% Inclusion rate (non-natural persons) 66 6% Time apportioned base cost formula: Y = B + [(P B) x N]/(T + N) P = R x B/(B + A) Where deductible enhancement expenditure has been incurred after the valuation date, the time apportioned base cost formulae change to: Y = B + [(P 1 B 1 ) x N]/(T + N) P 1 = R 1 x B 1 /(A 1 + B 1 ) Travel allowance table for years of assessment commencing on or after 1 March 2013 Value of the vehicle (including value Maintenance added tax (VAT) but excluding Fixed cost Fuel cost cost finance charges or interest) R R p.a. c/km c/km 0 60,000 19, , ,000 38, , ,000 52, , ,000 65, , ,000 78, , ,000 90, , , , , , , Exceeds 480, , Note: Where reimbursement is based on actual business kilometres travelled and no other compensation is paid to such employees and the kilometres travelled for business does not exceed 8,000, the prescribed rate is R3 24 per kilometre. 4

5 Tax rates of normal tax retirement lump sum benefits for the year of assessment ended 28 February 2014 Where taxable portion of lump sum: does not exceed R315,000 Nil exceeds R315,000 but does not exceed R630,000 18% of each R1 over R315,000 exceeds R630,000 but does not exceed R945,000 R56,700 plus 27% of the amount over R630,000 exceeds R945,000 R141,750 plus 36% of the amount over R945,000 Tax rates of normal tax withdrawal lump sum benefits for the year of assessment ended 28 February 2014 Where taxable portion of lump sum: does not exceed R22,500 Nil exceeds R22,500 but does not exceed R600,000 18% of each R1 over R22,500 exceeds R600,000 but does not exceed R900,000 R103,950 plus 27% of the amount over R600,000 exceeds R900,000 R184,950 plus 36% of the amount over R900,000 5 [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 Hold Co Ltd (HCL) is a resident public company for income tax purposes. HCL holds a variety of profitable subsidiaries, both resident in South Africa and internationally, which all operate in the telecommunications market. HCL is not a headquarter company as defined in the tax legislation. HCL s business is to act as a holding company for the subsidiaries and investment shareholdings of the group as well as being a provider of group finance. This group finance can be either interest free or interest bearing, depending on the circumstances. The vast majority (90%) of HCL s reported accounting income represents dividends received from its various subsidiaries and investments in shares. The remaining 10% of HCL s reported accounting income represents interest on loans made to its subsidiaries and management fees charged to its international subsidiaries. HCL is the beneficial owner of all of the income it receives. To date, the international subsidiaries have been considered to be effectively managed in the relevant jurisdiction in which they are located and therefore they have been treated as resident in those jurisdictions for double tax treaty purposes. The directors of HCL have approached Smart Tax Consultants, where you are employed as tax manager, for advice. The directors wish to understand the tax implications or tax risks of certain transactions undertaken during the year of assessment ended 31 March The summarised financial information relating to HCL at 31 March 2014 is as follows: HCL: Note R Income Foreign dividends (i) 256,850,000 Local dividends (ii) 30,650,000 Interest (iii) 19,440,000 Management fees (iv) 12,000,000 Expenses Audit fees (v) 3,245,000 Training fees (vi) 1,450,000 Notes: (i) The foreign dividend income arises from international share investments, associate and subsidiary holdings. The amounts are stated gross of any foreign withholding taxes levied. The foreign dividends received can be categorised as follows: (a) (b) (c) Dividends from international subsidiaries amounting to R179,550,000: These dividends have been translated at the spot rate on the date the dividend accrued. All shareholdings in subsidiaries represent equity holdings and carry voting rights of more than 50%. Of these dividends, R790,000 was declared by an African subsidiary whose domestic laws prevent remittance of this amount to South Africa. The total foreign withholding taxes levied on dividends in this category amounts to R10,773,000, of which R79,000 relates to the African subsidiary. Dividends from international listed share investments amounting to R53,000,000: These dividends have been translated at the spot rate on the date the dividend accrued. Of these dividends, R27,000,000 was paid by companies which are dual listed on the Johannesburg Securities Exchange (JSE), South Africa as well as on their own country s stock exchange. The foreign withholding taxes levied on dividends in this category amounts to R6,625,000. In addition to this amount, HCL has also been notified that South African withholding tax of 15% was deducted from the R27,000,000 of dividends paid by the companies listed on the JSE. Dividends from ordinary and preference shareholdings in unlisted international entities amounting to R24,300,000: These dividends have been translated at the spot rate on the date the dividend accrued. HCL holds less than 10% of the equity shares but more than 10% of the voting rights of all companies in this category. The total foreign withholding taxes levied on dividends in this category amounts to R2,430,000. Of these dividends, R9,000,000 was paid by an unlisted overseas company, which is majority owned by a listed South African company. The net income of this overseas company is R78,000,000. HCL holds 12% of the participation rights in this company across its equity and preference share holdings. The effective tax rate for this company (computed under South African principles) is 22%. 6

7 (ii) The local dividends are all from South African operating companies apart from one investment holding in a collective investment scheme (CIS) dealing in property and qualifying as a REIT. The CIS dividend amounted to R2,000,000. (iii) HCL has loaned R200,000,000 to its various subsidiaries and most of the loans are on an interest-free basis. The interest-free loans are made for periods of greater than 30 years and redemption of these loans is conditional on the solvency of the subsidiary at the time of redemption. However, one of HCL s profitable international subsidiaries is located in a jurisdiction where the corporate tax rate is 34%. HCL loaned this subsidiary R108,000,000 at an interest rate of 18% per annum on 1 April The interest rate on corporate loans in the jurisdiction in which the subsidiary is resident is 12%. In addition, an interest-free loan of R25,000,000 made by HCL to a South African subsidiary was waived during the period. HCL has not yet written off this amount in its financial statements. (iv) HCL charges management fees to all its international subsidiaries. R10,000,000 of the management fees is taxable in South Africa only under the terms of the double tax treaties in place. R2,000,000 was levied in a jurisdiction which has not concluded a double tax treaty with South Africa and which levies a 12% withholding tax on such payments. This is considered a final tax in that jurisdiction. All management services are rendered from within South Africa s borders. The amounts are stated gross of any withholding taxes levied. (v) HCL s auditors have indicated that, based on the time spent, 50% of their fee pertains to HCL s interest income, 15% to the management fees, 30% to the foreign dividend income and 5% to other statutory procedures. (vi) The training fees were incurred in training HCL s staff on the use of new computer software to facilitate the consolidation of the group s results for financial reporting purposes. Required: As a tax manager employed by Smart Tax Consultants, draft a report from the firm to its client, Hold Co Ltd, which assesses the tax implications of the income and expense items set out above, and makes recommendations for any actions to be taken. Notes: The South African prime rate was 8 5% for the entire year of assessment. The following mark allocation is provided as guidance for this question: (i) 18 marks (ii) 2 marks (iii) 4 marks (iv) 1½ marks (v) 4 marks (vi) 1½ marks Professional marks will be awarded in question 1 for the overall presentation of the report and the effectiveness with which the information is communicated. (4 marks) (35 marks) 7 [P.T.O.

8 2 Dylan Allgood conducts a management consulting practice from a self-contained flat within the same property as his primary residence. His wife, Bronwyn, is a vested income beneficiary of a large trust set up by her late father. The trust income represents dividends from South African listed companies. Bronwyn is also the registered owner of the entire property within which both the flat and Dylan s primary residence are located, having inherited the property under the terms of her father s will. The dividends vested and received from the trust are sufficient to cover the running costs of the entire property. Bronwyn has no other sources of income. Attached to the self-contained flat within the property is a single garage. Dylan uses this garage as a workshop for his hobby of building scale models of historical ships. As Dylan has received many compliments from friends for the craftsmanship of the scale models, he has decided to convert this hobby into a business and produce these model ships for resale. He would like to refurbish the garage into a more professional-looking workshop and showroom for the models built. The models on display will be for sale and customers will also be able to order a particular model. Dylan s management consulting practice generates a turnover of R1,500,000 per annum, excluding reimbursements (R100,000) for domestic and international travel received from his clients. The only costs he claims against this income are: (i) a dedicated telephone and internet line (R6,500 per annum); (ii) wear and tear on his desktop computer and laptop (currently R12,000 per annum); and (iii) stationery purchased of R1,500 per annum. As Bronwyn pays for the running costs of the house, Dylan has not claimed any expenditure for the flat as a home office. As Dylan s investments are in fixed-term products, Bronwyn has agreed to loan the funds to Dylan for the refurbishment of the flat s garage into a workshop and showroom. Bronwyn will source the funds by means of her mortgage facility. While a bank would grant Dylan a loan of R500,000 for the refurbishment at 8% per annum, Bronwyn pays 7 5% per annum on her facility. However, she will charge Dylan 8 5% per annum. Over dinner with friends, it was suggested that Bronwyn should charge Dylan rental on the self-contained flat and attached garage to facilitate a tax deduction for Dylan and generate income for Bronwyn. Bronwyn has decided to charge Dylan an annual rent of R60,000 for the flat and R12,000 for the garage. A market-related rental for the area would be annual rental of R55,000 for the flat and R9,000 for the garage. The rental agreement also specifies the conversion of the single garage into a workshop and showroom for a cost of R500,000. No time period for the use and occupation of the flat and garage is specified in the rental agreement. The Commissioner will accept a period of 10 years as reasonable based on the current circumstances of both the lessor and lessee. Dylan is registered for value added tax (VAT) for the purpose of his management consulting business. Bronwyn is not VAT registered. All figures given exclude VAT, where applicable. It is anticipated that the model ship trade will generate R120,000 of turnover in the first year of operation. Apart from the refurbishment, the only other costs will be the acquisition of raw materials. Dylan will acquire R130,000 of new raw materials in anticipation of the commencement of his trade. No materials used by Dylan in the course of his hobby will be transferred to the new business. Due to the increased workload involved with the two trades, Dylan has decided to employ Bronwyn as his personal assistant for R100,000 per annum. A market-related rate would be R120,000. A reasonable apportionment of Bronwyn s time spent between the two trades (acceptable to the South African Revenue Service) is 95% for the management consulting business and 5% for the model ship building business. As Dylan is subject to income tax at a higher effective tax rate than Bronwyn, the couple are looking to structure their proposals in the most tax efficient way possible. 8

9 Required: Advise Dylan and Bronwyn as to the income tax and value added tax (VAT) implications of the proposals given above. Your answer should identify any planning opportunities and/or tax risks. The following mark allocation is provided as guidance for this question: Dylan s management consulting practice Dylan s model ship building business Bronwyn 7 marks 10 5 marks 7 5 marks (25 marks) 9 [P.T.O.

10 Section B TWO questions ONLY to be attempted 3 Manu Co Ltd is a manufacturing company resident in South Africa conducting a process of manufacture for goods and services. Its year of assessment ends on 31 March each year. During the year ended 31 March 2014, the company disposed of one of its manufacturing assets, which it had held for the past 14 years. The asset was a piece of machinery (machine A) used in the manufacture of a product. The figures given below exclude value added tax (VAT), where relevant. Machine A was originally acquired on 1 June 2000 for USD$68,000 (US dollars). This price included the delivery and installation costs. On 1 October 2001, machine A was valued at R500,000. Manu Co Ltd has its own research division and has developed a patented product. The production of this product required certain modifications to be made to machine A. On 13 April 2012, parts and labour to make the necessary modifications were purchased from an Australian company. AUD $65,000 (Australian dollars) was paid in respect of consultants fees and a further AUD $150,000 was paid for the necessary parts. Machine A s value lies in its ability to manufacture the particular patented product. Machine A was sold to a British company for GBP 230,000 (British pounds) on 15 May This sale facilitated the acquisition of a new machine (Machine B) capable of producing a different patented product. The purchase took place as Manu Co Ltd considers that the South African market for the older product is now exhausted and wishes to pursue a new product line. Machine B cost R4,000,000 from a South African company. Additional information: Currency Date Spot rate Year of Average rate for year of assessment assessment United States 1 June 2000 USD 1 = 2001 USD 1 = USD 1 = dollar R R GBP Australian 13 April 2012 AUD 1 = 2013 AUD 1 = AUD 1 = dollar R8 243 R GBP British pound 15 May 2013 GBP 1 = 2014 GBP 1 = GBP 1 = R R GBP 1 Year of Average for relevant assessment year of assessment 2001 GBP 1 = R GBP 1 = R GBP 1 = R GBP 1 = R GBP 1 = R Required: Explain and calculate the income tax implications of the above disposal of machine A. Your answer should provide brief explanations of any alternative computations of the tax liability and advise as to the appropriate option for Manu Co Ltd. (20 marks) 10

11 This is a blank page. Question 4 begins on page [P.T.O.

12 4 You are a tax adviser for an accountancy firm in South Africa. Your manager has asked you to respond to certain queries from a client, In-and-Out Ltd ( IAO ), a company which operates an import and export business. IAO imports a variety of products for South African customers and exports South African products to Europe and the United States of America. The company is a Category C VAT vendor. IAO s accountant has approached your firm for advice on the value added tax (VAT) and income tax implications of a number of transactions entered into during the tax period ended 30 November The relevant transactions are outlined below: Item 1 One of the organisations from which IAO obtains its products is a South African branch of a German company. The branch has been classified as a permanent establishment under the terms of the South Africa Germany double tax treaty. This permanent establishment supplies IAO with South African curios which it acquires from informal traders, none of which are registered for VAT. The permanent establishment has never registered for VAT. However, IAO wishes to increase the volumes of local curios acquired for export into the United States of America which would raise the turnover of the permanent establishment above R1 million. The German company has no regular consultants and thus has asked IAO for assistance as to any VAT registration requirements or issues to consider. IAO in turn has approached your firm for advice to be provided to the German company and for information as to the effect on IAO of the permanent establishment becoming registered for VAT. Item 2 Certain goods were imported by IAO from Kenya for export to Europe. The goods cost R270,000 with an associated customs value of R280,000. The goods were subsequently exported for a consideration of R350,000 to IAO s European distributors. Item 3 One of the foreign distributors was liquidated at a date when it still owed IAO R210,000. IAO received only 40c in the Rand when the foreign distributor was liquidated and no further payments are expected. Item 4 IAO sold some solar lights, solar panels and related accessories, which it imported at a cost of R450,000 with a declared customs value of the same amount. The solar equipment was sold locally for R550,000 (excluding VAT). IAO also acquired some locally-made solar lights and accessories from Street Solar (Pty) Ltd, a wholly owned subsidiary of IAO. Street Solar (Pty) Ltd is not a VAT vendor. The goods were similar in type and quantity to those imported but the price paid by IAO to Street Solar (Pty) Ltd was R550,000. IAO s accountant specified a high purchase price as Street Solar (Pty) Ltd has an assessed loss available to utilise whilst IAO is profitable. IAO sold the equipment acquired from Street Solar (Pty) Ltd for only R530,000 (excluding VAT) to a third party customer. Item 5 IAO would like to purchase a company vehicle (not a motor car) for its managing director. IAO will pay for all fuel. The vehicle has a cash cost of R986,000 (including VAT) with a five-year maintenance plan. IAO does not have sufficient available cash to acquire the vehicle now and has been offered two alternatives by the dealership, as outlined below: Option (a) The vehicle is leased for R18,662 per month for five years with a balloon payment of 20% of the cash cost at the end of the lease, after which the vehicle can be traded in (with a trade-in value equal to the balloon payment) for another vehicle of the same or higher specification. Option (b) The vehicle is purchased for the full cash value, but is financed through the dealership for monthly instalments of R21,685 for 60 payments (five years). The interest on the first instalment would be R9,449. Item 6 IAO s offices were burgled and trading stock, office computer servers and a company pool car were stolen. The insurance company paid IAO R650,000 on 2 November 2014 in full settlement of the insurance claim made. The claim can be broken down into the following: R300,000 for the trading stock, R200,000 for the computer servers and R150,000 for the pool car. IAO had replaced all of the stolen assets by 28 November The stock was replaced at a cost of R410,000 (as a result of currency fluctuations), the servers at a cost of R220,000 and the pool car at a cost of R205,000. All of the acquisition figures are inclusive of VAT. 12

13 Note: IAO has all the necessary documentation, wherever relevant. Required: Advise In-and-Out Ltd as to the income tax and value added tax (VAT) implications of items 1 to 6 above. Your answer should include calculations, where relevant. (20 marks) 13 [P.T.O.

14 5 (a) You are employed by a tax consulting practice and have received a number of queries from a Trust and Estate Management company (TEMC) with respect to their clients to whom they provide trustee and deceased estate services. Query 1: A bad debt was recovered by the executor of an estate. The original debt was in respect of a business carried on by the deceased. The business had been bequeathed to the deceased s son under the terms of his will. Query 2: Another, now deceased, client has bequeathed, under the terms of her will, her interest in a private company to her son. With the permission of all the parties, the executor has sold the shareholding and has distributed the cash from the sale to the son. Required: For queries 1 and 2, advise the Trust and Estate Management company of the tax implications for the deceased estate, the deceased and the ascertained heir. (6 marks) (b) The Joyce Family Trust has two beneficiaries, Rowan, aged 20, and Mikaela, aged 17. Each beneficiary has a 50% vested income right. The trustees may exercise their discretion as to the distribution of any capital of the trust. The trust previously owned a residential property comprising flats, which were let to third party tenants. This property was the trust s only asset and the trust has no other income. The property was acquired from Wim, the grandfather of the two beneficiaries, by way of a market-related sale of the property to the trust during The acquisition was funded by way of an interest-free loan account between Wim and the trust. All of the parties are South African residents as defined by the tax legislation. During the year of assessment ended 28 February 2014, the trust earned rental income of R1 8 million from the residential property and incurred deductible expenditure totalling R2 3 million. None of the rental income was distributed to the beneficiaries. The trustees decided to sell the property as the rental market was deteriorating. A capital loss of R600,000 was realised on the sale. The proceeds are currently held by the trust in cash with a view to being placed in investments once the tax position has been established. The trustees would like to distribute half of the capital loss to the beneficiaries and retain the other half. Required: Advise the trustees on whether or not they may distribute the capital loss and discuss the tax effect which the revenue loss on the trust s rental activities will have on the vested income rights of the beneficiaries. (5 marks) (c) Group Ltd (GL) owns 100% of the equity shares of Op Co (Pty) Ltd (OCPL). OCPL is GL s only subsidiary and is a trading company. GL wishes to issue equity shares in OCPL to a Broad Based Black Economic Empowerment company (BBBEE Co). Financial Institution SA (FISA), an unconnected bank, has advised GL that it should first incorporate a new subsidiary. It can then structure a deal through this newly-formed tax-neutral subsidiary, in order to reduce the tax payable by the GL group, and increase its profit after tax. In order to do this, FISA proposes that GL form a new subsidiary, known as New Op Co (Pty) Ltd (NOCPL). 100% of the shares in NOCPL will be issued to GL. GL will then sell a 26% holding in NOCPL to BBBEE Co. Subsequently, all of the trading assets of OCPL will be sold to NOCPL as a going concern, at their market value of R5m. It has been suggested that the group make use of the intra-group corporate rule, which allows for a roll-over of any tax consequences on the sale of the assets (e.g. recoupments and capital gains) from one group company to another. Use of this provision will enable the intra-group transfer of trading assets from OCPL to NOCPL to take place without any immediate charge to tax. 14

15 In order to fund the transfer of assets from OCPL, a tax-neutral subsidiary of FISA will lend R5m to NOCPL at a market-related interest rate of 10% a year. The trade to be transferred to NOCPL is very profitable and will fully absorb the interest deductions arising from the loan agreement with FISA s subsidiary. OCPL will then distribute the R5m proceeds to GL as a dividend and GL will invest this amount in preference shares to be issued by FISA. GL will earn preference dividends of 9% a year on the R5m of preference share capital, all of which would be exempt from tax under the terms of the Income Tax Act. The 9% rate is considered to be market-related return for such shares. Required: Advise whether or not the Commissioner could apply the general anti-avoidance (GAAR) provisions to the proposed transaction. (9 marks) (20 marks) End of Question Paper 15

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