Professional Level Options Module, Paper P6 (ZAF)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (ZAF) Advanced Taxation (South Africa) June 2017 Answers Note: ACCA does not require candidates to quote section numbers or other statutory or case references as part of their answers. Where such references are shown below [in square brackets] they are given for information purposes only. 1 To: Tax.Manager@work.com From: ACCA.Student@work.com Subject: Tax queries with respect to Thuli Patel Date: 8 June 2017 Dear Tax manager I have addressed the issues per your of 8 June 2017 concerning the tax matters of Thuli Patel. For ease of reference, my comments are stratified into sub-headings. (a) Foreign lottery winnings With respect to the foreign lottery winnings, such winnings can only be capital nature. The very nature of the competition makes it unlikely to be a trading activity. As a result, the winnings fall to be taxed as a capital gain. It should be noted that capital gains or capital losses from gambling, games or competitions are only excluded if that of a natural person if authorised and conducted in terms of the law of South Africa. As such, the foreign lottery winnings are not excluded from capital gains tax. It is submitted that the lottery ticket of 2 represents the base cost and the winnings of 9,000,000 represent the proceeds. Assuming Thuli has no other capital gains or capital losses, the capital gain of 8,999,998 would have to be translated to Rands at either the spot rate on the date of disposal or, if elected for all transactions in foreign currency, the capital gain could be translated at the average rate. On the assumption that the average rate is not applied, the capital gain of R143,999,968 ( 8,999,998 x 16) would be reduced by R40,000 and 40% of the result included in taxable income, i.e. R57,583,987 ((R143,999,968 R40,000) x 40%). If we assume other income accrues to an amount higher than the maximum marginal rate, the South African tax on these winnings would be: R23,609,435 (41% x R57,583,987). It is important to note that the foreign lottery winnings are considered to be of a foreign source. The ticket was bought overseas and the winnings accrued overseas; it is a national competition held within a particular jurisdiction. As the Netherlands tax is not included in the scope of the treaty, Thuli can consider the unilateral relief offered by domestic legislation in South Africa. Against the South African tax, a credit may be considered for the foreign tax incurred. The foreign tax must first be translated into South African Rands. The foreign tax would be translated at the average exchange rate for the relevant year of assessment as specified in the legislation. This means that the foreign tax to be credited amounts to: 9,000,000 x 30% x = R44,215,470. This is in excess of the tax levied in South Africa (R23,609,435) so although the lottery winnings are taxable in South Africa, the Netherlands tax credit will reduce the South African tax liability. However, this foreign tax is not considered in isolation. It would have to be aggregated with the other foreign taxes first. The total foreign tax would be limited to the South African tax levied on the foreign source income over total taxable income. Any excess remaining could be carried forward to future years of assessment (up to seven years). Finally, the remittance of the money from the foreign account to the South African account, while giving rise to an exchange difference, does not result in any exchange gain or loss for taxable income purposes. This is because it did not arise from an exchange item held by a natural person and used for trading purposes. Repayment of one month s salary and allowance in lieu of leave notice not given While the salary and allowance accrued to Thuli for the services rendered until the date of her resignation, she would be permitted a deduction again such accrual for the repayment of the portion of her salary and the taxable portion of the allowance in respect of leave notice not given [s.11(na)]. It is equally possible that the salary and allowance may be exempt if Thuli has been out of the country for more than 183 days including 60 days continuous absence, in which case, no deduction would be permitted. Sole proprietorship There are two main considerations from a tax perspective in respect of Thuli running her business as a sole proprietorship: (i) The business income tax and value added tax (VAT) effects for Thuli; and (ii) The obligations of the business as an employer to withhold employees tax. Each of these considerations are dealt with below. (i) The business income tax and VAT effects As a sole proprietorship, the business is conducted in Thuli s personal capacity. The business turnover therefore adds to her gross income. The business does not qualify to be separately classified as a micro business as its turnover is above R1 million. However, as the turnover is above R1 million, Thuli will have to register as a VAT vendor. Thuli will be making taxable supplies, but these are taxable supplies at the zero rate, being exported goods. 17

3 (ii) The purchase of inventory (if from vendors) will be accompanied by an input tax credit (assuming the necessary documentation has been obtained). The amount, exclusive of VAT, will be available to claim as an income tax deduction. The closing inventory value will be added back to taxable income. The acquisition of the building will provide a further VAT input claim. Furthermore, the building will qualify for a 5% commercial building allowance on the value exclusive of VAT. The supply of services by an employee to employer is not an input for VAT purposes. The wages paid will qualify as a deduction for income tax purposes. Despite being above market related rates, the salaries to these unconnected persons remain deductible. Of course, the extent to which the salaries exceed market related rates should not be excessive. No donations tax is levied on the portion above market rates as the amount remains remuneration taxable in the employees hands. In addition, Thuli s contribution to the employees retirement annuity funds will be specifically deductible, but her contribution to the medical aid scheme must qualify for deduction under the general deduction there is sufficient support for such a deduction. The provision of interest-free loans to the employees does not generate any income tax or VAT effects for Thuli. The obligations of the business as an employer to withhold employees tax Thuli, as the employer, has an obligation to withhold employees tax for qualifying employees. As her employees earn more than the primary rebate threshold of R75,000, employees tax will have to be withheld on the salary and fringe benefits. In calculating the withholding tax, Thuli will have to take into account the interest-free loans and corporate contributions to both the retirement annuity funds and the medical aid scheme. Furthermore, Thuli will be responsible for the related employer contributions to the unemployment insurance fund (UIF) and skills development levy (SDL) and from the employees tax (PAYE). (d) Conversion of the business into a company The only viable corporate rule to apply for roll over relief would be the exchange of the asset (the business) for shares. In this regard, the various assets of the business would need to be considered. Assets held for trading purposes would have to be received by the new company for trading purposes. Similarly, assets held as capital would have to continue to be held as capital assets. The depreciable assets will transfer at the base cost for capital gains tax purposes and tax value for allowance purposes (i.e. the transferor and transferee are treated as one and the same person). Any personal goodwill created will not be transferable in terms of this rule. Based on the information supplied, the assets would include the inventory and the building in which the business is housed. These assets could be exchanged for shares in the newly formed company. The rule may apply as Thuli will hold a qualifying interest of 100% (i.e. more than 10% of the equity shares and voting rights) at the end of the transaction. For VAT purposes, the business may be transferred as a going concern at the standard rate. This would require the corporate entity to be registered for VAT prior to the transaction taking place, in addition to the remaining requirements for the successful transfer of a going concern. The employment contracts would have to be terminated with Thuli and reinstated with the company, as would any bank guarantees in respect of any employee loans, etc. Incorporation would allow the newly formed company to qualify as a small business corporation with the associated reduced rates of tax applicable to such classification. On the declaration of dividends to Thuli (as the sole shareholder), the company would become obliged to withhold dividends tax. The withholding obligation as pertains to employees tax would transfer from Thuli to the company. The above documents the key tax implications of the information as supplied. Should there be any further queries, I will be happy to assist. Kind regards ACCA Student 2 Fresh Daily Ltd (FDL) (a) Tax implications of the loan to First Fruits Ltd, interest earned and associated tax risks The loan supplied by Fresh Daily Ltd (FDL) to its Brazilian subsidiary First Fruits Ltd (FFL) is considered to be an exchange item. The exchange differences on the debt (gains or losses) will be marked to market at the end of each year and on any settlement of the loan. The interest accrues monthly on the loan. As the interest accrues, the amount must be translated at the spot rate and included in gross income. In this instance, the interest accrues, but is not remitted. This growing balance equally is an exchange item as an amount owing. The exchange gains and losses are therefore taken into account in this instance as well. Tax risks to consider in terms of the loan include: (i) Transfer pricing: Should the interest charged on the loan be considered to be below market related rates, it is likely that the South African Revenue Service (SARS) would apply an adjustment. Such adjustment would be considered a dividend in specie declared by the South African company rendering such adjustment liable for dividends tax of 15%, apart from the adjustment to normal tax and the related penalties for understatement and interest. 18

4 (ii) A further risk exists, again mostly likely should the interest be understated, that the general anti-avoidance rule (GAAR) may be applied. Similarly the Associated Enterprises article in the tax treaty may require an adjustment in South Africa [further discussion of this point is considered beyond the syllabus]. Supporting calculations The tax implications of the foreign loan and interest rest with the foreign exchange gains and losses. Furthermore, the amount of interest accruing will need to be translated to Rands for the purposes of gross income in South Africa. (i) Gross income (interest accruals) January R$24,041 x 4 45 = R106,982 February R$34,520 x 4 27 = R147,400 March R$38,219 x 4 56 = R174,279 TOTAL: R428,661 (ii) Exchange gains and losses Settlement of R$2,000,000 on 1 February 2017: R$2,000,000 x ( ) = R300,000 (gain) Translation of capital debt at year end: R$4,000,000 x ( ) = R1,040,000 (gain) Translation of interest owing at year end: R$96,780 x 4 56 R428,661 = R12,656 (gain) Tax implications of the import and export of the fruit and of the wasted fruit Value added tax (VAT) on imported goods from countries other than Botswana, Lesotho, Namibia and Swaziland is paid on the added tax value (ATV) and this is determined as follows: [customs value, plus any duty levied on the goods, plus 10% of the customs value] x 14%. In this instance the calculations for VAT payable on the imported fruit are as follows: 1 February 2017: [R$2,000,000 x 1 15 (to add the 15% customs duty) + R$2,000,000 x 10%] x 4 45 (conversion to Rands) x 14% = R1,557,500 The input tax deduction may be made in the tax period corresponding to the date of the custom release notification. The time of supply of imported services is the earlier of the time that an invoice is issued by the supplier or the recipient, or any payment is made by the recipient in respect of that supply. As the input VAT is paid but then claimed as an input deduction, the VAT does not add to the cost of the fruit for income tax purposes. The customs duty will add to the cost. The total cost of inventory will be claimed as a deduction for income tax purposes. The 10% spoilage is effectively deducted at this stage as the fruit will no longer be included in closing stock at the end of the period, nor sold. No further deduction may be claimed for the spoiled fruit. For the exports, the sales price (marked up from cost) will be included in gross income. The VAT is levied at 0% being an export of goods (subject to certain conditions for exported goods being met). No customs duty is levied in the export country. Tax consequences of the transfer pricing adjustment and reasons and mechanisms to appeal the decision of the Commissioner The increased cost arising from the use of the subsidiary amounts to R34,000,000 x 20% = R6,800,000. As a deduction in South Africa, assuming the adjustment is not justifiable, the taxable income would be understated by the same amount. The transfer pricing adjustment would trigger a transfer pricing penalty of the dividend withholding tax as the R6,800,000 will be deemed a dividend in specie. This means that the adjustment penalty is R1,020,000 (15% x R6,800,000). Furthermore, SARS levied an understatement penalty of 50%. This penalty therefore amounts to 28% x R6,800,000 x 50% = R952,000. The adjustment was justified by SARS on the basis that there was No reasonable grounds for tax position taken. Should there be a valid commercial reason for the use of FFL and the price reflects an arm s-length price, it may be that the company can successfully defend an appeal against the adjustment and penalties levied. 3 Prince (a) Tax implications of the transfers to the trust on 1 July 2016 The assets have been sold to the trust on interest-free loan. Such transfers represent sales. The sales have taken place at full market value and therefore, capital gains tax is levied on these disposals. No value added tax (VAT) will be levied, however, securities transfer tax would be levied on the sale of the shares. The transfer of the holiday home will result in the levying of transfer duty (given) on the trust (the buyer). As the trust has no capital from which to fund this transfer duty expense, the loan to the trust would have to be increased by the amount of R607,500. For capital gains tax, the house is a pre-valuation date asset. This implies that the base cost will have to be determined by first establishing the valuation date value of the asset. As proceeds exceed costs, the valuation date value is determined by one of three methods, namely the higher of: time apportioned base cost; market value on 1 October 2001; or 20% of the proceeds (after first deducting from the proceeds any expenditure incurred after 1 October 2001). The holiday house is not the primary residence of Prince and therefore no primary residence exclusion may be applied. 19

5 The shares represent the disposal of identical assets (as each share is an asset). However, the determination of base cost is straightforward as this is a post-valuation date asset and Prince started the company with share capital of R100. The value increase in the shares since then reflects the increase in value. Calculations (i) Holiday house The house was worth R7,000,000 at date of sale and was purchased on 1 July 1999 for R350,000. Capital gains tax R Proceeds (disposal at market value) 7,000,000 Less base cost: No market value on 1 October % x proceeds = R1,400,000 TABC: P = R7,000,000 B = R350,000 N = 3 T = 15 Y = B + [(P B) x N/(T + N)] = R1,458,333 (1,458,333) Capital gain 5,541,667 (ii) Shares Capital gains tax R Proceeds (10% of market value of shares as value on 100%) 3,800,000 Less base cost (10% of original cost) (10) Capital gain 3,799,990 These gains would be aggregated with the gains made on the deemed disposals on emigration. Assuming the annual exclusion is exhausted by those gains, the net tax liability for the capital gains tax would be R1,532,032 (41% tax rate on 40% of the total capital gains of R9,341,657 (the sum of the gains above)). Tax implications for Prince and his estate assuming he dies on 18 September 2016 There are a number of tax implications, most of which apply to Prince. The key taxes to be considered are income tax and estate duty. It should be remembered that one and a half months before 18 September 2016, Prince had formally emigrated to Mauritius. Such emigration ended his year of assessment and he would have had to settle his tax affairs with the South African Revenue Service (SARS) as a resident. This answer therefore is only concerned with the period after emigration (i.e. after 1 August 2016). Income tax As there is no detail of any income, the income tax component concerns those assets which would remain subject to South African capital gains tax after emigration. Only four South African assets exist, however, three are eliminated. First, the company shares while being held in a South African company do not fall within the capital gains tax scope after emigration. The exit tax for capital gains tax would have been paid in terms of the final tax return submitted by Prince in South Africa as a resident. Second, the cash held in the bank accounts is not considered to be an asset for capital gains tax purposes (being an interest in currency). Equally, the household contents would have been considered at emigration and therefore are not considered for Prince now as non-resident. The only asset which would remain subject to capital gains tax is therefore the Durban house. This house was not sold prior to emigration and is expected to still be on the market to be sold at 18 September It was not subject to the exit tax on emigration as it is immovable property in South Africa. Although no longer Prince s primary residence, the exclusion may still be applied with respect to the period when it was a primary residence and for up to two years after emigration, it may be considered as being used as a primary residence. This is because the purpose was to sell it and obtain a new primary residence in Mauritius. For this reason, the primary residence exclusion in the calculations below is not apportioned. 20

6 Calculation Capital gains tax R R Proceeds (deemed disposal at market value on date of death) 15,000,000 Less base cost (cost in 2003) (5,000,000) Capital gain 10,000,000 Less primary residence exclusion (see comments above) (2,000,000) 8,000,000 Less annual exclusion (40,000) Aggregate and net capital gain 7,960,000 Inclusion at 40% 3,184,000 Tax (assumed at 41%) 1,305,440 Estate duty Prince is a non-resident. The only assets which may be considered for estate duty purposes will be the South African movable property (the shares, cash and debt) and immovable property (the Durban house). The bequest to the public benefit organisation (PBO) would usually result in a deduction in the estate, but in this instance, it will be funded from foreign assets not included in the determination of estate duty (the Mauritius bank account). The abatement on the net estate is usually R3,500,000. However, in this instance, Prince has a previously deceased spouse who only utilised R1,500,000 of her abatement value. The balance therefore transfers to Prince. The estate duty calculation, if Prince were to die on 18 September 2016 is as follows: Calculation Estate duty R Durban house (realisation value is used) 14,500,000 Shares (90% x R38,000,000) 34,200,000 Cash in South Africa 5,750,000 Debt receivable (dividend): 90% x R3,000,000 2,700,000 Gross estate 57,150,000 Less deductions: Estate expenses (150,000) No deduction for the PBO donation as the donation was made from a foreign asset not included above 0 Net estate 57,000,000 Abatement (R3,500,000 x 2 (for previously deceased spouse) R1,500,000 (used by previous deceased spouse)) (5,500,000) Dutiable estate 51,500,000 Estate duty at 25% 12,875,000 4 Lesidi (a) Annual cost to I-Fashion (Pty) Ltd, after income tax, of employing the full-time personal assistant The after income tax cost to I-Fashion (Pty) Ltd would be the cash impact after having determined the relief obtained from the deduction of the costs for income tax purposes. There are no value added tax (VAT) considerations as VAT is not charged on wages and salaries by the employees as it is not an enterprise. The business is not a personal service company and therefore the deductions would not be limited. An additional cost to I-Fashion (Pty) Ltd [but outside the scope of the syllabus] would be the contributions to the skills development levy and the unemployment insurance fund. 21

7 R Salary (R30,000 x 12) 360,000 Software course 120,000 Contribution to retirement fund employer contribution (R6,000 x 12) 72,000 Contribution by the employee (built into the cash salary cost) 0 Medical contributions (R3,000 x 12) if included as a fringe benefit for the employee 36, ,000 Less income tax saving on deductible costs for employer (at 28%)* (164,640) Cost to I-Fashion (Pty) Ltd 423,360 * The tax rate of 28% has been chosen for the following reasons: (i) Even if the company qualifies as a small business corporation, the preferential rates have already been absorbed by other income and the balance (and this is a new expense) applies at 28%. (ii) If not a small business corporation, the standard corporate rate is 28%. (iii) The business does not qualify as a micro-business. Tax treatment of Lesidi s sale of the art collection The tax treatment of the income from the sale of the art collection will depend on whether or not Lesidi is deemed to be carrying on a trade in the sale of art. If she is, the income will be treated as trading income, and subject to income tax in the same way as her salary from I-Fashion (Pty) Ltd. If not, then the sales will be dealt with under the capital gains tax rules. In determining how Lesidi should be taxed, the South African Revenue Service (SARS) will make reference to a series of factors as derived from case law in prior years. In this case, the key relevant factors for trade would include: Factors indicating that the sale of the art does not constitute a trade: Initially, Lesidi was holding the art with a capital intent having inherited it and paying a curator to store it. Merely selling for a profit does not cause a change from capital to revenue and something more is required to convert the motive from capital to revenue intent and vice versa. The frequency of transactions; it may be that this is a one-off sale (but see below). Factors indicating that the sale of the art does constitute a trade: Using the services of a broker with the express intent to maximise the profit (i.e. sales in a systematic fashion).it may be that this is not a one-off sale but a series of sales. Based on the above factors, it is more likely that the capital gains tax treatment will apply as insufficient has been done to convert from the original intention of capital. For capital gains tax purposes works of art are personal use assets. It does not matter that the art is worth a substantial sum or not and as a result any capital gain or capital loss will be disregarded for capital gains tax purposes. Tutorial note: Marks were available for discussion of any relevant factors and for reaching a sensible conclusion. Mpho s income tax liability for the year of assessment ended 28 February 2017 and the tax payable With respect to the sale of the property in Greece, the manner in which Mpho calculates the capital gain provides options. As the property was acquired in one currency but the disposal proceeds are in a different currency, there are specific translation rules. First, a choice exists between translating the proceeds to Rands by applying the spot rate or the average exchange rate for the year of assessment of the disposal. Second, a similar choice applies with respect to the acquisition in Euros (i.e. spot rate on the date of acquisition or the average exchange rate in the year of acquisition). Note that this treatment differs from the approach which would be taken if the acquisition and disposal had been in the same currency. As a result, the taxpayer may elect whichever option provides the most beneficial outcome. For Mpho, this would be the lower of the proceeds values and the higher of the base cost values. With respect to the foreign tax credit, Mpho would need to be able to prove its payment to the foreign government before claiming the credit. Assuming this to be possible, the foreign taxes must be translated to Rands at the average exchange rate for that year of assessment. Thereafter the foreign tax credit limitation may be applicable. To protect the tax base, the foreign credit may not exceed those South African taxes levied on the foreign income (see calculation below). 22

8 R R Salary (R60,000 x 12) 720,000 Capital gains tax Proceeds GBP 800,000 x ,648,000 Less base cost: 500,000 x (4,425,700) Capital gain 9,222,300 Less annual exclusion (40,000) Aggregate and net capital gain 9,182,300 Inclusion at 40% 3,672,920 Taxable income 4,392,920 Tax per the tables (R206,964 + ((R4,392,920 R701,300) x 41%) 1,720,528 Less primary rebate (13,500) 1,707,028 Less foreign tax rebate: 15% x ((800,000 x 1 09) 500,000) x ,786 Limit: Foreign taxable income/total taxable income x SA Tax R3,672,920/R4,392,920 x R1,720,528 1,438,533 Claim full rebate (913,786) Tax payable 793,242 5 (a) Commercial Diving Supervision (Pty) Ltd (CDS) residency position A company is considered resident in South Africa if it is incorporated, established or formed, or has its place of effective management in South Africa. On the basis of the above, CDS is resident in South Africa as it was formed in South Africa. This test may be broken where, for the application of a tax treaty, the company is deemed resident elsewhere. South Africa has a treaty with Northania modelled on the OECD Model Convention on Income and on Capital of In this instance, if the domestic law of Northania also classifies CDS as resident of Northania, the tie breaker of place of effective management would be necessary. A key consideration in this instance is the place of effective management. Place of effective management can loosely be described as the single dominant place where key management and commercial decisions are regularly and predominantly made. A single snapshot of the end of the year of assessment is not the manner in which the decision should be taken. It is unclear from the scenario where the key decisions are regularly made. The onus of proof would rest on Joseph for the company to demonstrate where the key decisions are regularly made to establish the place of effective management. If this place is Northania, then the determination of SARS that the company is resident would be incorrect. If the place of effective management is South Africa, then the tie breaker is not necessary and its mere incorporation is sufficient to prove residence. Tax implications if CDS is classified as a personal service company for both CDS and the two oil companies, RJ Oil Ltd (RJO) and WH Petroleum Ltd (WHP) A personal service company arises where a service is rendered personally by a person connected to the company and on behalf of that company to a client and any one of three conditions are met, namely: (i) The person would be considered an employee if the service was rendered directly by that person rather than by the company; (ii) The duties must be performed mainly at the client premises or the person is under the control or supervision of the client as to the manner in which the duties are performed or are to be performed; or (iii) More than 80% of the income of the company arises from one client (directly or indirectly). However, even where these criteria are met, if the company employs three or more persons on a full-time basis to render the services of the company, but are not shareholders in the company or connected persons of such shareholders, then the company will not be classified as a personal service company. Applying these criteria to the current facts, Joseph created CDS and immediately rendered the same services directly to his former employer, RJO. Initially, this was CDS s only client. It further appears that Joseph was also CDS s only employee (and sole shareholder). This implies that: (i) The services are being rendered on behalf of CDS by Joseph personally to the former employer, RJO; (ii) For the same services, Joseph was previously an employee; (iii) It is perhaps debatable whether the commercial diving supervision is performed under the control or supervision of the client; 23

9 (iv) Initially, more than 80% of the CDS s income is being earned from a single client, RJO. While it is not necessary to meet all the criteria, it appears that CDS would be classified as a personal service company. This means that the employing company, RJO, has to deduct employees tax on the payments to CDS. For CDS, the employees tax withheld becomes a tax credit. In the determination of taxable income, the deductions claimable by the company are severely restricted to any legal expenses; bad debts; contributions of the employer to retirement funding; voluntary or other amounts repayable by the company employee to the company; and, expenses in respect of premises; finance charges, insurance, repairs and fuel and maintenance in respect of assets, if such premises or assets are used wholly and exclusively for the purposes of the trade. In addition, amounts paid to employees as remuneration are deductible. However, it is also necessary to assess whether the contract with WHP in Oilhavia is sufficient to change this classification. The contract with WHP would have generated income of R3,428,571 (being R6,000,000/7 months x 4 months) compared to the contract with RJO of R2,916,667 (R3,500,000/12 months x 10 months). Note that the R3,500,000 was the annual amount. Clearly less than 80% is earned from a single client by the end of the 2017 year of assessment. Certainly, examining the earlier conclusions, if it can be said that the supervision and control criterion is debatable, the only condition to be tested is whether or not Joseph would be regarded as an employee of the client if Joseph rendered the services directly. It would appear that this condition would be met. It is possible that this test could be argued to fail if Joseph would be considered an independent contractor. In this instance the key statutory test considers control and supervision as key. If Joseph works independently, it could be argued that he does not fall under the supervision and control of the client. If independent, then it could be argued that the CDS is no longer a personal service company. However, if failing the test, then Joseph does not have three or more full-time employees rendering the services of the company as he has only recently employed his wife and has no other employees. His wife does not add to the count of three employees as she is a connected person in reference to Joseph. Joseph s current structure There are a number of deficiencies with the current structure. In addition, a number of factors do not critically impact the structure. Remuneration Assuming the classification as a personal service provider is correct, this implies the amounts received represent remuneration. It is therefore conceivable that the earnings from the offshore companies may be considered exempt on the same basis as that for an individual resident in South Africa spending more than 183 days outside South Africa, including a period of more than 60 days continuous absence, in a 12-month period beginning or ending in the year of assessment. However, this may be contentious as companies cannot physically move between jurisdictions. Should the above not be true, then the structure is deficient. While it is accepted that tax credits would be available for the foreign earnings, should the same services have been performed by an employee, the remuneration earned for the services rendered outside South Africa (where the employee has spent more than 183 days outside South Africa including a continuous absence of more than 60 days for a 12-month period starting or ending in the year of assessment) would be exempt from income tax. Second, if CDS is deemed to be a personal service provider, this might not exempt the company from registering for value added tax (VAT). This is because the classification as a personal service provider applies for the purposes of income tax. Joseph has not drawn a salary. Apart from the possibility of classifying the earnings as exempt for income tax purposes, for any taxable amounts, Joseph could at least take advantage of the lower tax rates for amounts up the corporate rate of tax (effectively splitting the income). Third, by borrowing the money from the company, the notional market related interest on this interest-free loan will be deemed a dividend and subject to dividends tax at 15%. The tax credits would work in the same way whether a company or an individual and so are neither an advantage nor a disadvantage. 24

10 Professional Level Options Module, Paper P6 (ZAF) Advanced Taxation (South Africa) June 2017 Marking Scheme Available Maximum 1 (a) Foreign lottery winning: Capital versus revenue nature 1 Consideration of exclusion from capital gains 1 Base cost and proceeds 1 Translation of the gain 1½ Tax on winnings 2 Foreign tax credit considered 1 Determination of the rand value of the credit 1 Limitation of the foreign tax credit 1 Consideration of the excess 1 Exchange item consideration 1 11½ 10 Repayment of the salary and allowance: Deduction against employment income 1 Possibility for salary to be exempt Sole proprietorship business and VAT effects: Business turnover added to Thuli s gross income 1 No micro business 1 VAT vendor registration needed 1 Zero rating applicable and turnover to gross income 1 Input VAT claimed 1 Net amount deductible for income tax 1 Closing inventory considered ½ Commercial building 1 Wages VAT and income tax considerations 1 Higher than market related salaries paid to unconnected persons remain deductible 1 No donations tax on portion of salary above market value ½ Retirement benefits versus medical contributions 1 Interest-free loans ½ Employees withholding tax obligations 2 13½ 10 (d) Conversion to a company: Transfer via the asset for shares rule 1 Retention of asset type in the new company 1 Transfer at base cost for capital gains tax ½ Transfer at tax value for allowance purposes ½ Personal goodwill excluded 1 Qualifying conditions 2 VAT considerations 2 Qualification as a small business corporation 1 Dividends tax impact 1 Employer obligations transferred Professional marks Format and presentation of the 1 Effectiveness of communication

11 Available Maximum 2 (a) Tax implications of the loan: Identify exchange items 2 Translation to be applied to the interest 1 Tax implications of gains and losses 2 Tax risks transfer pricing 3 Tax risks GAAR 1 Supporting calculations Tax implications of import and export: Input calculation description for imports 1 Calculations 3 Time of supply and claim of VAT 1 Impact of the VAT and customs on the income tax deduction 2 Spoiled fruit deduction 1 Sales included in gross income 1 VAT levied at 0% for exports and no customs duty in export country Transfer pricing adjustment: Determination of the adjustment made by SARS 1 Penalties on the adjustment dividends tax 1 Penalties on the adjustment understatement 1 Calculations on penalties 2 Basis to defend an appeal on the adjustment (a) Transfers to the trust: Assets sold on loan are disposals at market value 1 Other taxes considered 1 Transfer duty incidence 1 Determination of base cost for the house and shares 1½ Calculations 4 8½ 8 Consequences on death: Capital gains tax post emigration 1 Immovable property to still be considered 1 Reason for no apportionment for period of non-residence 1 Calculations 3 Estate duty assets to be considered 1 Calculations

12 Available Maximum 4 (a) Cost to company of employing full-time personal assistant: No VAT considerations 1 Not a personal service company so no limitation of deductions 1 Calculations 3 Rate of tax Sale of art: Capital versus revenue discussion 5 Conclusion: application of decision to income tax Mpho s income tax liability and tax payable: Translation issues for the proceeds 1 Translation issue for the base cost 1 Requirement to prove payment of foreign tax credit 1 Foreign credit translation 1 Calculations (a) Residency position: Definition 1 Application of test 1 Treaty consideration of tie breaker 1 Discussion of place of effective management 2 Conclusion and identification of onus Personal service company and tax implications: Definition of personal service company 2 Application of facts to definition 2 Conclusion 1 Tax implications for the two oil companies 1 Tax implications for CDS as a personal service company 2 Consideration of the test after the WHP contract obtained Consideration of the tax structure: Offshore earnings and exemption for physical presence outside South Africa 3 Value added tax (VAT) 1 Loan to Joseph no use of income splitting 1 Dividends tax on the notional market-related interest on the loan 1 Tax credits indifferent