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

Transcription

1 Professional Level Options Module Advanced Taxation (South Africa) Friday 5 June 2015 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 2015 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 2015/31 March 2015 Rebates Primary rebate R12,726 Secondary rebate (over 65) R7,110 Tertiary rebate (over 75) R2,367 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 Additional medical expenses tax rebate R257 R514 R172 Persons 65 or older or persons younger than 65 if that person, their spouse or their child is a person with a disability: ((Medical contributions (medical aid contribution tax rebate x 3) + other qualifying medical expenses) x 33 3% Persons younger than 65: ((Medical contributions (medical aid contribution tax rebate x 4) + other qualifying medical expenses) as exceeds 7 5% of taxable income x 25% 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% 2

3 Rates of normal tax payable by persons (other than companies) for the year of assessment ended 28 February 2015 Where taxable income: does not exceed R174,550 18% of each R1 of the taxable income exceeds R174,550 but does not exceed R272,700 R31,419 plus 25% of the amount over R174,550 exceeds R272,700 but does not exceed R377,450 R55,957 plus 30% of the amount over R272,700 exceeds R377,450 but does not exceed R528,000 R87,382 plus 35% of the amount over R377,450 exceeds R528,000 but does not exceed R673,100 R140,074 plus 38% of the amount over R528,000 exceeds R673,100 R195,212 plus 40% of the amount over R673,100 Tax rates for small business corporations for the year of assessment ended 31 March 2015 Where taxable income: does not exceed R70,700 Nil exceeds R70,700 but does not exceed R365,000 7% of the amount over R70,700 exceeds R365,000 but does not exceed R550,000 R20,601 plus 21% of the amount over R365,000 exceeds R550,000 R59,451 plus 28% of the amount over R550,000 Turnover tax rates for micro businesses for the year of assessment ended 28 February 2015 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 R560,000 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) R335 per day (local travel) Deemed expenditure for incidental costs only (per Government regulation) R103 per day (local travel) Deemed expenditure for meals and incidental costs (foreign travel) (per published tables) will be supplied in the question where relevant 3 [P.T.O.

4 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 New or unused plant or machinery used for research and development (where it does not qualify for the research and development accelerated allowance) 50%/30%/20% 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 150% 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 ) 4

5 Travel allowance table for years of assessment commencing on or after 1 March 2014 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 80,000 25, , ,000 46, , ,000 66, , ,000 84, , , , , , , , , , Exceeds 560, , 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 30 per kilometre. Tax rates of normal tax retirement lump sum benefits for the year of assessment ended 28 February 2015 Where taxable portion of lump sum: does not exceed R500,000 Nil exceeds R500,000 but does not exceed R700,000 18% of each R1 over R500,000 exceeds R700,000 but does not exceed R1,050,000 R36,000 plus 27% of the amount over R700,000 exceeds R1,050,000 R130,500 plus 36% of the amount over R1,050,000 Tax rates of normal tax withdrawal lump sum benefits in respect of the year of assessment ended 28 February 2015 Where taxable portion of lump sum: does not exceed R25,000 Nil exceeds R25,000 but does not exceed R660,000 18% of each R1 over R25,000 exceeds R660,000 but does not exceed R990,000 R114,300 plus 27% of the amount over R660,000 exceeds R990,000 R203,400 plus 36% of the amount over R990,000 5 [P.T.O.

6 Section A BOTH questions are compulsory and MUST be attempted 1 Your client, Baby World Ltd, is a company resident in South Africa and is a registered value added tax (VAT) vendor. The company supplies a retail chain with baby products sourced worldwide. Your manager has asked you to draft briefing notes to prepare her for an upcoming meeting she will be having with the directors of Baby World Ltd regarding a number of transactions entered into during the year ended 31 March The relevant transactions are as follows: Transaction 1 Baby World Ltd imported selected products for resale from the UK. The total cost of the goods imported was GBP 100,000 (British pounds). The transaction was concluded and the invoice issued to Baby World Ltd on 1 April 2014, payment taking place within 45 days of invoice. The customs tariff is 20% of the invoice price at the time of arrival in South Africa. The goods arrived in South Africa on 20 April 2014 and were cleared by Customs officials by 2 May In compliance with company policy, Baby World Ltd entered into a forward exchange contract with One Bank Ltd for the entire liability of GBP 100,000. The relevant exchange rates are as follows: Exchange rates (spot rate) 1 April 2014: GBP 1 = R April 2014: GBP 1 = R May 2014: GBP 1 = R May 2014: GBP 1 = R18 20 Exchange rate (forward rate): 1 April 2014: GBP 1 = R18 00 (7 marks) Transaction 2 Baby World Ltd imported some tricycles from its supplier in Botswana, Tricycle Technology Ltd. The purchase took place on 20 February 2015 for BWP P150,000 (Botswana pula) and the tricycles cleared customs on 28 March Payment is due on 30 April No customs duty applies to the import as Botswana forms part of the Southern African Customs Union (SACU). Again, in compliance with company policy, Baby World Ltd entered into a forward exchange contract with One Bank Ltd for the entire liability of BWP P150,000. Exchange rates (spot rate) 20 February 2015:BWP 1 = R March 2015: BWP 1 = R March 2015: BWP 1 = R April 2015: BWP 1 = R1 15 Exchange rate (forward rate): 20 February 2015: BWP 1 = R1 20 (5 marks) Transaction 3 Baby World Ltd has two operating subsidiary companies. Subsidiary X is resident in Ireland and engaged in trading activities. Subsidiary X operates from business premises in Ireland and employs a number of staff locally who carry on the company s operating activities. Subsidiary Y is resident in Argentina. Subsidiary Y is a trading company which sells Baby World Ltd s products to the South American market. Baby World Ltd owns 52% of the ordinary share capital of both of these two subsidiaries. Baby World Ltd intends to borrow R10,000,000 from Subsidiary X in Ireland on 1 April 2015 at an interest rate of 15% per annum (simple interest). Baby World Ltd could have borrowed the same amount from a local bank at an interest rate of 10% per annum (simple interest). The directors of Baby World Ltd believe that this will be a simple method of shifting profits out of South Africa and into Ireland, where they will be taxed at a lower tax rate. Baby World Ltd charged Subsidiary Y in Argentina a royalty in respect of certain of its patented products. The royalty charged is calculated as 15% of the sales revenues generated by Subsidiary Y from sales of these products in 6

7 Argentina. The royalty is determined on 31 December each year (being Subsidiary Y s financial year end) in Argentine Peso (ARS). The equivalent arm s length royalty rate is 25% of sales revenue. The sales to 31 December 2014 amounted to ARS $30,000,000. Note You should assume the following rates of corporate tax: Corporate tax rate in Ireland applicable to Subsidiary X 12 5% Corporate tax rate in Argentina applicable to Subsidiary Y 35% (19 marks) Required: Draft briefing notes for your manager s meeting which assess the value added tax (VAT) and corporate income tax implications of Transactions 1 and 2 and the corporate income tax implications of Transaction 3 for Baby World Ltd. Notes: 1. The mark allocation is shown against each of the three transactions above. 2. Your assessment of Transaction 3 should include consideration of the application of the controlled foreign company (CFC) rules. Professional marks will be awarded in question 1 for the overall presentation of the briefing notes and the effectiveness with which the information is communicated. (4 marks) (35 marks) 7 [P.T.O.

8 2 Cheap Homes South Africa (Pty) Ltd ( CheapSA ) is a wholly-owned subsidiary of a UK company, Cheap Homes Plc ( CheapUK ). CheapSA constructs affordable housing on affordable land and then leases the properties to low-income tenants under long-term agreements of up to 20 years. In addition, CheapSA constructs retirement villages and provides life rights over the constructed homes. CheapSA is resident in South Africa and has a 31 March year end. The tax disputes below are in relation to CheapSA s year of assessment ended 31 March Dispute 1 CheapSA made an offer to purchase a property for R20,000,000 for its next development. CheapSA had paid an independent valuer to value the property and believes the offer made reflects the fair market value of the property. The owner made a counter-offer to enter instead into a 30-year lease agreement in terms of which CheapSA would have the use of the property for a single upfront lump sum payment of R10,000,000. This payment of R10,000,000 is described as an immediate rental expense payment. CheapSA agreed to this counter-offer and duly signed a 30- year lease agreement with the owner on 1 January CheapSA claimed a deduction for the lump sum payment of R10,000,000 in terms of the general deduction provision [a s.11 (a) deduction] in its tax return for the 2015 year of assessment. The Commissioner for the South Africa Revenue Service ( the Commissioner ) has disallowed the deduction on the grounds that the expenditure was capital in nature. The directors of CheapSA are dissatisfied with the disallowance of the upfront lease payment as they argue that the amount is revenue in nature and the company is entitled to the deduction. The directors would like your opinion as to the Commissioner s revised assessment. Dispute 2 CheapUK is a registered and established brand in Europe. CheapSA utilises this trademark to further their South African operations. CheapSA is contractually obligated to pay CheapUK a royalty of 10% of CheapSA s total turnover each year in respect of the use of the trademark. CheapSA claimed a deduction for the royalty payment in terms of the general deduction provision [a s.11(a) deduction] on its tax return for the 2015 year of assessment and again the Commissioner disallowed the deduction on the basis that the expense was capital in nature. The directors of CheapSA are dissatisfied with the disallowance of the royalty expense as they argue that the amount is revenue in nature and the company is entitled to the deduction. The directors would like your opinion as to the Commissioner s revised assessment. Dispute 3 CheapSA completed construction of a retirement village during CheapSA immediately marketed and entered into life right agreements with a number of customers (a life right provides the holder with the right to occupy the residential unit for the rest of their life). In exchange for the life right, the customers advance CheapSA an interest-free loan for an amount equal to the determined market value of the property at the date the customer moves into the property. The loan remains outstanding for as long as the customer occupies the units (that is, until their death or such time that the arrangement is otherwise cancelled). The loans are repayable either to the customer or the customer s estate (if deceased) on termination of occupation. The loans are utilised by CheapSA as working capital to fund new projects. The directors of CheapSA consider the loan amounts received from the customers to be capital in nature and therefore did not include such amounts in their gross income for The Commissioner issued a revised assessment including the value of each of the loans entered into in 2015 in the company s gross income. The directors of CheapSA are dissatisfied with the inclusion of the loan amounts as gross income as they argue that the loans are capital in nature and therefore must be excluded. The directors would like your opinion as to the Commissioner s revised assessment. 8

9 Required: Provide the directors with your reasoned opinion on the Commissioner s revised assessments in respect of each of the three disputes, as requested above. The following mark allocation is provided as guidance for this question: Dispute 1 Dispute 2 Dispute 3 11 marks 6 marks 8 marks (25 marks) 9 [P.T.O.

10 Section B TWO questions ONLY to be attempted 3 A (Pty) Ltd is a resident company with two shareholders. Mr B, a non-resident, holds 40% of the equity shares and C Ltd, a resident company, holds 60% of the equity shares. During the year the following transactions occurred: (i) (ii) A (Pty) Ltd declared and made a dividend in specie to Mr B of a machine. The machine had a market value of R5,000,000 on the date the dividend in specie became payable, a tax value of R1,000,000 and an original cost of R4,500,000. (6 marks) A second dividend in specie was made to C Ltd of the motor vehicles and trading inventory of A (Pty) Ltd. The motor vehicles had a market value of R380,000, a tax value of nil and an original cost of R590,000. The trading inventory had a market value of R690,000 and was being carried at cost of R570,000. (4 marks) (iii) Following the above dividends in specie, A (Pty) Ltd was placed in voluntary liquidation. As at the date of liquidation, the only remaining asset was cash of R4,250,000. Notes: A (Pty) Ltd s statement of financial position at the date of liquidation is presented as follows: R 000 Assets Cash 4,250 Equity Share capital 750 Share premium 250 Retained earnings 3,250 4,250 Of the R750,000 share capital, R400,000 represents previously capitalised reserves. The values expressed here are shown after settling all liabilities (including current income tax liabilities up to the date of liquidation). (10 marks) 1 The income tax treaty with Mr B s jurisdiction of residence provides that where a resident of that State holds more than 25% of the equity shares in a South African company, any tax payable on dividends must be reduced to 5%. Mr B has made all necessary submissions to A (Pty) Ltd for such a reduced rate to apply, where applicable. 2 C Ltd has similarly lodged all necessary documentation with A (Pty) Ltd for the correct application of dividends tax. 3 Mr B purchased his shares for R2,700,000 five years prior to A (Pty) Ltd s liquidation. C Ltd has held its shareholding since the formation of the company when it purchased the shares for R360,000. Required: Advise A (Pty) Ltd, Mr B and C Ltd of the tax implications of the above three transactions. Note: The mark allocation is shown against each of the three transactions above. (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. A number of unrelated value added tax (VAT) queries on different clients have been marked for your consideration. The relevant transactions are outlined below: Muso Ltd A non-resident company, Muso Ltd, provides downloadable music via a website set up in the US. All transactions are run through a server based in Bermuda. Muso Ltd has no presence in South Africa. South African customers log on to the website and purchase the music (denominated in US Dollars) and the music is then downloaded via the internet to their personal computer from the server. The company is required to sign a declaration on the tax return in its country of residence which states that the company is in compliance with foreign laws for all jurisdictions in which it operates. The company would like to understand the recent amendment to the Value-Added Tax Act in South Africa with respect to electronic services and its impact (if any) on its business. Goods Ltd Goods Ltd is a South African resident company and a VAT vendor. Due to a computer system error, tax invoices received in respect of purchases by Goods Ltd were added to its customer s accounts. In consequence, a number of customers made payments in excess of the amount owing to Goods Ltd. In addition, as the amounts owing were not correctly shown in Goods Ltd s records, it did not make payment to the supplier vendors from whom purchases had been made. The VAT return (VAT201) for Goods Ltd had been filed shortly before the computer error took effect. Goods Ltd had therefore correctly accounted for the VAT input claims on its purchases before the computer system error took place and had only accounted for output VAT on valid invoices issued to customers. Goods Ltd would like to understand the VAT consequences of the above errors and any timeframes within which the errors must be corrected. Many of the customers who overpaid are repeat customers and have requested that the amounts overpaid remain in credit against their account to use against future purchases. The tax invoices issued to Goods Ltd by its suppliers and incorrectly charged to customer accounts were selected by the computer system at random. Two of the invoices are from periods 12-months prior to when the computer system error took place. Prop Ltd Prop Ltd is a commercial property letting company with a 31 March year end. The company is a South African resident company and a VAT vendor. Prop Ltd intends to expand its trade into residential letting. The company is concerned about the impact which a change in use adjustment and other VAT considerations may have on its cash flows and would therefore like a full explanation of the likely change in use adjustment impact as a result of its proposed new business model. In the initial test phase, the revenue to be generated from the new business of the letting of residential units will make up 5% of Prop Ltd s total revenue. If the test phase is successful, this will increase to 20% of the total revenue. Prop Ltd currently holds the following assets. All figures are stated inclusive of VAT, where applicable: Cost Market value R R Commercial properties 15,000,000 19,000,000 Office furniture 228, ,000 Computer system to manage rentals 114,000 93,000 Miscellaneous assets 128, ,000 In addition, Prop Ltd plans to purchase residential property with a market value of R2,300,000 for the purpose of its proposed residential letting. The miscellaneous assets each have an original cost of less than R40,000 and current market values of less than R40,000. The office furniture and computer system (all components of which cost more than R40,000) are used by the administrative staff of Prop Ltd to manage the business and, in future, will be used for both the commercial and residential rentals. 12

13 Once the revenues from the residential rentals reach 20% of total revenue, the computer system will be sold and a new computer system acquired. A new computer system will cost R178,000 and the old computer system is anticipated to have a market value of R74,000 at that time. Required: Advise each of the above clients as to the value added tax (VAT) implications of their situation. Your answer should include supporting calculations, where relevant. The following mark allocation is provided as guidance for this question: Muso Ltd Goods Ltd Prop Ltd 5 marks 5 marks 10 marks (20 marks) 13 [P.T.O.

14 5 (a) Joe Wealthy, a natural person and resident of South Africa, would like to create a discretionary trust (Trust A). The trust will hold various assets such as rental properties, interest-earning investments, and shares currently owned personally by Joe. The beneficiaries of Trust A will be Joe s adult child and his minor child and his wife. As Trust A is a new trust, it does not have the cash resources to purchase the assets from Joe and therefore a sale for cash is not possible. As an alternative, Joe is considering one of the following alternative methods of effecting the transfer: (i) Transfer by donation (ii) Sale at full market value on interest-free loan account (iii) Sale at full market value on interest-bearing loan account Required: Advise Joe of the immediate and future tax implications of each of the three alternative methods of transferring the assets to Trust A. (10 marks) (b) Jim Nobody was resident in South Africa in terms of the physical presence test for the year of assessment ended 28 February 2015 and was ordinarily resident in the United Kingdom. Jim died in a motor car accident on 1 February He was survived by his wife, Rachel, who was also resident in South Africa in terms of the physical presence test for the year of assessment ended 28 February 2015, and their two children (currently studying in the United Kingdom). Rachel immediately returned to the United Kingdom (where she is ordinarily resident) following Jim s death. Jim owned a number of assets at the date of his death, as follows: Base cost Market value at death R R House in Cape Town (his primary residence) 5,000,000 7,500,000 House in Mauritius (holiday house) 3,500,000 10,000,000 Interest-bearing investments (South Africa) 200, ,000 Interest-bearing investments (United Kingdom) 750, ,000 House in the United Kingdom 12,000,000 17,000,000 Yacht (moored and registered in Bermuda) 650, ,000 Under the terms of Jim s will, he left the South African interest-bearing investments to a South African public benefit organisation. His will provided that the yacht (which is greater than 11 metres) was to be sold and the cash utilised to meet any expenses of his estate. The house in Mauritius and the house in the United Kingdom were left to his two children in equal shares. The residue of Jim s estate was left to his wife. In the year of assessment ended 28 February 2015, Jim had taxable income of over R800,000. Required: Calculate and contrast both the capital gains tax and estate duty liability on Jim Nobody s estate on death. Note: You should ignore any double tax relief considerations. (10 marks) (20 marks) End of Question Paper 14