Barter Transactions & Debit Loans

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1 Barter Transactions & Debit Loans

2 Program A brief reminder of what is new in the tax field Here we will cover recent regulations and other notices issued by SARS. The constitutional court recently considered the in duplum rule in Paulsen and another v Slip Knot Investments. Does it apply to a tax debt? The tax consequences of barter transactions: The recent South Atlantic Jazz Festival tax case will be used to set the context. Whilst the focus would be on the Value-added Tax aspect some of the basic principles of gross income and deductions will also be covered. Debit loans In tax case the taxpayer convinced the court that the debit loans were not subject to the secondary tax on companies. We will revisit the dividends tax consequences of debit loans in order to understand if this decision has any impact on the deemed dividend subject to the dividends tax. An opportunity for questions.

3 Notice to submit returns The following persons must furnish an income tax return: (a) every company, trust or other juristic person, which is a resident; (b) every company, trust or other juristic person, which is not a resident- (i) which carried on a trade through a permanent establishment in the Republic; (ii) which derived income from a source in the Republic; or (iii) which derived any capital gain from a source in the Republic; (d) (iv) who is a resident and held any funds in foreign currency or owned any assets outside the Republic, if the total value of those funds and assets exceeded R at any stage during the 2015 year of assessment;

4 Notice to submit returns A natural person is not required to furnish a return for the 2015 year of assessment in terms of paragraph 2(d)(viii) if the gross income of that person consisted solely of gross income described in one or more of the following subparagraphs: (a) remuneration, other than an allowance or advance referred to in paragraph 2(d)(ii) above, paid or payable from one single source, which does not exceed R and employees' tax has been deducted or withheld in terms of the deduction tables prescribed by the Commissioner; (b) interest from a source in the Republic not exceeding - (i) R in the case of a natural person below the age of 65 years; or (ii) R in the case of a natural person aged 65 years or older; and (c) dividends and the natural person was a non -resident during the 2015 year of assessment.

5 Other DTA with Mauritius published in GG on 17 June date of entry into force is 28 May 2015 Value-Added Tax Act, 1991 Regulations R.446 and R.447 (GG 38836) in terms of section 74(1) read with section 23 - Registration of vendors and the requirements to be complied with for registration as a vendor 446 deals with applications based on the nature of activities where taxable supplies not probable in first 12 months. 447 deals with the R voluntary applications introduces a R4 200 per month test, a contract of R and expenses of R

6 Paulsen and Another v Slip Knot Investments 777 (Pty) Limited Judge Madlanga (majority) The in duplum rule is a long-standing and well-established part of our law. It provides that arrear interest ceases to accrue once the sum of the unpaid interest equals the amount of the outstanding capital. a brief outline of the history of the in duplum rule in South African law. The rule has its origins in classical Roman law. The rule was carried through to Roman-Dutch law, reference to it being made by various old authorities, including, most pertinently for this case, Huber and Van der Keessel. Our common law is based on the same Roman law rule66 and the rule has been recognised in local case law as far back as 1830.

7 Paulsen and Another v Slip Knot Investments 777 (Pty) Limited Judge Madlanga (majority) As stated in numerous cases and academic writings stretching back over centuries, the overarching purpose of the rule is to protect debtors from being crushed by the never-ending accumulation of interest on an outstanding debt. With approval from the SCA: Dit vorm deel van ons daaglikse ekonomiese lewe. Dit vervul n ekonomiese funksie om skuldenaars wat hulle in finansiële verknorsing bevind, te help.

8 Paulsen and Another v Slip Knot Investments 777 (Pty) Limited Judge Madlanga (majority) By suspending the application of the in duplum rule pendente lite, Oneanate indiscriminately targets all debtors regardless of whether they are defending the claim in good faith or not. To hit all debtors in this manner would surely have an undesirable, chilling effect. Some debtors, despite a genuinely held belief that they have a valid defence, may sooner opt to settle a claim than face the potentially financially ruinous interest that would again commence to pile up once court process was served.

9 Paulsen and Another v Slip Knot Investments 777 (Pty) Limited Judge Madlanga (majority) For those reasons, I proceed to overrule Oneanate insofar as it held that the in duplum rule is suspended pendente lite. That means the law reverts to what it was, to the benefit, not only of the Paulsens, but all debtors, except those whose matters have been finalised with no possibility of appeal. Would the in duplum rule apply to a tax debt for instanced where the taxpayer disputed an assessment and the matter took 10 years to be decided on?

10 The tax consequences of barter transactions

11 South Atlantic Jazz Festival (Pty) Ltd v CSARS the vendor carried on business as the owners and organisers of a world acclaimed festival, an annual international festival held during the months of either March or April of any given year. In the course of that enterprise it concluded sponsorship agreements with South African Airways, the City of Cape Town, the South African Broadcasting Corporation and Telkom in terms of which the sponsors paid money towards and provided goods and services for the festivals, in return for which South Atlantic Jazz Festival (Pty) Ltd provided goods and services to the sponsors in the form of branding and marketing. The taxpayer and each of the sponsors were registered as vendors in terms of the VAT Act. TC-VAT 872 WC - 2 December 2013

12 TC-VAT 872 WC The services provided by the sponsors to the vendor included flight tickets on the X (Pty) Ltd flights (one of the sponsors); airtime to broadcast the festival promotions and advertisements on certain V (Pty) Ltd radio stations and television channels; and certain city or municipal services. In return for the sponsorships, the vendor agreed to provide and did provide the sponsors with certain services, these being festival stage branding, which entailed the sponsors logos being displayed on the backdrop of the stage; festival venue branding, which entailed the sponsors logos being displayed on the venue; the sponsors logos to be displayed in all promotions, advertisements and events associated with the festival in all mediums of communications used; and corporate hospitality marquees, accommodation and festival tickets.

13 TC-VAT 872 WC The vendor, in turn, did not issue the sponsors with tax invoices in respect of the services it provided to the sponsors in terms of the sponsorship agreements. The vendor did not declare output tax on the value of the services supplied to it by the sponsors in its VAT returns for the relevant periods of assessment... nor did it claim input tax on the value of the services supplied to it by the sponsors in any of its VAT returns. The sponsors did not charge VAT on the supply of goods and services made or rendered to the vendor and no VAT was paid by the vendor on the sponsorships so received. The sponsors did not issue tax invoices to the vendor in respect of the services they provided to the vendor.

14 South Atlantic Jazz Festival (Pty) Ltd v CSARS TC-VAT 872 WC - 2 December 2013 SARS conducted an audit into the tax affairs of the vendor and discovered that the vendor received sponsorships in kind from various sponsors but failed to declare output VAT on such sponsorships. Arising from such audit, SARS raised an assessment and also levied interest on the assessment so raised.

15 South Atlantic Jazz Festival (Pty) Ltd v CSARS South Atlantic Jazz Festival (Pty) Ltd does not dispute its liability for output tax on the transactions. The matter in contestation is whether it should be entitled to offset that liability with a deduction in respect of the input tax in respect of the supplies made to it by the sponsors. The Commissioner had declined to allow any deduction of input tax in the particular circumstances.

16 Enterprise - Paragraph (a) of the definition in section 1(1) goods or services are supplied to Supplier A vendor carrying on an enterprise Any other person Recipient for a consideration

17 Imposition of the tax Section 7(1)(a) Value-added tax is levied and paid on the supply Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, calculated at the rate of 14% on the value of the supply concerned by any vendor Section 1(1) Section 23(1) of goods or services supplied by him in the course or furtherance of any enterprise carried on by him; vendor means any person who is or is required to be registered under this Act Every person who carries on any enterprise and is not registered, becomes liable to be registered... The vendor will pay the tax

18 Value of supply of Section 10(2) The value to be placed supply of goods or services shall, be the amount of the consideration for such supply, save as is otherwise provided in this section, as determined in accordance with the provisions of subsection (3),

19 Value of supply of Section 10(3) the amount of any consideration referred to in this section is a consideration in money, is not a consideration in money, shall be to the extent that such consideration the amount of the money; and the open market value of that consideration.

20 Consideration in relation to the supply of goods or services to any person, Section 1(1) includes any payment made or to be made whether in money or otherwise, (including any deposit on any returnable container and tax), or any act or forbearance, in respect of, in response to, or for the inducement of, whether or not voluntary, the supply of any goods or services, whether by that person or by any other person, The recipient but does not include any payment made by any person as a donation to any association not for gain:

21 Consideration Section 1(1) (other than a deposit on a returnable container), Provided that a deposit, whether refundable or not, given in respect of a supply of goods or services shall not be considered as payment made for the supply unless and until the supplier applies the deposit as consideration for the supply or such deposit is forfeited

22 But did the sponsors receive consideration? Does it matter that there is no loss to SARS? (Output of one is input for the other no loss to the fiscus).

23 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS accepting, as one may, that the transactions were at arms length, the value of the goods and services provided by the appellant to the sponsors in each case falls to be taken as the same as that of the counter performance by the relevant sponsor. The Commissioner was able to assess the sum of the appellant s liability for output tax on the basis of the information contained in the respective sponsorship contracts. Thus, for example, in the case of the transaction with South African Airways the value was determined as the monetary equivalent of the value of the transportation benefits provided to the taxpayer by the sponsor expressed in the contract in socalled travel rands. travel rands were air travel vouchers redeemable as payment for any SAA flight.

24 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS In an ordinary arms length barter transaction the value that the parties to it have attributed to the goods or supplies that are exchanged seems to me, in the absence of any contrary indication, to be a reliable indicator of their market value. It is thus plain that the value of the goods and services provided to the taxpayer by the sponsors was equally determinable from the sponsorship contracts. (For reasons which are unexplained, and which do not appear to bear scrutiny, the Commissioner did not include the cash payment components of the sponsorships in the calculation of the value of the services provided to the sponsors by the appellant.)

25 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS The sponsors were required in terms of section 7(1)(a) of the VAT Act to levy value added tax on the supply by them of the goods and services concerned to the appellant. In terms of section 20(1) of the Act the sponsors were obliged within 21 days of the supply of the goods or services concerned to issue the appellant with a tax invoice in respect of the supply. The tax invoice was required to set out, amongst other things, either - (i) the value of the supply, the amount of tax charged and the consideration for the supply; or (ii) where the amount of tax charged is calculated by applying the tax fraction to the consideration, the consideration for the supply and either the amount of the tax charged, or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged.

26 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS South Atlantic Jazz Festival (Pty) Ltd would, subject to the applicable provisions of the Act, be entitled to deduct the tax thus levied on it by the sponsors from its liability to the South African Revenue Service in respect of output tax. It is common ground that, notwithstanding requests by the appellant that they should do so, the sponsors had not provided the appellant with tax invoices and no documents of the nature described in section 16(2)(b) of the VAT Act had been issued.

27 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS It is also common ground that the Commissioner was aware of the sponsors failure to comply with their obligation to issue tax invoices, but, that notwithstanding his responsibility in terms of section 4(1) of the VAT Act to carry out the provisions of the Act, he had taken no steps to procure compliance by the sponsors with their obligation, or to have them prosecuted for their failure to do so. The tax court held that in those circumstances the appellant could not make deductions in respect of the input tax.

28 Documentary proof Section 16(2) No deduction of input tax in respect of a supply of goods or services, the importation of any goods into the RSA any other deduction shall be made in terms of this Act, unless (a) a tax invoice or debit note or credit note in relation to that supply has been provided in accordance with section 20 or 21 and is held by the vendor making that deduction at the time that any return in respect of that supply is furnished

29 Documentary proof Section 16(2) No deduction of input tax in respect of a supply of goods or services, the importation of any goods into the RSA any other deduction shall be made in terms of this Act, unless (b) (i) a document as is acceptable to the Commissioner has been issued in terms of section 20(6); or (ii) a document issued by the supplier in compliance with section 20(7) or 21(5); a tax invoice is in terms of section 20(6) or (7) not required to be issued, or a debit note or credit note is in terms of section 21 not required to be issued;

30 The deduction Section 16(3) Subject to the provisions of subsection (2) of this section and the provisions of sections 15 and 17, the amount of tax payable in respect of a tax period shall be calculated by deducting from the sum of the amounts of output tax of the vendor which are attributable to that period the following amounts, namely (a) in the case of a vendor who is in terms of section 15 required to account for tax payable on an invoice basis, the amounts of input tax in respect of supplies of goods and services made to the vendor during that tax period

31 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS The tax court judgment further held that the sponsors had in point of fact not charged VAT on the value of the goods and services supplied and that the appellant had not paid VAT to the sponsors in respect of the supply of such goods and services. It does not seem to me, however, that the observation by the learned judge a quo in this regard affected the material finding of the court that the appeal should fail because of the appellant s inability to satisfy the requirements of s 16(2)(a) or (b) of the VAT Act. It is in any event not apparent from the judgment on what basis the factual finding was made. It may have been predicated on the provisions of the SABC and SAA sponsorship contracts which expressly excluded VAT in certain respects.

32 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS In my judgment the approach overlooks that what required to be determined in respect of the appellant s claim to be entitled to a deduction for input tax was the open market value of the supplies given by the sponsors in consideration for the services provided by South Atlantic Jazz Festival (Pty) Ltd. In the context of what is accepted by the parties to have been akin to a barter transaction, the value of the goods and services supplied by the sponsors fell for tax purposes to be determined in terms of section 10 of the VAT Act.

33 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS Notwithstanding any contractual arrangements that were in place, the sponsors did not account separately for the tax on the consideration given by the appellant. The tax levied by them is thus deemed to have been an amount equal to the tax fraction of the open market value of the goods and services supplied. By virtue of its counterprestation in terms of the barter transaction, the appellant must be taken to have paid the tax and it should have been issued with the relevant tax invoices by the sponsors.

34 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS In the circumstances the only question that the court below was called upon to decide was whether, in the context of the failure, despite demand, by the sponsors to have issued tax invoices, the provisions of either s 20(7)(b) or 16(2)(f) of the VAT Act should have been applied to allow the appellant the deductions in respect of input tax. The Commissioner must be able to be satisfied as to two things before he may direct that a tax invoice is not required to be issued: (i) the existence or availability of sufficient documentary records and (ii) (ii) the impracticability of requiring a full tax invoice to be issued.

35 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS It was argued on behalf of the appellant that the sponsorship contracts afforded sufficient records of the supplies concerned. In the context of there being no contention that the stipulated goods and services had not been supplied and no dispute that the contract documents record their open market value, I am willing for present purposes to accept that argument. I am unable, however, to find that it would be impractical to require that a full tax invoice be issued. No basis for any such finding is apparent on the record. The fact that the sponsors have failed to issue the invoices does not make it impractical to require that they be issued. On the contrary it was the Commissioner s responsibility in the circumstances to compel their issue. The evidence provides no basis for us to find that the Commissioner could reasonably have been satisfied as to the requirement of impracticability.

36 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS Mention has already been made of the fact that it was not in issue that what the parties were content to characterise as barter transactions were implemented, and that it may thus be inferred that the goods and services stipulated to be provided by the sponsors under the sponsorship contracts (which were in writing) were indeed provided. As also mentioned, it is evident that the Commissioner predicated his calculation of the output tax on the information provided in the contracts.

37 Judge Binns-Ward South Atlantic Jazz Festival (Pty) Ltd v CSARS South Atlantic Jazz Festival (Pty) Ltd s contention is that the contracts also serve as proof of its entitlement to a deduction for input tax. In my judgment the contention is well-made. If the documents were good enough for the Commissioner to assess the appellant s output tax liability, it is impossible to conceive, having regard to the character of the particular transactions, why they should not also have been sufficient for the purpose of computing the input tax which should have been deemed to have been levied by the sponsors.

38 South Atlantic Jazz Festival (Pty) Ltd v CSARS Judge Binns-Ward Section16(2)(f) is expressly intended to provide a general supplemental basis for the allowance in cases in addition to those specifically identified in paragraphs (a) to (e). The phrase in any other case means in any case other than those in (a) to (e). The phrase in any other case means in any case other than those in (a) to (e). According to its tenor the paragraph applies in respect of any deduction comprehended in the introductory part of the subsection that includes a deduction of input tax in respect of a supply of goods or services.

39 South Atlantic Jazz Festival (Pty) Ltd v CSARS Judge Binns-Ward With regard to SARS s argument that although the documentation [i.e. the sponsorship contracts] refers to amounts, there is no evidence on record that the amounts referred to can in any way be equated to the value of the services rendered or the consideration paid therefor. the documentation did not comply with the requirements of section 20(4) of the VAT Act. I agree with the submission by Mr Sholto-Douglas SC for the taxpayer that it is not open to the Commissioner, in circumstances when the point was not clearly taken earlier, to contend for the first time at this stage that the appellant should have adduced evidence on the value of the consideration given for the goods and services provided by the sponsors.

40 South Atlantic Jazz Festival (Pty) Ltd v CSARS Judge Binns-Ward Moreover, not only was the point not taken, as described, but the Commissioner has proceeded for his own purposes using the information in the documentation as sufficient for computing the output tax. I agree with the submission by Mr Sholto-Douglas SC for the taxpayer that it is not open to the Commissioner, in circumstances when the point was not clearly taken earlier, to contend for the first time at this stage that the appellant should have adduced evidence on the value of the consideration given for the goods and services provided by the sponsors.

41 South Atlantic Jazz Festival (Pty) Ltd v CSARS Judge Binns-Ward Section 20(4) of the VAT Act prescribes the particularity that must be set out in a tax invoice. Much of it has nothing whatsoever to do with the entitlement to an input tax deduction, for example, the requirement that the words tax invoice must appear in a prominent place on the document, that it must bear a serialized number and date of issue, and that it must bear the name, address and VAT registration number of the supplier. If the requirements of section 20(4) had to be satisfied, there would be no need or scope for section 16(2)(f). SARS s reliance on non-compliance with section 20(4) is wholly without merit.

42 Barter transactions normal tax Gross income In this instance it would be in respect of services rendered and therefore specifically included in gross income. With regard to amount Judge Cloete in the Brummeria case said if a right has a money value as the right in question did, for the reasons I have given the fact that it cannot be alienated does not negate such value.

43 Barter transactions normal tax Expenditure In a barter transaction the question is whether or there was expenditure. Judge Harms in the Labat case said expenditure, accordingly, requires a diminution (even if only temporary) or at the very least movement of assets of the person who expends. This does not mean that the taxpayer will, at the end of the day, be poorer because the value of the counterperformance may be the same or even more than the value expended.

44 Debit loans an interesting court decision

45 Tax case dispute SARS based the raising of the disputed assessments on the contention that the appellant s advancement of the loans to its connected persons constituted interest-free loans and are therefore deemed dividends which are subject to STC in terms of the Act and that the appellant s failure to pay the STC triggered the payment of interest in terms of section 64B(9) of the Act. The appellant s objection to the disputed assessment, relevant for present purposes, is principally based on the exemption provided for in section 64C(4)(bA) of the Act, for the contention that the loans did not constitute deemed dividends and that interest did not become payable.

46 Tax case Section 64C(4)(bA) The provisions of subsection (2) shall not apply to the extent of any consideration received by that company in exchange for the cash or asset distributed, transferred or otherwise disposed of; or any other benefit granted as contemplated in subsection (2);

47 Tax case Section 64C(4)(bA) 2004: It is... not the intention that transfers of cash or assets in terms of an arm s length transaction be included in this provisions and an exclusion is specifically provided for amounts which constitute cash or assets which are transferred by the company in terms of a disposal or acquisition of an asset for arm s length consideration. 2005: This amendment clarifies the principle that where insufficient consideration is paid for an asset transferred or other benefit granted by a company to any of its shareholders, the amount deemed to be a dividend will be limited, for STC purposes, to the portion of the value of the cash, asset or other benefit transferred for no consideration.

48 Mr X... the patriarch Y Trust... the lenders... X Family Trust The taxpayer Of those entities...12 were borrowers of funds...entities, which all have some connection to the X family... was used as a treasury company in the X Group....a tacit term... The loans were made interest-free to the appellant by the lenders (the incoming loans) and channelled to the borrowers by way of interest-free loans to them (the outgoing loans). The appellant, put differently, merely acted as a conduit in the loan transactions.

49 Judge van Oosten Tax case the provisions of the relevant sections of the Act, against the background of the principle involved in levying STC on dividends, in my view sufficiently provides for a proper interpretation thereof the intention of STC was to subject the profits distributed by companies to their shareholders to the liability for payment of tax. This case is simply about the application of the exemption relied on by the appellant. The main thrust of the appellant s argument is that the appellant, in granting the outgoing loans, did not distribute any of its profits to its shareholders or connected persons. It merely acted as a conduit.

50 Judge van Oosten Tax case This, the argument continued, was not the kind of situation in which the deeming provisions were intended to apply. As much is clear from the provisions of the exemption provision relied on. In my view the argument is unassailable... CSARS v Airworld CC and another:...the "mischief" which the legislator sought to prevent by enacting section 64C was the avoidance by companies of liability for STC, by disguising what was in truth a dividend distribution as some other form of transaction.

51 Judge van Oosten Tax case In the present case dividends do not arise. Nor do deemed dividends arise. The argument (SARS) proceeded from the premise that the exemption in ss (4)(d), on the application of the maxim expressio unius est exclusion alterius, provided for the kind of loan to be exempted. It is trite that for purposes of interpretation it does not always follow that the mention of one matter implies the exclusion of others. The maxim must in any event at all times be applied with great caution I find it impossible in this case, having regard to the wording and purpose of the subsection, to apply the maxim. Had it been the intention of the legislature that only loans of the kind referred to in ss (4)(d) would qualify for exemption, one would have expected clear words to that effect of which there are none...

52 Judge van Oosten Tax case This brings me to the main argument advanced by counsel for the Commissioner. It is this: no consideration within the meaning of the exemption relied on was received by the appellant in return for the interestfree loans advanced to the borrowers. I am unable to agree. I am unable to agree.

53 Judge van Oosten Tax case I am unable to agree. The consideration, or quid pro quo, as correctly pointed out by counsel for the appellant, lies in the nature of the loan agreements: in essence the appellant was granted equivalent benefits in the form of the interest-free incoming loans as consideration in exchange for the amounts it loaned by way of interest-free outgoing loans. The outgoing loans matched the benefits the appellant received by way of incoming loans. It accordingly clearly constituted a quid pro quo which the appellant received in return for making the outgoing loans. Counsel for the Commissioner made much of the words to the extent of any consideration received as militating against the appellant s contention. The relevance thereof escapes me. The incoming and outgoing loans, by their nature, as I have alluded to, clearly qualify for the exemption.

54 Judge van Oosten Tax case One last aspect. The only witness to testify in the appeal was Ms Z. She is the daughter of Mr X and the financial director of the appellant since Only one aspect of her evidence, which perhaps may cause unease, needs to be addressed. Ms Z readily conceded that the use of the appellant merely as a conduit for the purpose of effecting the incoming and outgoing loans was, as she chose to describe it, bizarre. Let me immediately lay all fears to rest: nothing sinister in the arrangement was either relied on by the Commissioner or suggested in argument before us. As counsel for the appellant correctly remarked, tax payers are entitled to arrange their affairs in the manner they wish as long as the confines of the law are respected. For all the above reasons the appeal must succeed.

55 Debit loans the dividends tax

56 A loan or advance - Section 64E(4)(a) Event: Where, during any year of assessment, any amount is owing to a company in respect of a loan or advance provided by the company to a person that is or a person that is not a company a resident a connected person in relation to that company not a company a resident a connected person in relation to (a person )

57 A loan or advance - Section 64E(4)(a) Event: Where, during any year of assessment, any amount is owing to a company in respect of a loan or advance provided by the company to a person that is a connected person in relation to that company or to a person that is a connected person in relation to the connected person in relation to that company

58 A loan or advance - Section 64E(4)(a) Then: that company must be deemed to have paid a dividend if that loan or advance is provided by the company by virtue of any share held in that company by a person contemplated above The amount of the dividend that is deemed to have been paid is deemed to consist of a distribution of an asset in specie

59 The amount of the dividend section 64E(4)(b) The amount of the dividend that is deemed to have been paid the market-related interest in respect of that loan or advance, must be deemed to be equal to the greater of less or nil. the amount of interest that is payable to that company in respect of that loan or advance for that year of assessment

60 The date of the dividend - Section 64E(4)(c) Where a company is deemed to have paid a dividend on the last day of the that dividend must be deemed to have been paid year of assessment during which the loan or advance is provided by the company

61 market-related interest - Section 64E(4)(d) The market-related interest is defined for purposes of section 64E(4) and in relation to any loan or advance provided by a company to mean: the amount of interest as defined in paragraph (1) of the Seventh Schedule that would be payable to that company on the amount owing to that company in respect of that loan or advance for a period during a year of assessment if the loan or advance had been provided for that period at the official rate of interest

62 from the 2009 Explanatory Memorandum: Individual #1 RSA Co #2 Trust #1 15% 60% 25% RSA Co #1 RSA Co #1 provides Individual #1with a loan of R1 million at an average rate of interest of 4%per annum. The loan is provided on 1 May Assume that the official rate of interest for the relevant period will be 6,5%.

63 Applying the law: Was any amount owing to a company? Y N Was this in respect of a loan or advance provided by the company? Was this in respect of a loan or advance provided to a person that is a connected person in relation to that company? Conclusion: RSA Company #1? Y N Y N Section 64E(4) does not apply. RSA Co #1 has no obligation in respect of the dividends tax in this instance.

64 Applying the law: How would the conclusion above change if Individual #1 is a beneficiary of Trust #1 Was the amount owing to the company in respect of a loan or advance provided to a person that is a connected person in relation to the connected person in relation to that company? Y N Section 64E(4)(e) This subsection does not apply to the extent that the amount owing to a company in respect of a debt contemplated in paragraph (a) was deemed to be a dividend that was subject to the secondary tax on companies.

65 How is the dividend calculated? Amount of the dividend the market-related interest in respect of that loan or advance R1 6,5% p.a. R65,000 the amount of interest that is payable to that company in respect of that loan R1 p.a. R40,000 Period: 1 May 2012 to the end of the year of assessment of RSA Co #1 Amount of the dividend R25,000 The dividend tax is calculated at the rate of 15% of the amount.

66 Thank you for your attention Questions