Professional Level Options Module, Paper P6 (ZAF)

Transcription

1 Answers

2 Professional Level Options Module, Paper P6 (ZAF) Advanced Taxation (South Africa) December 2016 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 Memorandum To: Tax Manager From: ACCA Candidate Subject: Queries with respect to the Hold (Pty) Ltd group and shareholder Sam Quick Date: 8 December 2016 I have addressed the issues within the context of the facts as per your memorandum of 6 December For ease of reference, the key considerations in each scenario are presented under headings. (i) Anti-avoidance rules with respect to the lease transaction Utilisation of the balance of assessed loss brought forward As a result of the change in the shareholding of Build (Pty) Ltd (BPL) from the previous owner to Hold (Pty) Ltd (HPL), income in the form of rental income and a lease premium accrued to BPL during the 2016 year of assessment. Since BPL had a balance of assessed loss of R400,000, the rental income of R300,000 plus the lease premium income of R100,000 would be set off against the assessed loss, resulting in a tax liability of R0. In this way, BPL has avoided a tax liability in the 2016 year of assessment. Furthermore, the tax liability of Operations (Pty) Ltd (OPL) would be reduced due to the greater than market-related deductions they would be able to claim in respect of the rental and lease premium payments made during the 2016 year of assessment. There is, therefore, a risk that if the Commissioner for the South African Revenue Service is satisfied that the change in shareholding was effected solely or mainly for the purpose of utilising the assessed loss in order to avoid or reduce a tax liability, the set off of the balance of assessed loss against the income would be disallowed. Since it appears clear that the change in shareholding resulted in the avoidance of a tax liability for BPL and the reduction of a tax liability for OPL, it should be noted that, if the Commissioner were to disallow the set off, in any objection and appeal proceedings against this decision it will be presumed, until the contrary is proved, that the change in shareholding was effected solely or mainly for the purpose of using the assessed loss. The onus is on the taxpayer involved in such a dispute to prove that the sole or main purpose was not to utilise the balance of assessed loss, but was rather due to commercial reasons, i.e. the premises owned by BPL had been identified as the ideal location for expanding the operations of OPL, but the owner of BPL was only willing to sell the shares in the company and not the building itself. Application of the general anti-avoidance rules (GAAR) In considering whether GAAR applies to this transaction, it should first be considered whether a tax benefit is derived from an arrangement. An arrangement means any transaction, operation, scheme, agreement or understanding (whether enforceable or not), including all steps or parts thereof. This definition is very wide and therefore, it is clear that in this scenario, there is indeed an arrangement. A tax benefit includes any avoidance, postponement or reduction of any liability for tax. By entering into a lease agreement with BPL, a fellow wholly owned subsidiary of HPL, OPL claimed deductions in respect of payments greater than the market-related rental and lease premium made to BPL. The deductions claimed were, therefore, greater than would have been the case had the lease agreement been entered into between OPL and a third party. Therefore, the greater than market-related rental and lease premium payments resulted in a tax benefit for OPL in the form of a reduction in any income tax liability for the 2016 year of assessment. It is also noted that the greater than market-related rental and lease premium income which BPL received would be shielded by the balance of assessed loss in that entity. Second, it should be considered whether the sole or main purpose of the arrangement was to obtain a tax benefit. In this regard it should be noted that since the arrangement did result in a tax benefit, there is a presumption that the sole or main purpose was to obtain such a tax benefit. OPL would need to show that, reasonably considered, tax avoidance was not the sole or main purpose of the arrangement. Although it is apparent from the facts provided that the lease agreement was entered into for a commercial purpose (i.e. larger premises required for the expanding operations), it nevertheless appears that the sole or main purpose for making the rental and lease premium payments in excess of the market-related rates was to obtain a tax benefit as described above. Therefore, it is necessary to consider the other GAAR requirements: Was the arrangement entered into or carried out by means or in a manner which would not normally be employed for bona fide business purposes, other than obtaining a tax benefit? Entering into a lease agreement which required greater than the market-related rental and lease premium payments is clearly abnormal in a business context. Therefore, this requirement is satisfied. Based on the above, the arrangement is an impermissible avoidance arrangement as defined. For completeness, it is also noted that the lease agreement created an obligation for OPL to pay greater than the market-related lease rentals 17

3 and premium, and such an obligation would not normally be created between persons dealing at arm s length. It is further noted that the presence of an accommodating or tax indifferent party is an indicator of a lack of commercial substance and in the scenario BPL is such a party, since it derives an amount (rental and lease premium income) in connection with the avoidance arrangement which is entirely offset by its assessed loss. The Commissioner s powers to bring about the prevention or diminution of the relevant tax benefit are couched in very wide terms. The Commissioner may treat the impermissible avoidance arrangement in such manner as he deems appropriate, which could, for example, entail disallowing as a deduction the portions of the rental and lease premium expenses which are in excess of the market-related amounts. The exact application by the Commissioner cannot be known, but there is sufficient risk of the application of GAAR. (ii) Requirements to qualify for the application of the amalgamation corporate rule An amalgamation transaction involves the disposal by a resident company, namely the amalgamated company, of all its assets to another resident company, namely the resultant company. BPL (the amalgamating company) is disposing of the building, its only substantive asset, to OPL (the resultant company). The rollover relief applies only to the extent that the assets are disposed of in exchange for equity shares. The building is transferred to OPL in exchange for shares, so this requirement is met. The amalgamated company, BPL, must then transfer the equity shares in the resultant company, OPL, to its shareholder, HPL. Again, this requirement is met. Within 36 months after the date of the amalgamation transaction, the amalgamated company (BPL) must take the necessary steps to liquidate, wind up or deregister. If this does not occur, the transaction will not qualify for the relief offered by the amalgamation corporate rule. The building was evidently held by BPL as a capital asset and therefore OPL must acquire the building as a capital asset. Since the building is to be used to house OPL s expanding business operations, in the absence of any information to the contrary, it would appear that OPL acquired the building as a capital asset and therefore, this requirement is met. Therefore, the amalgamation transaction will qualify for the relief offered by the amalgamation corporate rule. (iii) (1) Amalgamation corporate rule income tax relief available BPL is deemed to have disposed of the building at its base cost and BPL and OPL are deemed to be one and the same person with respect to the date of acquisition of the building, all the expenses allowable in respect of the base cost of the building and the valuation of the asset for capital gains tax purposes. When BPL disposes of its equity shares in OPL to HPL, that disposal is disregarded for the purposes of determining the taxable income of BPL. HPL is deemed to have disposed of its BPL shares for their base cost and is deemed to have acquired the OPL shares for the same amount. Furthermore, HPL is deemed to have acquired the shares in OPL on the same date that it incurred the expenditure in respect of the shares in BPL (i.e. 1 April 2015). Since both OPL and BPL are registered value added tax (VAT) vendors, the transfer of the building will be deemed to be a non-supply for VAT purposes. (2) Limitations to be considered with respect to the application of the amalgamation corporate rule If OPL disposes of the building within 18 months of acquiring it under the amalgamation transaction, a portion of the capital gain may not be set off against any capital losses arising in that year of assessment or brought forward from previous years; or alternatively if the disposal results in a capital loss, a portion of the capital loss must be disregarded. The portion is calculated as the market value of the asset as at the date of the amalgamation transaction less the deemed cost in terms of the amalgamation transaction. As mentioned previously, the amalgamation corporate rule will not apply if within 36 months after the date of the amalgamation transaction, BPL has not taken the necessary steps to liquidate or deregister. The amalgamation corporate rule will not apply if the three companies (HPL, OPL and BPL) agree in writing that it will not apply. (iv) Residence of HPL A company incorporated in the Republic is regarded as a South African tax resident regardless of where it is, or becomes, effectively managed. Therefore, Sam s emigration will have no effect on the corporate residence of HPL. 18

4 2 (a) Query 1 Conrad (i) Sale of business as a going concern Due to the fact that: the purchaser of the business is a registered value added tax (VAT) vendor, and the income earning activity, being the client list and client files from which a management consulting business would primarily derive its income, will be supplied, the disposal of Conrad s consulting business may qualify as a supply of a going concern and, therefore, be a zero rated supply for VAT purposes. In order to ensure that the sale qualifies as a zero rated supply, Conrad is advised to ensure that he and the purchaser have agreed in writing that: the enterprise is disposed of as a going concern; the enterprise will be an income-earning activity on the date of transfer; the assets necessary for carrying on the business have been disposed of as part of the sale (i.e. the client list and files); and the consideration is inclusive of tax at 0%. The fact that not all of the assets are transferred to the new business should not pose a threat to the application of zero rating, since it can still be applied where the assets necessary for trade as a going concern are transferred. (ii) Income tax consequences of disposal of the overseas property On becoming a South African tax resident (ordinarily resident) on 7 July 2002, Conrad was deemed to have disposed of and re-acquired his Flottenburg property for a base cost equal to its market value. The sale of the property will give rise to capital gains tax for Conrad. Since the property was purchased and sold in different foreign currencies, the capital gains tax implications of the sale (assuming Conrad had no other capital gains during the 2016 year of assessment) are as follows: R Proceeds (TZK 180,000 x 18) 3,240,000 Base cost (FLB 130,000 x 9) (1,170,000) Capital gain 2,070,000 Annual exclusion (30,000) Net capital gain 2,040,000 Therefore, the taxable capital gain which will be included in Conrad s taxable income for the 2016 year of assessment will be R679,320 (R2,040,000 x 33 3%). As Conrad is taxed at the maximum marginal tax rate, the tax payable in respect of the taxable capital gain will be approximately R278,521 (R679,320 x 41%). Conrad will be entitled to a rebate in respect of the foreign tax paid of R156,000 (FLB 12,000 x 13) as this is less than the South African tax payable on the foreign income (gain). (b) Query 2 Jeremy (i) Sale of shares to a foreign trust Tax payable if shares sold prior to emigration The sale of the shares prior to emigration will yield a capital gain of R4,000,000 (R12,000,000 R8,000,000). Assuming no other capital gains or capital losses and no assessed capital loss brought forward, the annual exclusion of R30,000 will be applied and 33 3% of the result included in taxable income. The tax on the capital gain will, therefore, be: R542,024 [(R4,000,000 R30,000) x 33. 3% x 41%] (i.e. an effective rate of 13 55% before rebates). Tax payable if shares sold post emigration On emigration, the shares will be deemed to have been disposed of at their market value on the day before Jeremy ceases to be a resident (with the year of assessment ending on that date). As a result, a capital gain will be determined as follows: R678,554 [(R13,000,000 R8,000,000 R30,000) x 33 3% x 41%] (i.e. an effective rate of 13 57% before rebates). In addition, as the value of the shares is derived from assets of which more than 80% are in South Africa, the shares will remain liable to capital gains tax in South Africa. So, on their subsequent disposal the R1,000,000 additional gain (being the then market value less the stepped up base cost) would be subject to capital gains tax (in the absence of any tax treaty relief). This will result in an inclusion in taxable income of R323,010 [(R1,000,000 R30,000) x 33 3%] on which tax will be levied according to the progressive table of R71,376 [(R323,010 R284,100) x 31% + R59,314] (i.e. an effective rate of 7 14% before rebates for comparative purposes). 19

5 (ii) Conclusion Although the actual tax payable is lower in the case of a pre-emigration sale (R542,024 compared to R749,930 (R678,554 + R71,376) before rebates), the difference of R207,906 is more than offset by the increase in value (and thus sales proceeds) of R2,000,000. Thus, if Jeremy has confidence in the expected increase in value of the shares and no immediate need to sell, he should wait to sell until after he emigrates. Subscription for new shares and subsequent repurchase Issue of new shares The issue of shares is not a disposal for the company for capital gains tax purposes. It does, however, result in an increase in the company s contributed tax capital. Share repurchase tax implications for the company As there has been no election to reduce contributed tax capital, the repurchase consideration will constitute a dividend as defined, declared by the company. Although Jeremy would be liable for the dividends tax, Coccia (Pty) Ltd (CPL) is required to withhold the tax and pay it over to the South African Revenue Service (SARS), and submit the relevant dividends tax returns to SARS. As CPL would be an unlisted company, securities transfer tax is payable by the company at the rate of 0 25% on the market value of the shares immediately prior to their repurchase. There would be no other tax implications for the company (i.e. no income tax, donations tax, value added tax (VAT) or capital gains tax consequences). With regard to capital gains tax, there would be no tax implications because the payment of the cash consideration for the repurchase is not a disposal of an asset for capital gains tax purposes, and the cancellation of the repurchased shares (they revert from issued shares to authorised, unissued share capital) is also not a disposal for capital gains tax purposes. Share repurchase tax implications for Jeremy Jeremy will receive a dividend as defined for income tax purposes. He will, therefore, have to include the dividend amount in his gross income, but it will be exempt from normal income tax. The repurchase of the CPL shares will constitute a disposal by Jeremy for capital gains tax purposes. His proceeds will be the amount received by or accrued to him in respect of the disposal, reduced by such amount as was included in his gross income (that is to say, the dividend). On the basis that the repurchase will be concluded for a consideration which will reflect an arm s length price, the proceeds would be R0. Jeremy s base cost of the shares would of course be greater than R0, therefore the share repurchase will result in a capital loss. This capital loss may be clogged (and thus only available for set off against capital gains in respect of future disposals to CPL), since the parties are connected persons immediately before the disposal. As the repurchase consideration will constitute a dividend as defined (paid in cash), Jeremy will be liable for dividends tax at the rate of 15% on the entire amount received. There would be no other tax implications for Jeremy (i.e. no donations tax or VAT consequences, etc). 3 Denise (a) (b) Value added tax (VAT) on sales within South Africa and to neighbouring countries Output tax at the rate of 14% must be levied on the value of the supply of the goods (clothing) to customers within South Africa. The sales to neighbouring countries will meet the definition of exported since it appears that the goods will be delivered by Dee s Boutique (via courier) to the customer at an address in the export country. Therefore, these sales will be zero rated. Denise will need to ensure that the business has relevant documentary proof that the goods were indeed delivered to the customer in the export country. Deductibility of employee salaries and employees tax position The personal assistant s salary will be deductible since the expense will be actually incurred in the production of income for the purposes of Denise s trade as an online boutique clothing store business. The salary is not of a capital nature as it relates to the income earning operations of the business. The child minder s salary will not be deductible since it is incurred for the maintenance of Denise s family and is in any event a domestic or private expense. Therefore, a deduction in respect of the child minder s salary is specifically prohibited. Denise as employer will become liable to pay remuneration to the personal assistant and the child minder, and as such she is required to withhold employees tax from the remuneration using the deduction tables for employees tax as prescribed by the Commissioner for the South African Revenue Service [as provided in paragraph 9 of the Fourth Schedule]. The fact that the cost of the child minder is a domestic expense is irrelevant for this purpose. 20

6 Personal assistant R Salary package (R16,000 x 12) 192,000 Employer contribution to medical aid cash equivalent (R150 x 12) 1,800 Taxable income 193,800 Tax per tables (R32,742 + (R193,800 R181,900) x 26%) 35,836 Less: Primary rebate (13,257) Less: Medical contributions rebate (R270 x 12) (3,240) Less: Additional medical expenses tax credit 0 [((R300 x 12) (R3,240 x 4) + 0) = negative] Total employees tax withheld during the year 19,339 Child minder R Salary package (R8,000 x 12) 96,000 Travel allowance (R1,000 x 12 x 80%) 9,600 Taxable income 105,600 Tax per tables (R105,600 x 18%) 19,008 Less: Primary rebate (13,257) Total employees tax withheld during the year 5,751 (c) Availability of preferential tax regimes Since Dee s Boutique s turnover is in excess of R1 million, Denise s business cannot qualify as a micro business, so she may not register for turnover tax. As Denise is running her online business as a sole proprietor, her business is currently ineligible for the preferential tax regime for small business corporations. However, Denise could qualify for this regime if she were to take the following steps: Incorporate her business as a company (or close corporation). Ensure that the shareholders of the company are natural persons (presumably this would be the case as Denise, and perhaps her husband, would likely be the only shareholders). Ensure that at any time during the year of assessment the shareholders in the company do not hold any shares in any other company, other than a listed company or participatory interests in a collective investment scheme (this should pose no risk since Cadoc currently runs his business as a sole proprietor). Ensure that not more than 20% of the gross income and all the capital gains from the company consists collectively of investment income and income from rendering a personal service (from the description of the business, this should not pose a risk). Ensure that her gross income for the year of assessment in which she wishes to register does not exceed R20 million (Denise s taxable income for the 2016 year of assessment is anticipated to be R14 million, but an estimate of her gross income will need to be determined). Once Denise s company qualifies for the small business corporation tax regime, it will be entitled to apply the preferential tax rates and claim accelerated capital allowances. 4 Complete Consulting Solutions (Pty) Ltd (CCS) (a) Value added tax (VAT) implications for CCS Contract 1: Since the technical services are rendered mainly outside South Africa, the supply of these services will be zero rated. Contract 2: Since the technical services are supplied to a non-resident (the Government of Botswana) who is outside South Africa at the time the services are rendered, the supply of these services will also be zero rated. Accommodation and restaurant expenses for clients: Input VAT is denied in respect of goods or services acquired by a vendor for the purposes of entertainment. As a result, VAT inputs may not be claimed in respect of the accommodation and restaurant expenses incurred for the purpose of entertaining the clients. Interest free loan to Jason: The supply of a loan is not a supply of goods as defined and therefore, there are no VAT implications. 21

7 Subsistence allowance paid to Jason: No input VAT is claimable as the costs are incurred outside South Africa in respect of transactions with non-south African VAT vendors. Tutorial note: Generally, when an employee who is out of town on business incurs costs on accommodation and meals, and provided that the appropriate tax invoice is obtained, input VAT will be claimable on the actual expenses. Where an employee is out of town and entertains clients, the cost will be regarded as a mixed supply, and, as such, must be apportioned between the employee s subsistence element and the entertainment element. (b) (c) Income tax implications for Jason Purchase of the property in Botswana: There are no income tax consequences arising on the purchase, however, Jason should record the expenditure for base cost purposes. Interest free loan: As Jason is employed by CCS and assuming the interest free loan is granted as a result of the employee employer relationship between Jason and CCS (and not due to Jason being a shareholder), the difference between the official rate of interest (i.e. 8%) and the rate paid by Jason (i.e. 0%) is a taxable fringe benefit. The cash equivalent of the taxable fringe benefit is R160,000 (R2,000,000 x 8%) and this amount will be included in Jason s gross income (and subject to employees tax) in the 2016 year of assessment. Tutorial note: The provision of the loan would also be a deemed dividend, but no dividends tax would be payable if the deemed dividend has been taxed as a fringe benefit as described above. Subsistence allowance: Ordinarily, the subsistence allowance (less any amount actually expended by Jason, such as the entertainment costs in respect of the various officials) would be included in taxable income. However, Jason spent in excess of 183 days outside South Africa during the 2016 year of assessment, including a continuous period exceeding 60 days (being the two-week contract period plus the two-month holiday period). During his time outside South Africa, he rendered services on behalf of his employer, CCS, therefore, his remuneration (including fringe benefits, allowances, etc) earned in respect of the services rendered outside South Africa will be tax exempt. Income tax implications for CCS Contract 1: As a South African tax resident company, CCS is taxed on its worldwide income. Since the gross income inclusion is based on the earlier of receipt or accrual, the full contract consideration of BWP 5,000,000 (translated at the spot rate of 1 31) will accrue to CCS on 1 April 2015 and R6,550,000 will be included in CCS s gross income in the 2016 year of assessment. CCS can claim an allowance in respect of the future expenditure on the contract, but further information would be required to determine the quantum of this allowance. At the year end, the debt owing to CCS will be translated for exchange gain or loss purposes, resulting in a taxable gain of R90,000 (BWP 1,000,000 x ( )). Contract 2: The accrued contract consideration of BWP 4,000,000 (translated at the spot rate of 1 31) will be included in gross income, so R5,240,000 will be included in the 2016 year of assessment. Again, CCS could potentially claim an allowance in respect of the future expenditure on the contract, but further information would be required to determine the quantum of this allowance. An exchange gain will arise on the settlement of the debt (i.e. when the amount accruing on 1 April 2015 is paid on 31 March 2016) of R360,000 (BWP 4,000,000 x ( )) and this is also taxable in the 2016 year of assessment. Withholding tax on technical services: Based on the Botswana South Africa tax treaty, the Botswana withholding tax levied on the contract payments is limited to the rate of 10%. In the case of Contract 1, CCS will be entitled to a rebate in respect of the withholding tax levied in Botswana. The rebate is limited to the South African tax on the foreign income, but as the withholding tax rate is less than the South African tax rate to be levied (without considering the allowance for future expenses), a full rebate is likely. In the case of Contract 2, as the work is undertaken in Bloemfontein, the income is from a South African source. Therefore, no rebate in terms of the South African unilateral relief is permitted, rather a deduction for the tax paid in Botswana will be permitted as an expense in calculating the taxable income. Accommodation and restaurant expenses for clients: These expenses should be allowed as a deduction since they were incurred in the production of CCS s contract income and are not of a capital nature. The VAT inputs denied on the accommodation and restaurant expenses would also be allowed as an income tax deduction, resulting in a deduction for the full amounts of R126,000 and R27,000. Interest free loan: There are no income tax consequences for CCS in respect of the loan granted by CCS to Jason. Subsistence allowance paid to employees: An income tax deduction may be claimed in respect of the R1,000 per day subsistence allowances. 22

8 5 Richard (a) (b) Donation of half of the assets to Richard s wife No donations tax will arise on the donation by Richard of half of the assets to his wife. This is due to the exemption for donations to spouses who are not separated from the donor. The donation of half of the assets to his wife will be a disposal for the purposes of capital gains tax. However, specific rollover relief applies to transfers between spouses and, therefore, no capital gains tax will arise in respect of these transfers. In terms of the rollover relief, Richard s wife is deemed to have acquired her half of the assets on the same date as Richard, for the same expenditure (base cost) as Richard, and is deemed to have used the assets in the same way that they were used by Richard. The transfer of a half share in each of the two immovable properties will attract transfer duty at a progressive rate (up to a maximum of 11%) on the value of the half shares transferred. Asset-for-share transaction Since Richard and his wife will each own 50% of the assets immediately prior to the transaction, they will effectively each enter into an asset-for-share transaction with the company. Richard s asset-for-share transaction will, for the most part, qualify for relief under the relevant corporate rule. This is due to the requirements being met as follows: Richard will dispose of his share of the assets to a South African tax resident company (Alpha Co). The assets are disposed of to Alpha Co in exchange for equity shares in the company. The market values of the assets are in excess of their base costs on the date of disposal, except for the motor vehicles. (Note: The asset-for-share corporate rule will not apply to the disposal of the motor vehicles see separately below.) Richard and his wife will presumably each hold a qualifying interest in the company at the close of the day on which the assets are disposed of. In the current instance, this should be a minimum of 10% of the equity shares and conferring at least 10% of the voting rights in the company. Since Richard and his wife are likely to be the only shareholders in Alpha Co and since they will each transfer a 50% share of all the assets, they would presumably each hold a 50% interest in the company at the close of the day in which the transaction occurs. The assets were held by Richard and his wife as capital assets, and it appears that Alpha Co will acquire the assets as capital assets. Richard and Alpha Co will presumably not exclude the application of the relevant corporate rule in writing. Richard is not exempt from tax. None of the assets to be disposed of by Richard constitute a debt owing by Alpha Co or a share in the company. As a result of the application of the relevant corporate rule, the effect for Richard would be as follows: Richard will be deemed to have disposed of his share of the family home, the investments and the flat in Rondebosch at their base cost for capital gains tax purposes. Therefore, he will not realise any capital gain or loss on this disposal. Richard s cost history for the assets will for future tax purposes be rolled over to the shares he acquires in Alpha Co. This cost history will entail the acquisition date, the acquisition cost and any qualifying valuation of the assets for capital gains tax purposes. Again, transfer duty will apply to the disposal of his half share in the two immovable properties to Alpha Co. Clawback provisions apply in the case of a disposal within 18 months. However, there is nothing to indicate that Richard will dispose of his interest in Alpha Co until at least 18 months has passed or that he will not retain his qualifying interest throughout that period. Therefore, the claw-back provisions are unlikely to be relevant. Regarding the transfer of the motor vehicles, as their market value is not in excess of their base cost, these disposals will not qualify for the relief provided by the asset-for-share corporate rule. As Richard and Alpha Co are connected persons (given as presumed earlier he and his wife will each hold 50% of the company s shares), the disposal of the vehicles will be deemed to be at market value. However, since it appears that the vehicles are private use assets, as opposed to business assets, the resulting capital loss of R300,000 (R700,000 R1,000,000) would be disregarded. 23

9 Professional Level Options Module, Paper P6 (ZAF) Advanced Taxation (South Africa) December 2016 Marking Scheme Available Maximum 1 (i) Use of assessed loss 1 Change in shareholding noted 1 Explanation of injection of income and effect 2 Effect of the application of this anti-avoidance rule 1 Conclusion 1 Onus discussion 1 GAAR 1 Identification of arrangement 1 Identification of tax benefit 1 Sole or main purpose test and presumption in favour of SARS 2 Manner or means requirement 1 Conclusion as to whether GAAR applies or not 1 Accommodating or indifferent party 1 Powers of the Commissioner for the application of GAAR (ii) Consideration of basis for an amalgamation transaction and application to scenario 2 Identify that rollover only applies where exchanged for equity shares 1 Explanation that shares received by amalgamating company (BPL) are transferred to shareholder (HPL) 1 Identify requirement for amalgamating company (BPL) to liquidate, wind up or deregister 1 Receiving company must receive asset on the same basis as amalgamated company and application to scenario (iii) (1) Asset sold at base cost and receiving company treated as one and the same as amalgamated company 2 Disposal of equity shares by amalgamated company disregarded 1 Shareholder of amalgamated company receives shares at base cost 2 Transfer of the building deemed a non-supply as both VAT vendors (2) 18-month rule, with explanation 2 No liquidation, winding up or deregistration within 36 months 1 Exclusion of rule if application in writing (iv) No change to residence, with reason 1 1 Professional marks Format and presentation of the memorandum 1 Effectiveness of communication

10 Available Maximum 2 (a) Query 1 Conrad (i) Zero rating possible due to both parties being vendors and all assets necessary for the going concern being included in the disposal 2 Qualification criteria for disposal of the going concern (4 x ½) 2 No restriction due to all necessary assets being sold (ii) Base cost stepped up on immigration 1 Sale of the property impacted by different currencies being used 1 Strict translation rules are to be applied 1 Calculation of net capital gain 2 Inclusion and SA tax liability 1 Rebate for foreign tax paid (b) Query 2 Jeremy (i) Capital gain and calculation on disposal pre-emigration 2 Capital gain and calculation on emigration 2 Shares remain liable post-emigration, with reason 1 Calculation on disposal post-emigration 1 5 Conclusion (ii) Subscription for new shares not a disposal 0 5 Share repurchase company considerations Dividends tax position 1 Securities transfer tax 1 No other tax implications 0 5 Capital gains tax position 1 Share repurchase considerations for Jeremy Dividend and no normal tax 0 5 Capital loss and clogged loss 2 Dividends tax on repurchase consideration 1 No other tax implications

11 Available Maximum 3 (a) Standard rate supplies for local destinations 1 Zero rated exported service plus requirements (b) Personal assistant salary deductible 1 Child minder salary not deductible 1 Both require withholding of employees tax 1 Irrelevant that child minder is a domestic expense 0 5 Calculation for personal assistant 3 5 Calculation for child minder (c) Identification of ineligibility for turnover tax 1 Identification of current ineligibility for small business tax 1 Identification of steps and application to scenario: Incorporate a company 1 Shareholders natural persons 1 Restriction on holding shares in other companies 1 5 Restriction on company s investment and personal service income 1 5 Limit on gross income in year of registration 1 5 Effect of application of small business regime (a) Contract 1: Technical services rendered outside SA zero rated 1 Contract 2: Also zero rated as rendered to a non-resident outside SA 1 Denied input VAT on entertainment 1 Interest free loan is not a supply no VAT 1 Subsistence allowance no VAT (b) No tax consequences on acquisition other than base cost 1 Interest free loan as employee and calculation of fringe benefit 2 Subsistence normal position 1 Meets requirements of exemption for service outside SA, applies to allowances as well as income (c) Principles of worldwide income and earlier of receipt and accrual 1 Contract 1 gross income inclusion and calculation 1 Exchange gain and calculation 1 Contract 2 gross income and calculation 1 Exchange gain and calculation 1 Withholding tax levied limited to treaty rate of 10% 1 Rebate available for Contract 1 1 Deduction of foreign taxes for Contract 2 2 Deduction of accommodation and restaurant expenses (inclusive of VAT) 1 5 No consequences for interest free loan 0 5 Subsistence allowances deductible

12 Available Maximum 5 (a) No donations tax for donations to non-separated spouses 1 Capital gains tax rollover relief and application 2 Transfer of share in immovable properties will be liable to transfer duty (b) Requirements for the asset-for-share transaction Disposal of assets to a resident company 1 Equity shares received in exchange for shares 1 Will only apply to assets in excess of base cost (i.e. not motor vehicles) 1 Qualifying interest in the company held after disposal (linked to half-share to wife and quantum of interest held) 2 Company must acquire assets on same basis as disposer 1 No exclusion of the rule in writing 1 Seller not exempt from tax 1 None of the assets are excluded assets for the purposes of the rule 1 Application of the rule Deemed disposal for Richard at base cost no capital gain or loss 1 5 Cost history rolled over to company 1 Transfer duty will apply to the immovable property transfers 1 Identification of the 18-month claw back rule 1 Disposal of motor vehicles No corporate rule application base cost less than market value 1 Disposal will be to a connected person (i.e the company) 1 Disposal deemed to be at market value, so capital loss 1 Personal use asset so loss disregarded (no mark for clogged loss)