Professional Level Options Module Advanced Taxation (South Africa) Thursday 8 December 2016 Time allowed: 3 hours 15 minutes This question 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 question paper 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
SUPPLEMENTARY INSTRUCTIONS 1. You should assume that the tax rates and allowances for the tax year 2016 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 29 February 2016/31 March 2016 Rebates Primary rebate R13,257 Secondary rebate (over 65) R7,407 Tertiary rebate (over 75) R2,466 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 26/41sts of the dividend is exempt For companies 13/28ths of the dividend is exempt Medical aid contribution tax rebate rates Single member Member plus one dependant Each subsequent dependant Additional medical expenses tax rebate R270 R540 R181 Persons 65 or older or persons younger than 65 if an immediate family member has 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) 41% Dividends tax 15% Companies Normal tax rate 28% Donations tax 20% Estate duty 20% Official rate of interest (assumed) 8% 2
Rates of normal tax payable by persons (other than companies) for the year of assessment ended 29 February 2016 Where taxable income: does not exceed R181,900 18% of each R1 of the taxable income exceeds R181,900 but does not exceed R284,100 R32,742 plus 26% of the amount over R181,900 exceeds R284,100 but does not exceed R393,200 R59,314 plus 31% of the amount over R284,100 exceeds R393,200 but does not exceed R550,100 R93,135 plus 36% of the amount over R393,200 exceeds R550,100 but does not exceed R701,300 R149,619 plus 39% of the amount over R550,100 exceeds R701,300 R208,587 plus 41% of the amount over R701,300 Tax rates for small business corporations for the year of assessment ended 31 March 2016 Where taxable income: does not exceed R73,650 Nil exceeds R73,650 but does not exceed R365,000 7% of the amount over R73,650 exceeds R365,000 but does not exceed R550,000 R20,395 plus 21% of the amount over R365,000 exceeds R550,000 R59,245 plus 28% of the amount over R550,000 Turnover tax rates for micro businesses for the year of assessment ended 29 February 2016 Where taxable turnover: does not exceed R335,000 Nil exceeds R335,000 but does not exceed R500,000 1% of the amount over R335,000 exceeds R500,000 but does not exceed R750,000 R1,650 plus 2% of the amount over R500,000 exceeds R750,000 but does not exceed R1,000,000 R6,650 plus 3% 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) R353 per day (local travel) Deemed expenditure for incidental costs only (per Government regulation) R109 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.
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
Travel allowance table for years of assessment commencing on or after 1 March 2015 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 26,105 78 7 29 3 80,001 160,000 46,505 87 9 36 7 160,001 240,000 66,976 95 5 40 4 240,001 320,000 84,945 102 7 44 1 320,001 400,000 102,974 109 9 51 8 400,001 480,000 121,886 126 1 60 8 480,001 560,000 140,797 130 4 75 6 Exceeds 560,000 140,797 130 4 75 6 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 18 per kilometre. Tax rates of normal tax retirement lump sum benefits in respect of the year of assessment ended 29 February 2016 Where taxable portion of lump sum: does not exceed R500,000 Nil exceeds R500,000 but does not exceed R700,000 18% of the amount 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 29 February 2016 Where taxable portion of lump sum: does not exceed R25,000 Nil exceeds R25,000 but does not exceed R660,000 18% of the amount 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.
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Section A BOTH questions are compulsory and MUST be attempted 1 You have received a memorandum from your manager with respect to discussions with a current client. The memorandum concerns a number of transactions. Extracts from the memorandum Original group structure The shares of Hold (Pty) Ltd (HPL) are held 100% by Sam Quick. HPL in turn owns 100% of the shares in Operations (Pty) Ltd (OPL). Both HPL and OPL are incorporated and currently tax resident in South Africa. Group transactions OPL needed larger premises to expand its operations. Sam found the ideal location but the owner only wanted to sell the shares in the company holding the building and not the building itself. The necessary due diligence was completed and the entire equity shareholding of Build (Pty) Ltd (BPL) was purchased by HPL on 1 April 2015. At the time of the acquisition BPL had an assessed loss brought forward of R400,000. The rental of the building has been BPL s only trade. The building has not previously, nor will in the future, qualify for any capital allowances. Following its acquisition by HPL, OPL agreed to pay BPL an annual rental of R300,000 and a lease premium for a one-year lease of R100,000 for the use of the building. A market-related rental for a similar building would have been R250,000, with no premium. On 31 March 2016, the group entered into an amalgamation transaction in which the building held by BPL would be transferred to OPL in exchange for equity shares in OPL. The shares in OPL held by BPL would then be transferred to HPL, and BPL would be liquidated. The building is BPL s only substantive asset. Only cash sufficient to settle costs with respect to the transaction or any outstanding trade debts will be retained. Sam Quick potential emigration Sam is considering emigrating to Notaxembourg, a small island state with a sunny climate and lovely beaches. If he emigrates, as chairman of the board of HPL, he will conduct all board meetings from his estate on Notaxembourg. Additional notes 1. All three companies are registered value added tax (VAT) vendors. 2. All amounts are exclusive of VAT, where applicable. 3. All three companies have years of assessment ending 31 March. Required: Draft a memorandum to your manager in which you address the following issues: (i) The risk of any anti-avoidance rules being applied with respect to the lease transaction. Note: You are not required to consider transfer pricing issues. (14 marks) (ii) Whether or not the amalgamation transaction will qualify for the relief offered by the amalgamation corporate rule. (7 marks) (iii) Assuming the amalgamation transaction does qualify for relief under the amalgamation corporate rule: (1) the income tax relief offered; and (5 marks) (2) any limitations to be considered with respect to the rule s application. (4 marks) (iv) Whether or not Sam Quick s emigration from South Africa to Notaxembourg will have any effect on the corporate residence of Hold (Pty) Ltd. (1 mark) Professional marks will be awarded in Question 1 for the format and presentation of the memorandum and for the effectiveness of communication. (4 marks) (35 marks) 7 [P.T.O.
2 You have been sent two unrelated queries from your manager as follows: (a) Query 1 Conrad Conrad has been running a successful management consulting business since his immigration to South Africa on 7 July 2002. He started the business himself and has traded as a sole trader and value added tax (VAT) vendor. The value of the business rests in the client list and relationships built. Conrad has decided to sell his business to a friend and former colleague, who runs another management consulting business. This business is also a registered VAT vendor. Conrad and his friend are in the final stages of negotiations and Conrad expects the sale to be completed for R4,900,000 on 12 December 2016. The client list (including the client files with details of the work previously performed) is the only asset of Conrad s business to be sold as this is the only asset required as a going concern. The client files will only be transferred where the client has agreed to be transferred to the new business. Apart from the proposed sale of his business, Conrad sold a property he owned in the country of Flottenburg on 30 November 2015. The property had been acquired on 1 August 1990 for FLB 90,000, and the property had been valued at FLB 130,000 when Conrad immigrated to South Africa in 2002. The property was sold to a friend of Conrad s, who is resident in the country of Tazakstan, for TZK 180,000. Flottenburg levied tax of FLB 12,000 on the capital gain realised on the sale of the property. There is no tax treaty between South Africa and Flottenburg. Required: (i) Advise Conrad as to the value added tax (VAT) implications of the sale of his business. (5 marks) (ii) Advise Conrad as to the income tax consequences for the 2016 year of assessment of the disposal of his property in Flottenburg. Support your answer with calculations of the tax payable for this isolated transaction if Conrad s other taxable income for the year exceeds R750,000. Note: The following exchange rates are to be used where relevant: FLB 1 = TZK 1 = TZK 1 = 1 August 1990 ZAR 7 ZAR 10 FLB 0 70 7 July 2002 ZAR 9 ZAR 12 FLB 0 75 30 November 2015 ZAR 13 ZAR 18 FLB 0 72 (7 marks) (b) Query 2 Jeremy Jeremy inherited 100% of the shares in Coccia (Pty) Ltd (CPL) on 1 May 2013, when they were valued at R8,000,000. CPL held assets (mainly properties) placed there by Jeremy s grandfather before his death. These properties represent 85% of the current value of the assets in the company. Jeremy is considering emigrating to the country of Taxhavia. No taxes are levied in Taxhavia and there is no tax treaty between South Africa and Taxhavia. The following estimated values of Jeremy s CPL shares are available: R Value applicable to a sale made pre-emigration 12,000,000 Value applicable at date of emigration 13,000,000 Value applicable to a sale made post-emigration 14,000,000 Jeremy will have other taxable income (while resident) such that if he disposes of his CPL shares before he emigrates, tax will be payable at the maximum marginal rate. After he emigrates, Jeremy will have no other South African taxable income. 8
Required: (i) (ii) Advise Jeremy whether or not he should sell his shares in Coccia (Pty) Ltd to a foreign trust before or after he emigrates. Support your advice with calculations prepared on the basis that Jeremy will have no other capital gains or capital losses in the relevant year of assessment and has no assessed capital losses brought forward. (7 marks) Explain the tax implications for Jeremy if before he emigrates, the foreign trust were to subscribe for shares in Coccia (Pty) Ltd and the company then used the same proceeds to repurchase Jeremy s shares and the directors did not utilise any contributed tax capital for the repurchase. (6 marks) (25 marks) 9 [P.T.O.
Section B TWO questions ONLY to be attempted 3 Denise and her husband, Cadoc, are both tax residents of South Africa and under the age of 65. Denise and Cadoc each run separate sole trader businesses. Both are (separately) registered as value added tax (VAT) vendors for their respective businesses. Denise began an online boutique clothing store, Dee s Boutique, from her home in 2001. The business began slowly, but has since grown substantially. The majority of the sales are in South Africa, but some are to neighbouring countries. Based on online orders, the goods are packed and couriered direct to the customer. Due to the expansion of her business, Denise is considering employing two further employees. She already employs her husband, Cadoc, a trained accountant, as her financial manager. 1. A personal assistant for herself. The employment package will be a salary of R16,000 per month plus a 50% employer contribution to a medical aid scheme. The total medical aid contribution (employer and employee combined) is R300 per month. The personal assistant will be under 65 years of age. 2. A child minder. The employment package will be a salary of R8,000 per month with an additional R1,000 monthly travel allowance. The child minder s duties will involve looking after Denise s two children, including driving them to and from school and other events and activities. Denise s business has averaged a taxable income of R12 million for the last three years. For the 2016 year of assessment, a taxable income of R14 million is anticipated before taking into account the two additional appointments. Required: (a) (b) (c) Explain the value added tax (VAT) implications of the sales made by Dee s Boutique to customers both within South Africa and in neighbouring countries. (3 marks) Explain the deductibility of the cost of the prospective employee packages for Denise s business and her obligation to deduct employees tax. Support your answer with calculations of the employees tax to be withheld for each package for the 2016 year of assessment, if the employments commenced on 1 March 2015. (9 marks) Advise Denise on the availability of any preferential tax regimes for her business and the steps, if any, which she might take in order to qualify for such regime(s). (8 marks) (20 marks) 10
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4 Complete Consulting Solutions (Pty) Ltd (CCS) is a company tax resident in South Africa. CCS is registered for value added tax (VAT) in South Africa and has a financial year end of 31 March each year. CCS was formed by four engineers in 2014 in response to the proposal for Botswana to draw water from the Lesotho Highlands Water Project (Highlands Project). Botswana is also considering a project to tap water from the Zambezi river into a dam to be constructed near Francistown (Zambezi Project). After an extensive tender process in the 2015 year of assessment, CCS was awarded two contracts from the Botswana Government as follows: Contract 1 To provide technical services to the Botswana Government with respect to the infrastructure required for the area designated to receive the water and where the dam is to be built. The contract consideration of BWP 5,000,000, accrued in full on 1 April 2015 and an advance payment of BWP 4,000,000 was immediately made. The remaining BWP 1,000,000 was unpaid as at 31 March 2016. The services under this contract are mainly rendered in Botswana during periodic visits. Contract 2 To provide technical services with respect to evaluating the two options for the Highlands Project and the Zambezi Project in order to prioritise the most efficient and affordable option. The contract consideration is BWP 8,000,000. Only half the contract had been fulfilled and accrued by 31 March 2016. The BWP 4,000,000 for the services already rendered accrued on 1 April 2015 but was not paid until 31 March 2016. The services under this contract are mainly rendered from CCS s company offices in Bloemfontein. However, as they are for the Botswana Government, they are considered to be rendered to non-residents. A ruling has been obtained from the Botswana Unified Revenue Service (BURS) that no permanent establishment is created in terms of these contracts. Botswana levies a withholdings tax of 15% on payments made for consultancy services. The Botswana South Africa tax treaty limits the withholding rate on technical service fees to 10%. Government officials from Botswana, Lesotho (Highlands Project) and Zambia (Zambezi Project) were invited by CCS for a round of technical discussions in terms of the contracts. CCS paid for the hotel accommodation and entertained the officials each night of their one-week stay. CCS paid the hotels a total of R126,000 (including VAT) and the restaurants a total of R27,000 (including VAT). Jason Jason is one of the shareholders in CCS and a company employee engineer. After his first visit to Botswana for Contract 1, Jason decided to purchase a property in Botswana. As his capital was partly illiquid, he borrowed R2,000,000 from CCS interest free to purchase his house in Botswana. None of the amount borrowed was repaid before the end of the 2016 year of assessment. Jason spent 190 days in Botswana during the 2016 year of assessment, two months of which was on holiday. The holiday followed immediately after a two-week stay in terms of Contract 1. None of the individual visits in terms of Contract 1 last for more than four weeks at a time. For each visit, CCS grants a daily subsistence allowance of R1,000 to each of its employees, including Jason. In the 2016 year of assessment, Jason incurred expenses in entertaining various officials in Botswana amounting to BWP 15,000 (including Botswana VAT at the rate of 12%), which was all paid from his subsistence allowance. As he stays in his own house when in Botswana, CCS did not incur any hotel costs for Jason. 12
Required: (a) (b) (c) Explain the South African value added tax (VAT) implications for Complete Consulting Solutions (Pty) Ltd (CCS) arising from the information in the above scenario. (5 marks) Explain the South African income tax implications for Jason, if any, of each of the transactions involving him. Support your explanations with relevant calculations. (5 marks) Explain the income tax implications for CCS for the 2016 year of assessment arising from the information in the above scenario. Note: The following exchange rates are to be used where relevant: BWP 1 = 1 April 2015 ZAR 1 31 31 March 2016 ZAR 1 40 (10 marks) (20 marks) 13 [P.T.O.
5 Richard, who is 39 years of age, has a wife, married out-of-community of property, and two minor children, all of whom are currently resident in South Africa. Richard is contemplating creating a company structure to hold a number of his assets, including some of his personal assets, as follows: 1. The family home acquired in December 2008 for R3,600,000 and whose current market value is R6,500,000. 2. Two motor vehicles acquired in July 2010 for a combined value of R1,000,000 and which have a current combined market value of R700,000. 3. Investments in collective investment schemes in securities. The base cost of these investments is R800,000 and their current market value is R1,200,000. 4. A flat in Rondebosch, which is rented to students at the local university. The base cost of this flat is R2,500,000 and its current market value is R3,200,000. Prior to their transfer to the company, half of each asset will first be donated to Richard s wife. The proposed structure Richard and his wife will enter into an asset-for-share transaction with a newly created resident company (Alpha Co). Alpha Co will issue equity shares in exchange for the assets. Alpha Co will continue to rent the flat in Rondebosch. The family house and the motor vehicles will continue to be used by the family when they are in South Africa. Alpha Co will sell the motor vehicles once their combined value drops below R500,000. Required: (a) Explain the tax implications of Richard s donation of half the assets to his wife. (4 marks) (b) Explain the tax implications for Richard of the proposed asset-for-share transaction with Alpha Co. (16 marks) (20 marks) End of Question Paper 14