General Principles Flashcards
General things when dealing with assets
- Cost on acquisition is a capital cost
- Are there capital allowances?
- VAT applicable?
- conversion cost is capital
Revenue or Capital losses
- Losses of revenue in nature from carrying on a trade are ring fenced
- Made losses in 3 years and made losses in 3 years subject to s20A
Inclusion in taxable income
- No taxable benefit in respect of insurance policy that relates to an event arising in the course of employment of the employee
(Company paid for insurance premiums on his life) - Gross income definition include at earlier of receipt or accrual
Miscellaneous things to include
- Identify TP
- Identify transactions
- Scope and Implication
- s23C cost allowed as a deduction should exclude VAT input claimed
- Legality of an action does not make it ethical
- s24M
- Cannot apply if not acquiring an asset
- Issue is whatever amount actually incurred?
- Consider contingency
- To deduct expenditure- unconditional legal obligation
- s11(o) N/A if UL> 10 years
- Capital gains deferred until they can be quantified - s23(q) deemed interest on loan used to earn dividends not deducted
- Improvement increases the income earning capacity
6 s23e excludes provisions for anything= 0
- Traveling expenses are capital in nature
- Dealing with employee and employer. Provide definitions first
- Bad debts recovered recoupment taxable income s8(4)(a)
- Mention if there is an exclusion of certain paragraphs
- Received ( as a result of termination) consider if a severance benefit
- s7B variable consideration only applicable when paid - Start with the definition of something then conclude
- Every Company is a provisional taxpayer
- Discount is reduction of purchase consideration
- 40% or allowances can be increased by up to 85% especially due to COVID
- In terms of Income Tax: No VAT consequences arise on xx so VAT does not have to be taken into account for Income Tax purposes (s23C of the Income Tax Act).
If they say TAX consequences
-Include all implications including VAT
- VAT
- Income Tax
- Transfer Duty (Payable buyer on fixed property as defined)
Deductions
- Always start with specific deductions if not met then go to general deductions
- What is the issue?
- For an amount to be deductable you need to determine whether there is a specific deduction in the Income Tax Act and if not use the general deduction formula (s 11(a)) in order to prevent double deductions (s 23B).
- Consider all facts in scenario
- Conclude
- Consider s11(a) read with 23B
- Onus of proof in terms of s102 of TAA
- Consider source of income of making payments
- Consider deduction s11(a) and 23(f)
- Consider s11(a) and 23(g) that prohibit the deduction of amounts not expended for the purpose of trade
- Salaried employees claim s23(m)
- Non-salaried (general deduction, special deduction, prohibited)
- Non-deductible legal expenses form part of BC for CGT
- May include in terms of par 20 QE
Mention that when you receive a deduction s23C exclude VAT
Interest and Dividends
- Earning of local dividends and local interest do not constitute the carrying on of a trade as it is regarded to be passive income and local dividends are exempt in terms of s 10(1)(k) and the first R23 800 local interest is also exempt in terms of s 10(i)(i)
Debt waiver
- Always consider if gratuitously done if not then not a donation
- Creditor reduced debt in full. Consideration for reduction is less than amount by which debt was reduced. There is a reduction amount s19(1)/par 12A
- ‘NOT RECOVERABLE’ as this was not gratuitously done, debt was not reduced by way of donation
- Reduction amount deemed to be an amount that has been recouped included in gross income s84a
- Par 12A applies where a reduction was used to fund a capital expenditure incurred iro any asset. It requires BC expenditure to be reduced
- Future allowances will be on reduced BC
- Mention if debt benefit is in the same year as proceeds
- Subtract debt benefit from BC if asset is sold
- The waiver of the debt by Brenda constitutes a concession or compromise which gives rise to a debt benefit to Chambers Gates in terms of section 19 and par 12A of the Eighth Schedule.
- None of the exclusion of s19(8) or par 12A(6) apply, as such, Co will apply the requirements of s19 and par 12A.
- Section 19(8) and par 12A(6) exclude however a debt benefit that arise as a result of a debt between companies of the same group of companies and when the company that received the benefit is dormant
- The asset will therefore not be depreciated going forward as it has a nil tax value (s19(7)).
- The proposal to waive the outstanding capital debt result in a concession or compromise and will result in a debt benefit as defined
- Section 19(8) and par 12A(6) exclude however a debt benefit that arise as a result of a donation
- The loan was used to fund…
- Section 19(5)
-No debt benefit as the MV of the shares issued = face value of the debt.
-Section 19 and para 12A can not apply to this transaction.
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Convert loan to shares
- capital is not debt benefit, interest is a concession or compromise and it is a debt benefit
Debtor:
- Interest bearing debt was converted into share capital this is read into concession or compromise
- Debt benefit arises on FV of debt (FV debt) > MV of converted shares (mv of shares)
- Recoupment limited to interest portion
- No recoupment on capital amount (not a debt benefit)
Creditor:
- Input VAT on TS purchased
- Interest is exempt financial services
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If asset is sold:
- Calculate recoupment
- Calculate CGT
-Recalculate reduction in base cost and recoupment as if debt waived before asset was sold
- BC = TV so TV less TV = 0
- Recoupment = Previous allowance (calculated recoupment)
- No additional recoupment as previous allowances fully recouped at sale
- Calculate new gain BC=0
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Debt benefit > MV of shares = recoupment which is limited to interest portion
- FV debt less FV T/S* x% *x/365
CTC increases debt value
Sub waives loan owed by parent, the cost price and reduction is in terms of liquidation so no capital gain
Deductibility of leasehold improvement owned by government
- s11(a) not applicable as capital in nature
- Consider s11(g)
- Consider s12N
- It will not apply if subleased to company which is not part of same group of companies
Exam technique
- Is amount subject to tax? Start with gross income definition
- Covid relief ( 29 Feb 20 - 28 Feb 21) 183 reduced to 117 days
- Want to pay least tax consider going concern
If started with PBT
- Revenue 0
- COS 0
- Assets ( calculate allowances, revoupments, CGT)
- Include bad debts
- s11j PY +, CY-
- Loan to employee of written off (add back)
- Loan above is capital loss -
- Fines and penalties (add back)
- Add back any vat
- Depreciation added back
- No write off of W+T = ACC depreciation
- Finance cost no adjustment
Provision for future deduction
S23(e) prohibition
Income inclusion
- Consider if considered in gross income
2. Consider s10 exemption or s23
Termination of lease and continue to use s8(5)(b)
- There is a recoupment limited to rentals
- Wear and Tear
