Interest, leases and limitation of deductions

Question 1

What are the VAT and income Tax implications of a rental agreement in comparison to a credit installment agreement type b?

Answer 1

Section 23C of the ITA?

• rental agreement
• the lessor is going to charge VAT on the full value of the asset to the lessee
• the lessor is also able to claim capital allowances on the asset (excluding input vat if he previously claimed that
• the lessee must claim the input VAT every time he makes a payment
• time of supply = earlier of payment and due date for payment
• credit installment agreement type b
• The seller will charge VAT on the full value of the asset to the buyer
• The seller will Pay output VAT to SARS only to the extent that it has been paid? idk
• The seller will also be able to claim the capital allowances still as in the tax eyes, the seller still owns the asset.
• The buyer will claim the full VAT as input at once on the purchase price
• the buyer will then be able to claim the lease payments as a deduction (less the VAT portion because VAT was already claimed)
• finance charges are not going to be carrying any VAT because are they are an exempt service
• time of supply is the earlier of date of delivery or first payment

Question 2

What are the tax rules with pre-paid expenditure?

Answer 2

Section 23H of the ITA
- if the benefit is received within 6 months AND the amount is LESS THAN 100000, then you can deduct all of it in the current year of assessment, otherwise it needs to be apportioned

Question 3

When can we deduct interest costs from our Taxable income?

Answer 3

section 24J of the ITA
- you must be dealing with an instrument as defined in terms of the section which is
* any interest bearing arrangement or debt
* excluding lease agreements
* etc
- interest is deductible if incurred in the production of trade income
- and is incurred during the course of trade
- you also do not require to have paid the interest before you can deduct it

Question 4

How does section 24O function?

Answer 4

Look at the special corporate rules deck

Question 5

What are the income tax implications of learnership agreements with your employees?

Answer 5

section 12H of the ITA
- THERE IS A DEDUCTION for the person (natural or legal entity) that is offering this to their employee
- there are two types of allowances but you cannot deduct both for the same employee in the same year of assessment?
* an annual allowance
> deductible in every year of assessment which the learner to party to the agreement
> if you have a diability and the allowance is for a NQF 1-6, allowance is 60000
> without a disability and studying towards NQF 1-6, allowance is 40000
> if you have a diability and the allowance is for a NQF 7-10, allowance is 50000
> without a disability and studying towards NQF 7-10, allowance is 20000
> it is also apportioned for YOAs less than 12 months
* a completion allowance
> these are deuctible in the YOA in which the learner completes the learnship successfully
> also apportionment (paper 2023 Nov CTA)
> if the learnership was greater or equal to 24 months, YOU CAN MULTIPLY THE ALLOWANCE FOR EVERY CONSECTIVE 12 MONTHS AND
~ you have a diability and the allowance is for a NQF 1-6, the allowance is 60000 FOR EVERY 12 MONTHS
~ without a disability and studying towards NQF 1-6, allowance is 40000 FOR EVERY 12 MONTHS
~ you have a diability and the allowance is for a NQF 7-10, allowance is 50000 FOR EVERY 12 MONTHS
~ without a disability and studying towards NQF 7-10, allowance is 20000 FOR EVERY 12 MONTHS
> if the learnership is less than 24 months then the same rules as above apply but since there is only 1 consective 12 month period, the allowance is only multiplied by ONE

para idk of the 7th sch of ITA
- this is considered a fringe benefit, the value of the fringe benefit is whatever they give you to help fund your learnership fees

Question 6

What happens when you dispose/ purchase an asset at the end of a lease?

Answer 6

According to Section 8(5) of the income Tax Act
~ (a)
- applies in the following coniditons
* the leased asset is purchased at the end of the lease period AND
* the purchase price was reduced by some or all of the lease payments AND
* the rent or other consideration was claimed as a tax deduction
- the effect of this section i that the you must recoup whatever lease payments were used to reduce the price
- the recoupment doesn’t apply if the acquisition gives rise to a taxable fringe benefit (double taxation reasons)
- the recoupment increases the base cost of the asset to where it would have been

~ (b)
- this is relevant when an asset is acquired by a lessee at a price below the fair market value or for no consideration, BUT NOT BEING LET AT A NOMINAL RATE
- the difference is deemed to be a reduction in the price like in section 8(5)(a) and therefore
- the recoupment amount is the difference between the FMV and the consideration recevied
- the recoupment is limited to what was actually claimed as a deduction, if no deductions were claimed then there is no recoupment

~ (bA)
- this section only applies when
* to movable goods or plant and machinery
* the lessor abandons the leased asset to the lease or the lease is renewed for a nominal rate (a nominal rate is <10% per annum of the DEEMED FMV
- when this happens the lessee is deemed to have acquired the asset for no consideration
- recoupment = deemed fair market value but it is limited to however many lease rental deductions were claimed
- the deemed fair market value = the cost of the asset to the lessor less a wear and tear allowance of 20% on reducing balance method
- if the lessor doesnt dispose of the asset by sale or compel the leasee to return the asset within 3 months, he is deemed to have abandoned the asset to the lessee
- the lessor has to advise the lessee within 14 days after the above 3 months of the FMV and furnish the commissioner with a copy of that advice

Question 7

if you acquire an asset at the end of a lease agreement can you claim capital allowances?

Answer 7

• IF you acquired it for no consideration
• you cant claim any allowances as the cost is zero
• if you acquired it for consideration
• You will only be able to claim s11(e) allowances if it is being used for the purposes of trade
• s12C is not allowed becasue it is not being bought into use for the first time????? huh?
• If you are leasing it again at normal rates or nominal rates or whatever
• you cant claim allowanes but you can deduct the monthly rates

Question 8

What are the tax implications for the lessor and lessee, in the following termination of lease events?

Answer 8

/ purchase price reduced by some or all of the lease payments
~ implications for lessor
* proceeds = capital receipt
* apply normal recoupment and/or CGT rules
~ implications for the lessee
* Section 8(5)(a) recoupment of lease payments applied to reduce the purchase price
* Claim Section 11(e) or other relevant allowances i.r.o asset acquired (cost = consideration paid)

/ asset acquired for less than FMV or no consideration
~ implications for the lessor
* proceeds = capital receipt
* apply normal recoupment and/or CGT rules
~ implications for the lessee
* Section 8(5)(b) recoupment of FMV less consideration paid (limited to the sum of deductions claimed from lease rentals)
* Claim Section 11(e) or other relevant allowances i.r.o asset acquired i.r.o asset acquired (cost = consideration paid)

/ lease renewed at nominal rental or for no consideration
~ implications for the lessor
* rentals = gross income
* continue to claim capital allowances
~ implications for the lessee
* Section 8(5)(bA) recoupment = DEEMED FMV (limited to lower of lease payments that have been claimed as a deduction or the deemed fair market value )
* the deemed fair market value = the cost of the asset to the lessor less a wear and tear allowance of 20% on reducing balance method
* rental paid = s11(a) deduction

/ lease renewed at fair rental
~ implications for the lessor
* rental = gross income
* continue to claim capital allowances
~ implications for the lessee
* rental = s11(a) deduction
* no capital allowances

/ asset returned to lessor
~ implications for the lessor
* there are no tax implications
~implications for the lessee
* there are no tax implications

/ asset abandoned by lessor (no transfer of ownership)
~ implications for the lessor
* no longer used for trade and therefore no capital allowances
* abandonment = disposal for CGT purposes, deemed to be disposed of at MV
~ implications for the lessee
* lessee is not the owner in a legal sense, therefore no capital allowances are granted
* the base cost is deemed to be the Market Value

/ The time of the recoupment is always when the lease terminates

Question 9

What are the VAT implications of leasehold improvements?

Answer 9

~ effective from 1 April 2018

~ implications for the lessee
* Section 8(29) deemed supply to the extent that improvements are made for no consideration
* value of supply s10(28)
* time of supply - when improvements are completed s9(12)

~ implications for the lessor
* Section 18C: adjustment for output VAT (effective 1 April 2018) if the following requirements are met
> Section 8(29) applies
> input tax would have been denied OR improvements are not used wholly to make taxable supplies
* value of supply - tax fraction x (amount in agreement OR if no amount stipulated, the OMV) x % applied for non-taxable supplies
* time of supply - completion of improvements s9(12)

Question 10

What are the CGT implications of leasehold improvements?

Answer 10

~ time of disposal
> Implications for the lessor
* Disposal occurs when the lessor disposes of the property, not then the lease ends
>Implications for the lessee
* The disposal is deferred until the time that the lease ends, I don’t know how the asset is his though..

~ compulsory improvements as part of the agreement
>Implications for the lessor
* Improvements that were included in his gross income get added to the base cost of the asset (para 20(1)(h)(ii)(cc), less all the allowances granted under section 11(h) deductions ??? (Which is bad debts)
>Implications for the lessee
* Obligatory improvements get deductions under section 11(g)

~ voluntary improvements affected
> Implications for the lessor
* No expenditure added to base cost because nothing was spent??
>Implications for the lessee
* Expenditure incurred is added to the base cost of the lease asset for him

~ compensation paid by the lessor
> Implications for the lessor
* Forms part of the base costs of improvements
> Implications for the lessee
* Compensation is included in your proceeds?? (Para 35(1)(b)

Question 11

What should be considered when deciding whether to lease an asset or to buy one?

Answer 11

• deductible lease rentals vs captial allowances and interest deductions
• VAT implications
• possible recoupments on the end of the lease
• finance lease is treated differently in accounting than in Tax
• after tax Cash flows
• time value of money