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ACCN2013 _ TAXATION II > June Exam > Flashcards

June Exam Flashcards

1
Q

Which case law do you state when talking about the subjective test?

A
  • Pick ‘n Pay Employees Share Purchase Trust Case
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2
Q

What is the principle of the Pick ‘n Pay Employees Share Purchase Trust case:

A

Receipts and accruals will be revenue in nature if the receipts or accruals are generated by “an operation of a business in carrying out the scheme of profit-making” or if the taxpayer is involved in the scheme of ‘profit-making’.

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3
Q

What must be done if the taxpayer’s intention changes after the acquisition of the asset?

A

If the intention of the taxpayer does not change then the subjective test is sufficient as shown in the Stott case.

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4
Q

Stott Case

A

Principle: if the intention after the acquisition does not change then it will remain a capital in nature. A taxpayer is entitled to sell the capital asset at the best advantage and to accommodate the asset to the exigencies of the market in which it is sold. The fact that a taxpayer does so does not constitute a change in intention.

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5
Q

Does the decision alone for a taxpayer to sell an asset make it revenue in nature?

A

No, as stated in the John Bell case, the mere decision to dispose of the asset does not change the intention of the taxpayer.

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6
Q

Does the decision to dispose of a capital asset for profit constitute a change in intention?

A

No, as stated in the Richmond Estates Case, the mere decision by a taxpayer to sell a capital asset for profit does not change the intention nor the nature of the asset.

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7
Q

Define what is stated in the ‘Natal Estates’ case?

A

The nature, degree, and extent of the taxpayer’s activities must be evaluated to determine whether the taxpayer has ‘crossed the Rubicon” and has embarked on a scheme of profit-making indicating a change in intention from investment (capital in nature) to the scheme of profit-making (revenue in nature).

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8
Q

Does improvement to an asset constitute ‘in the scheme-of-profit-making”?

A

Yes, if improvements were made it suggests that the taxpayer wanted to receive larger remuneration and so the asset will be considered as revenue in nature.

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9
Q

What are the objective factors:

A
  • holding period
  • reason for realizing an asset
  • profession
  • frequency
  • finance
  • nature of asset and income
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10
Q

Layout of a question based on revenue and capital:

A
  • Capital is not defined in the Income Tax Act, thus relevant case laws and the TAA can be used to define it.
  • The onus of proof rests upon the taxpayer to prove that an amount is a capital in nature in terms of section 102 of the Tax Administrations Act.
  • Subjective Test:
    For the scheme of profit-making (pick ‘n pay employees share purchase trust case).
  1. Intention at acquisition
  2. The intention during or at the disposal of the asset (John Bell Case and the Richmond Estates Case - profit).
  • Objective Test:
    1. Profession
    2. Reason for sale
    3. Frequency
    4. Period
    5. Finance
    6. Nature of asset and income
  • Conclusion
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11
Q

Burgess v CIR

A

Principle:
- The definition of ‘trade’ should be given a wide interpretation.
- The definition is not usually exhaustive and the term ‘trade’ was used to include any profitable activities.

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12
Q

Characteristics of ‘carrying on trade’:

A
  • continuity of activities
  • a profit motive
  • it involves an active step
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13
Q

4 forms of passive income:

A
  • interest income
  • dividends
  • pension
  • annuities
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14
Q

Is passive income deductible?

A

Carrying on a trade does not include passive income.

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15
Q

CSARS v Scribante Construction Pty (Ltd) has to do with what?

A

It has to do with s 11 tax deductions due to ‘carrying on of a trade’
- the ‘carrying on of trade’ includes borrowing and re-lending of money at an increased interest rate (indicative of profit).

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16
Q

In terms of s 11(A), 3 requirements need to be met for pre-trade expenditures to be deductible in the year that trade commenced:

A
  1. Actually incurred by the taxpayer before commencement AND in preparation for the carrying on of a trade.
  2. Expenditures and losses would have qualified for the following deductions if a taxpayer had already commenced carrying on a trade:
    - s 11 excludes s 11(x)
    - s 11(D) research and development
    - s 24 (J) interest incurred
  3. The expenditures and losses WERE NOT previously claimed as deductions.
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17
Q

What to do when the expenditures and losses which qualified for the s 11(A) deduction exceed the amount earned from the proceeds from the income of the trade?

A
  • s 11 A(2): may not be set off against another trade’s income.
  • s 11(A)(1)(c): it must be carried forward to the next year of trade and be set off against the same trade income.
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18
Q

What are the two sections of the act that is included in GDF:

A
  • s 11(a)
    Positive test
    -s 23 (g)
    Negative test
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19
Q

What are the 6 elements of GDF:

A
  1. expenditure and losses
  2. actually incurred
  3. during the year of assessment
  4. in the production of income
  5. not of a capital nature
  6. tp the extent laid out for the purpose of trade s 23(g)
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20
Q

What are the 5 requirements of the positive test:

A

The positive test includes what may be deducted under s11(a):

  1. expenditure and losses
  2. actually incurred
  3. during the current year of assessment’
  4. in production of income
  5. NOT of capital nature
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21
Q

CSARS v Labat

A

Defines what an expenditure is:
- the action of spending funds, disbursement or consumption.
Includes non-cash assets with a monetary value.

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22
Q

Joffe & Co (Pty)Ltd v CIR:

A

meaning of ‘loss’:
- an involuntary deprivation suffered, whereas ‘expenditure’ is a voluntary payment of money.

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23
Q

Sub-Nigel Ltd v CIR:

A

Deductible expenditure can only be deducted in the year of assessment it was incurred.

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24
Q

S 23H:

A

In certain instances, permits a deduction of expenditure in the current financial year of assessment which was incurred the previous year.

It may LIMIT the deduction of the prepaid portion of such an expense.

It should also be considered when 2 requirements are met:
1. the expenditure incurred qualified for a deduction in terms of:
- s 11(a): general deductions eg. water and electricity OR
- s 11(c): legal fees OR
- s 11(d): Repairs OR
- s 11(w): Insurance premiums in respect of key-policies OR
- s 11 A: pre-trade expenditure and losses

  1. The expenditure relates to:
    - goods or services that will NOT all be supplied or rendered during the year of assessment
    - any benefits and the period to which the benefits relate extends beyond the year of assessment.
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25
Q

Does s 23H apply to expenditure incurred to purchase trading stock

A

No, therefore the full prepaid amount for trading stock can be deducted as there is no limitation.

26
Q

S 23H (Prepaid Expenditure):
Limits the deduction UNLESS any of the 4 are met:

A

Limits the deduction UNLESS any of the 4 are met:
1. expenditure is paid in terms of an unconditional liability imposed by legislation to pay an amount.
2. It was all enjoyed within 6 months after the year of assessment.
3. Total does not exceed R100 000.

27
Q

Telkom SA SOC Limited v thee Commissioner for the South African Revenue Services

A

Facts of the case:
- Telkom paid a cash incentive bonus to Velocity (Pty)Ltd for connecting it to subscribers.
- V made these connections on behalf of Telkom.
- The full cash incentive bonus of R178 788 421 was claimed by Telkom during the 2012 year of assessment.
- SARS was under the impression that no benefit was derived by Telkom until the connection turns into fee income and should therefore be spread over the 24 month period

27
Q

Telkom SA SOC Limited v the Commissioner for the South African Revenue Services

A

Facts of the case:
- Telkom paid a cash incentive bonus to Velocity (Pty)Ltd for connecting it to subscribers.
- V made these connections on behalf of Telkom.
- The full cash incentive bonus of R178 788 421 was claimed by Telkom during the 2012 year of assessment.
- SARS was under the impression that no benefit was derived by Telkom until the connection turns into fee income and should therefore be spread over the 24-month period when the subscription fees are paid.
- The court agreed with SARS. S 23H, therefore needed to be applied to the cash benefit.

Principle of case:
- When the expense resulted in 2 benefits for the taxpayer (1) conclusion of contract and (2) monthly subscription payment.

The taxpayer did not incur the incentive bonus solely to establish new connections but also to receive subscription fees. The taxpayer should therefore spread the deduction over the subscription period.

28
Q

When to mention the Telkom SA SOC Limited v SARS?

A

Trigger words:
- subscription fees
- only look at the subscription portion which is prepaid.

29
Q

What is the difference between a capital expenditure and a revenue expenditure:

A

Capital is a once-off payment whereas the revenue is recurring payments.

30
Q

S 23(a) prohibits:

A

Private maintenance expenditure

31
Q

S 23(b) prohibits:

A

Domestic/Private Expenditures

32
Q

S 23 (c) prohibits:

A

Recoverable Expenditure

33
Q

S 23(d) prohibits:

A

Interest, penalties and taxes

34
Q

Section 23(e):

A

Provisions and reserves

35
Q

Section 23(f) prohibits:

A

Expenditures incurred to produce exempt income

36
Q

Section 23(g) prohibits:

A

Non-trade expenditures

37
Q

S23(h) prohibits:

A

Notional interest

38
Q

S23(i) prohibits:

A

Deductions claimed against any retirement lump sum benefits and withdrawal benefits.

39
Q

S23(k) prohibits:

A

Expenditure incurred by labour brokers & personal service providers

40
Q

S23(l) prohibits:

A

Restraint of trade

41
Q

S 23(m) prohibits:

A
  • Expenditure relating to employment or an office held
42
Q

S 23(o) prohibits:

A

unlawful activities

43
Q

S 23(q) prohibits:

A

Expenditures incurred in the production of foreign dividends

44
Q

S 23(r) prohibits:

A

Premiums in respect of insurance policies against illness, injury,
disability, unemployment or death of a person

45
Q

S 23C:

A

States who is allowed to claim input VAT.

46
Q

Gross income:

A

Gross income is defined in s1(1) of the ITA as:
- the total amount in cash or otherwise
- accrued to, received by, or in favor of that resident
- during that year of assessment
- which is not capital in nature

47
Q

S6(2):

A

REBATES:
Primary: R16 425
Secondary: R 9000
Tertiary: R2 997

48
Q

Two tests to determine if someone is an ordinary resident in SA:

A
  1. Ordinarily residence test
    Cohen v CIR - A person is ordinarily a resident in the country to which they return after all their wanderings.
    Cir v Kuttel - A person is ordinarily a resident where he has his usual or principal residence, described as his real home. It is the place where he habitually and normally resides apart from temporary or occasional absences.
  2. Physical Presence Test (PPT)
    - physically present in SA for a period exceeding 91 days in the current year of assessment
    - Physically present for a period exceeding 91 days for the past 5 years
    - Physically present in SA for a period exceeding 915 days for the past 5 years preceding the current year of assessment.
49
Q

Date on which a person becomes an ordinarily resident in another country

A

eg if I became an ordinarily resident on 1 July 2022.
non-resident: 1 March 2022-30 June 2022
resident: 1 July 2022-28 February 2023

50
Q

330 day rule:

A

If someone is outside of South Africa for at least 330 full days they are deemed to be a non-resident.
Commences on the day after they leave.

51
Q

Exemptions relating to employment:

A

Foreign pensions s 10(1)(gC)
Unemployment insurance benefits: s 10(1)(mB)
Uniforms and uniform allowances: s 10(1)(nA)
Relocation benefits: s 10(1)(nB)
Employment outside of South Africa: s 10(1)(o)(ii)

52
Q

Employment outside of South Africa: s 10(1)(o)(ii)

A

The exemption only applies if:
▪ employee was outside SA for more than 183 full days in total during any period of 12
months, AND
▪ the period outside SA includes a continuous period of absence of more than 60 full
days during that 12-month period, AND
▪ services were rendered during the period of absence from South Africa, AND
▪ services rendered for or on behalf of an employer, who can be situated in or outside
South Africa.

53
Q

Annual limit for contributions to a tax free investment

A

R36 000

54
Q

Lifetime limit for contributions to a tax free investment

A

R 500 000

55
Q

Section 10(1)(i) exemption amount for a natural person taxpayer under 65 years of age on the last day of the year of assessment.

A

R 23 800

56
Q

Section 10(1)(i) exemption amount for a natural person taxpayer 65 years or older on the last day of the year of assessment.

A

R 34 500

57
Q

Additional normal tax payable amount for contributions to a tax free investment scheme that exceed the annual or lifetime limit.

A

40%

58
Q

Maximum section 10(1)(o)(ii) exemption amount

A

R 1 250 000

59
Q

Section 10(1)(q) amount available for a person without a disability, studying towards an NQF level 6 qualification.

A

R 60 000

60
Q

Stellenbosch Farmers’ Winery Ltd

A

it was held that damages or compensation received in respect of the loss of a capital asset is capital in nature.

ACCN2013 _ TAXATION II (4 decks)

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