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Financial Planning 711 > Tax 2: Exemptions and Deductions > Flashcards

Tax 2: Exemptions and Deductions Flashcards

1
Q

Allowances are included in _________ income.

A

taxable (NOT gross income!!)

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2
Q

All allowances are taxed fully, except… (3)

A

Travel allowances
Accommodation & subsistence allowances
Office holders/duties e.g. entertainment allowance

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3
Q

What is an advance?

A

cash amount received
ahead of time
supposed to be spent on a BUSINESS expense;
and refunded to employer if not ALL spent
(not taxed in employee’s hands!)

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4
Q

What is a reimbursement?

A

(Reverse of advance)
employee’s own cash spent
on BUSINESS expenses
and employer refunds the money to the employee

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5
Q

True/False: Reimbursements are taxed in the hands of the employee and therefore included in taxable income.

A

False – reimbursements are not included in taxable income and not taxed in the hands of the employee

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6
Q

What is an allowance?

A

Fixed
Repetitive amount
to cover regular BUSINESS expenses
e.g. fuel etc.

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7
Q

Why does the Income Tax Act specify allowances to be included in taxable income?

A

To avoid tax avation

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8
Q

The _______ portion of travel allowances is NOT taxed, and is therefore ________ from the total allowance.

A

business, deducted

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9
Q

What is the formula to determine the taxable (private) portion of the allowance?

A

Total allowance given to employee
LESS
(Proven) Business portion/expenses

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10
Q

In the tax framework, taxable allowances are added directly after….

A

the RA contributions reduction

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11
Q

Why is it important to keep a logbook?

A

Without any proof or record of business expenses, there will be an increased taxable allowance!

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12
Q

What are the main requirements for a logbook (i.t.o. travel)?

A

odometer reading (on 1 March)
date(s) of business trip(s)
purpose of business trip(s)
amount of km’s traveled for business purposes

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13
Q

What are the 2 methods used to calculate the taxable travel allowance?

A
  1. Actual costs method (using list of actual costs)

2. Deemed costs method (using schedule)

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14
Q

When will the deemed costs method be used?

A

When no proof of business expenditure is kept OR simply by choice

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15
Q

What are ALL the inclusions on the list to calculate the total actual cost of travel?

A 
Fuel/oil
Repairs
Service/maintenance
Licence
Insurance
Finance charges -- MAX R560 000
Wear and Tear -- MAX R560 000 over 7 years
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16
Q

What cost is implied (needs to be calculated) when using this method?

A

Wear and Tear

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17
Q

How is wear and tear calculated?

A

CP of vehicle (INCL VAT)/7 x amount of months/12

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18
Q

Where is finance charges (interest) included for travel allowance purposes?

A

As one of the actual costs (and NOT part of Wear and Tear!) – it should be taken out of the total cost of the vehicle.

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19
Q

How is the rate (for business travel) calculated when deemed costs is used? (formula)

A

Rate
= fixed cost as per table/total km (based on value of car)
x #days/365 (only if car is used for less than a full year)
x 100 (to get it in cent)
+ fuel cost as per table (c/km)
+ repair cost as per table (c/km)

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20
Q

If business km is ____ than or equal to _____ km, the deemed rate of R_____ may be chosen. But no other travel allowance may be received then.

A

less; 8000; 3.30

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21
Q

Subsistence allowance is only allowed if employee spends AT LEAST ______ away from their _____ residence.

A

1 night; usual

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22
Q

What needs to be kept to use the actual method of calculating the subsistence allowance?

A

Invoices of expenditure

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23
Q

When can the deemed cost method be used for subsistence allowance reduction?

A

When no invoices were kept

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24
Q

Rates are provided for the ____ method of calculating subsistence allowance. These rates are for _____ and ____ costs, but does not include _______ for which invoices must be kept.

A

deemed
meals
incidental
accommodation

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25
Q

What is incidental costs?

A

Costs that relate to a business trip e.g. parking, tips to waiters, newspapers etc.

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26
Q

True/False: A person earning mainly a salary can easily deduct certain expenses from the taxable allowance.

A

False - mainly salaried persons have NO deduction of business portion – usually when >50% of income is a salary

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27
Q

What is an exemption?

A

Specific amounts of income subtracted from GROSS INCOME

28
Q

What are at least five notable exemptions?

A

Local only interest earned (individuals only)
Dividends (RSA 100%; Foreign has criteria)
Foreign earnings of an RSA employee working abroad
Bona fide scholarship or bursary @ recognized institution
Purchased (voluntary) annuities – CAPITAL portion

29
Q

True/False: Foreign dividends are always 100% exempt

A

False: Only under certain circumstances are these dividends 100% or otherwise exempt

30
Q

What are 3 scenarios where an exemption on foreign dividends is allowed?

A
  1. Shareholder owns AT least 10% of equity shares and voting rights –> 100%
  2. Dividends from a foreign company listed on the JSE –> 100%
  3. If none of above and shareholder is individual, estate or trust –> (25/40) x (the div that is not exempt)
31
Q

True/False: There is no exemption on interest earned from overseas accounts.

A

True – no exemption on foreign interest, only local interest

32
Q

True/False: Interest exemptions are apportioned after a person passes away.

A

False – only personal rebates are apportioned.

33
Q

If a person passes away in the YOA, what age is used for the purposes of interest exemptions?

A

The age he WOULD HAVE BEEN on the LAST day of the YOA (i.e. 28 Feb)

34
Q

Amounts earned by SA residents overseas fall into ____ income, but is exempt in certain circumstances.

A

Gross

35
Q

What are the 2 requirements for foreign earning to be exempt?

A

Outside SA >183 days in any 12 month period

(Of which) >60 days are CONTINUOUS!

36
Q

True/False: Weekends, sick leave, annual leave and public holidays while working overseas are added to “days outside SA”.

A

True – these days can be added when counting days for exemption requirements

37
Q

If a scholarship is granted to a family member of an employee, the employee’s annual remuneration should be ______ and he can receive and exemption of _______ or ________ depending on NQF level.

A
38
Q

If a bursary is granted to an employee, there is no exemption, unless….

A

…the employee will REFUND the amount to the employer if he/she fail to complete the studies (for reasons OTHER THAN death, ill-health or injury)

39
Q

Purchased annuities: only the _____ is taxed, but the ______ portion is exempt. Therefore we need to calculate this portion.

A

growth

capital

40
Q

A “purchaser” of an annuity could be a…. (3)

A

natural person; deceased/insolvent estate; curator bonis of natural person

41
Q

What are exclusions from a purchased annuity?

A

annuities payable as part of a pension fund, RA, inheritance or donations.

42
Q

What is the formula to calculate the capital portion of a purchased annuity?

A

Y = A/B X C
A – lump sum initially paid for the annuity
B – total expected returns
C – amount of the annuity (monthly)

43
Q

What would be the tax-free capital portion if a purchased annuity is commuted or terminated?

A

X = A - D
A – amount originally paid for the annuity contract
D – total of previously exempt portions of annuities received [i.e. Y from the other formula]

44
Q

What 2 TYPES of deductions do we recognize?

A

General and specific

45
Q

Deductions are subtracted from _______ to essentially determine the _________ income.

A

income; taxable

46
Q

General deductions refer to a person carrying on a ______ and who therefore has a _____ motive. What is deducted then from the income?

A

trade; profit
expenditure/losses ACTUALLY INCURRED (during tax yr)
in the (hope of) PRODUCTION of INCOME
provided such expenditure/losses is NOT CAPITAL in nature

47
Q

What part of capital may be deducted from income?

A

Wear and tear

48
Q

List a few general expenses that can qualify as deductions.

A 
advertising costs 
salaries and wages
interest incurred as PART of the business
rental of property, equipment etc.
cost of trading stock
water and electricity
lease payments
travel expenses (unless for acquiring a capital asset)
entertainment costs (unless an employee)
49
Q

Is letting a property seen as a trade or not?

A

Yes, it is specifically included

50
Q

Does “actually incurred” include credit transactions?

A

Yes, “incurred” means when someone becomes legally liable to pay an expense

51
Q

Do business expense have to be NECESSARY to the business in order to qualify for a deduction?

A

No

52
Q

What is the difference between floating capital and fixed capital?

A

floating – revenue in nature

fixed – capital in nature e.g. machines

53
Q

Home expenses are deductible. What does this mean?

A

Portion of house is used regularly and exclusively for trade e.g. home office

54
Q

What are examples of home expenses that are deductible?

A

rental, interest on bond, rates & taxes, electricity, telephone etc. (but ONLY as a percentage of square metres of the house! e.g. 10% of house for trade = 10% of normal home expenses is deductible

55
Q

What are some specific expenses that do not qualify for deductions? [s. 23]

A
  • expenses for private, domestic purposes
  • expenses refunded by insurance
  • accounting provisions/reserves (not actually incurred)
  • expenses which produced EXEMPT income i.e. not part of income
  • non-trade expenses
  • expenses relating to fines/illegal activities
56
Q

What is front-end loading?

A

Prepaid expenses – incurred in 1 year, benefit received in year 2+; can’t claim deduction for full expense, only for portion received – balance claimed in following year

57
Q

What are 3 exceptions to front-end loading?

A
  • goods/services supplied within 6 months after year-end
  • TOTAL prepaid expenses LESS or equal to R100K
  • expense paid due to liability imposed by LEGISLATION
58
Q

True/False: Trading stock bought in 2015, but delivered in 2016 is seen as front-end loading.

A

False – trading stock does not apply

59
Q

What are the requirements for ring-fencing to apply?

A
  • individuals only
  • earning within the TOP tax bracket (40%)
  • trade incurred losses for 3 o/o 5 yrs OR
  • carries on a suspect trade
60
Q

Assessed loss from one _______ may NOT be _____ against income from another _______.

A

trade; set-off; trade

61
Q

What is ring-fencing?

A
  • Tax deductions from a trade are limited to the income of that trade.
  • Assessed loss is kept SEPARATE (fenced in) until that loss-making trade generates taxable income
62
Q

What is the 3/5 year rule and when will it apply or not?

A

Looks at each year separately to determine if a loss has been incurred from a TRADE (current year + 4 years back) = assessed loss for 3 out of 5 years. WILL NOT APPLY if suspect trade!

63
Q

Name a few suspect trades i.r.o. ring-fencing…

A

creative arts; animal showing; PART-TIME farming/breeding; letting of residential accommodation; letting of vehicles; sport

64
Q

What is the escape clause (i.r.o. ring-fencing)?

A

Allows taxpayer to “escape” ring-fencing – by asking

  • is there reasonable prospect of deriving taxable income
  • within a reasonable period?
  • i.e. possibility of turning the business/trade around!?
65
Q

When will the escape clause NOT assist in avoiding ring-fencing?

A

Assessed losses for 6 out of 10 years! (loss will be ring-fenced in 6th year)

Financial Planning 711 (8 decks)

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