Advanced Taxation
(South Africa)
Friday 5 December 2014
Time allowed
Reading and planning:
Writing:
15 minutes
3 hours
This 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 paper until instructed by the supervisor.
During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
Paper P6 (ZAF)
Professional Level – Options Module
SUPPLEMENTARY INSTRUCTIONS
1.
2.
3.
4.
You should assume that the tax rates and allowances for the tax year 2014 will continue to apply for the
foreseeable future unless you are instructed otherwise.
Calculations and workings need only be made to the nearest R.
All apportionments should be made to the nearest month.
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 28 February 2014/31 March 2014
Rebates
Primary rebate
Secondary rebate (over 65)
Tertiary rebate (over 75)
R12,080
R6,750
R2,250
Interest exemption
Under 65
Over 65
R23,800
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 25/40ths of the dividend is exempt
For companies 13/28ths of the divided is exempt
Medical rebate rates
Single member
Member plus one dependant
Each subsequent dependant
R242
R484
R162
Trusts (other than a special trust)
40%
Dividends tax
15%
Companies
Normal tax rate
28%
Donations tax
20%
Estate duty
20%
Official rate of interest (assumed)
8%
Rates of normal tax payable by persons (other than companies)
for the year of assessment ended 28 February 2014
Where the taxable income:
does not exceed R165,600
exceeds R165,600 but does
exceeds R258,750 but does
exceeds R358,110 but does
exceeds R500,940 but does
exceeds R638,600
not
not
not
not
exceed
exceed
exceed
exceed
R258,750
R358,110
R500,940
R638,600
2
18% of each R1 of the taxable income
R29,808 plus 25% of the amount over R165,600
R53,096 plus 30% of the amount over R258,750
R82,904 plus 35% of the amount over R358,110
R132,894 plus 38% of the amount over R500,940
R185,205 plus 40% of the amount over R638,600
Tax rates for small business corporations
for the year of assessment ended 31 March 2014
Where taxable income:
does not exceed R67,111
exceeds R67,111 but does not exceed R365,000
exceeds R365,000 but does not exceed R550,000
exceeds R550,000
Nil
7% of the amount over R67,111
R20,852 plus 21% of the amount over R365,000
R59,702 plus 28% of the amount over R550,000
Turnover tax rates for micro business corporations
for the year of assessment ended 31 March 2014
Where taxable turnover:
does not exceed R150,000
exceeds R150,000 but does
exceeds R300,000 but does
exceeds R500,000 but does
exceeds R750,000 but does
not
not
not
not
exceed
exceed
exceed
exceed
R300,000
R500,000
R750,000
R1,000,000
Nil
1% of the amount over R150,000
R1,500 plus 2% of the amount over R300,000
R5,500 plus 4% of the amount over R500,000
R15,500 plus 6% of the amount over R750,000
Car allowance
Maximum vehicle cost for actual expenses
R480,000
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) R319 per day (local travel)
Deemed expenditure for incidental costs only (per Government regulation) R98 per day (local travel)
Deemed expenditure for meals and incidental costs (foreign travel) – (per published tables) will be supplied in
the question where relevant
Common capital allowances
New and unused manufacturing plant and equipment
Used or leased manufacturing plant and equipment
Small business corporation manufacturing plant and equipment
Small business corporation (other assets) – unless wear and tear
provides a greater deduction
40%/20%/20%/20%
20% each year for five tax years
100%
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)
New or unused commercial building (not a manufacturing building)
– 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’
5%
5%
Research and development (R&D) expenditure
Additional 50% on expenditure incurred if R&D project is approved by the Minister of
Science and Technology and incurred for R&D after such approval
100%
3
[P.T.O.
Capital gains tax
Annual exclusion (while alive)
R30,000
R300,000
Annual exclusion (in year of death)
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%
66·6%
Inclusion rate (non-natural persons)
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 + [(P1 – B1) x N]/(T + N)
P1 = R1 x B1/(A1 + B1)
Travel allowance table
for years of assessment commencing on or after 1 March 2013
Value of the vehicle (including value
added tax (VAT) but excluding
finance charges or interest)
R
0 – 60,000
60,001 – 120,000
120,001 – 180,000
180,001 – 240,000
240,001 – 300,000
300,001 – 360,000
360,001 – 420,000
420,001 – 480,000
Exceeds 480,000
Fixed cost
Fuel cost
Maintenance
cost
R p.a.
19,310
38,333
52,033
65,667
78,192
90,668
104,374
118,078
118,078
c/km
81·4
86·1
90·8
98·7
113·6
130·3
134·7
147·7
147·7
c/km
26·2
29·5
32·8
39·4
46·3
54·4
67·7
70·5
70·5
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 R3·24
per kilometre.
4
Tax rates of normal tax retirement lump sum benefits
for the year of assessment ended 28 February 2014
Where taxable portion of lump sum:
does not exceed R315,000
exceeds R315,000 but does not exceed R630,000
exceeds R630,000 but does not exceed R945,000
exceeds R945,000
Nil
18% of each R1 over R315,000
R56,700 plus 27% of the amount over R630,000
R141,750 plus 36% of the amount over R945,000
Tax rates of normal tax withdrawal lump sum benefits
for the year of assessment ended 28 February 2014
Where taxable portion of lump sum:
does not exceed R22,500
exceeds R22,500 but does not exceed R600,000
exceeds R600,000 but does not exceed R900,000
exceeds R900,000
5
Nil
18% of each R1 over R22,500
R103,950 plus 27% of the amount over R600,000
R184,950 plus 36% of the amount over R900,000
[P.T.O.
Section A – BOTH questions are compulsory and MUST be attempted
1
Hold Co Ltd (HCL) is a resident public company for income tax purposes. HCL holds a variety of profitable
subsidiaries, both resident in South Africa and internationally, which all operate in the telecommunications market.
HCL is not a ‘headquarter company’ as defined in the tax legislation.
HCL’s business is to act as a holding company for the subsidiaries and investment shareholdings of the group as well
as being a provider of group finance. This group finance can be either interest free or interest bearing, depending on
the circumstances. The vast majority (90%) of HCL’s reported accounting income represents dividends received from
its various subsidiaries and investments in shares. The remaining 10% of HCL’s reported accounting income
represents interest on loans made to its subsidiaries and management fees charged to its international subsidiaries.
HCL is the beneficial owner of all of the income it receives. To date, the international subsidiaries have been
considered to be effectively managed in the relevant jurisdiction in which they are located and therefore they have
been treated as resident in those jurisdictions for double tax treaty purposes.
The directors of HCL have approached Smart Tax Consultants, where you are employed as tax manager, for advice.
The directors wish to understand the tax implications or tax risks of certain transactions undertaken during the year
of assessment ended 31 March 2014.
The summarised financial information relating to HCL at 31 March 2014 is as follows:
HCL:
Income
Foreign dividends
Local dividends
Interest
Management fees
Expenses
Audit fees
Training fees
Note
R
(i)
(ii)
(iii)
(iv)
256,850,000
30,650,000
19,440,000
12,000,000
(v)
(vi)
3,245,000
1,450,000
Notes:
(i)
The foreign dividend income arises from international share investments, associate and subsidiary holdings. The
amounts are stated gross of any foreign withholding taxes levied. The foreign dividends received can be
categorised as follows:
(a) Dividends from international subsidiaries amounting to R179,550,000: These dividends have been
translated at the spot rate on the date the dividend accrued. All shareholdings in subsidiaries represent
equity holdings and carry voting rights of more than 50%. Of these dividends, R790,000 was declared by
an African subsidiary whose domestic laws prevent remittance of this amount to South Africa. The total
foreign withholding taxes levied on dividends in this category amounts to R10,773,000, of which R79,000
relates to the African subsidiary.
(b) Dividends from international listed share investments amounting to R53,000,000: These dividends have
been translated at the spot rate on the date the dividend accrued. Of these dividends, R27,000,000 was
paid by companies which are dual listed on the Johannesburg Securities Exchange (JSE), South Africa as
well as on their own country’s stock exchange. The foreign withholding taxes levied on dividends in this
category amounts to R6,625,000. In addition to this amount, HCL has also been notified that South African
withholding tax of 15% was deducted from the R27,000,000 of dividends paid by the companies listed on
the JSE .
(c) Dividends from ordinary and preference shareholdings in unlisted international entities amounting to
R24,300,000: These dividends have been translated at the spot rate on the date the dividend accrued. HCL
holds less than 10% of the equity shares but more than 10% of the voting rights of all companies in this
category. The total foreign withholding taxes levied on dividends in this category amounts to R2,430,000.
Of these dividends, R9,000,000 was paid by an unlisted overseas company, which is majority owned by a
listed South African company. The net income of this overseas company is R78,000,000. HCL holds 12%
of the ‘participation rights’ in this company across its equity and preference share holdings. The effective tax
rate for this company (computed under South African principles) is 22%.
6
(ii) The local dividends are all from South African operating companies apart from one investment holding in a
collective investment scheme (CIS) dealing in property and qualifying as a REIT. The CIS dividend amounted to
R2,000,000.
(iii) HCL has loaned R200,000,000 to its various subsidiaries and most of the loans are on an interest-free basis.
The interest-free loans are made for periods of greater than 30 years and redemption of these loans is conditional
on the solvency of the subsidiary at the time of redemption. However, one of HCL’s profitable international
subsidiaries is located in a jurisdiction where the corporate tax rate is 34%. HCL loaned this subsidiary
R108,000,000 at an interest rate of 18% per annum on 1 April 2013. The interest rate on corporate loans in
the jurisdiction in which the subsidiary is resident is 12%. In addition, an interest-free loan of R25,000,000
made by HCL to a South African subsidiary was waived during the period. HCL has not yet written off this amount
in its financial statements.
(iv) HCL charges management fees to all its international subsidiaries. R10,000,000 of the management fees is
taxable in South Africa only under the terms of the double tax treaties in place. R2,000,000 was levied in a
jurisdiction which has not concluded a double tax treaty with South Africa and which levies a 12% withholding
tax on such payments. This is considered a final tax in that jurisdiction. All management services are rendered
from within South Africa’s borders. The amounts are stated gross of any withholding taxes levied.
(v) HCL’s auditors have indicated that, based on the time spent, 50% of their fee pertains to HCL’s interest income,
15% to the management fees, 30% to the foreign dividend income and 5% to other statutory procedures.
(vi) The training fees were incurred in training HCL’s staff on the use of new computer software to facilitate the
consolidation of the group’s results for financial reporting purposes.
Required:
As a tax manager employed by Smart Tax Consultants, draft a report from the firm to its client, Hold Co Ltd,
which assesses the tax implications of the income and expense items set out above, and makes recommendations
for any actions to be taken.
Notes:
The South African prime rate was 8·5% for the entire year of assessment.
The following mark allocation is provided as guidance for this question:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
18 marks
2 marks
4 marks
1½ marks
4 marks
1½ marks
Professional marks will be awarded in question 1 for the overall presentation of the report and the effectiveness
with which the information is communicated.
(4 marks)
(35 marks)
7
[P.T.O.
2
Dylan Allgood conducts a management consulting practice from a self-contained flat within the same property as his
primary residence. His wife, Bronwyn, is a vested income beneficiary of a large trust set up by her late father. The
trust income represents dividends from South African listed companies. Bronwyn is also the registered owner of the
entire property within which both the flat and Dylan’s primary residence are located, having inherited the property
under the terms of her father’s will. The dividends vested and received from the trust are sufficient to cover the running
costs of the entire property. Bronwyn has no other sources of income.
Attached to the self-contained flat within the property is a single garage. Dylan uses this garage as a workshop for his
hobby of building scale models of historical ships. As Dylan has received many compliments from friends for the
craftsmanship of the scale models, he has decided to convert this hobby into a business and produce these model
ships for resale. He would like to refurbish the garage into a more professional-looking workshop and showroom for
the models built. The models on display will be for sale and customers will also be able to order a particular model.
Dylan’s management consulting practice generates a turnover of R1,500,000 per annum, excluding reimbursements
(R100,000) for domestic and international travel received from his clients. The only costs he claims against this
income are:
(i) a dedicated telephone and internet line (R6,500 per annum);
(ii) wear and tear on his desktop computer and laptop (currently R12,000 per annum); and
(iii) stationery purchased of R1,500 per annum.
As Bronwyn pays for the running costs of the house, Dylan has not claimed any expenditure for the flat as a ‘home
office’.
As Dylan’s investments are in fixed-term products, Bronwyn has agreed to loan the funds to Dylan for the
refurbishment of the flat’s garage into a workshop and showroom. Bronwyn will source the funds by means of her
mortgage facility. While a bank would grant Dylan a loan of R500,000 for the refurbishment at 8% per annum,
Bronwyn pays 7·5% per annum on her facility. However, she will charge Dylan 8·5% per annum.
Over dinner with friends, it was suggested that Bronwyn should charge Dylan rental on the self-contained flat and
attached garage to facilitate a tax deduction for Dylan and generate income for Bronwyn. Bronwyn has decided to
charge Dylan an annual rent of R60,000 for the flat and R12,000 for the garage. A market-related rental for the area
would be annual rental of R55,000 for the flat and R9,000 for the garage. The rental agreement also specifies the
conversion of the single garage into a workshop and showroom for a cost of R500,000. No time period for the use
and occupation of the flat and garage is specified in the rental agreement. The Commissioner will accept a period of
10 years as reasonable based on the current circumstances of both the lessor and lessee.
Dylan is registered for value added tax (VAT) for the purpose of his management consulting business. Bronwyn is not
VAT registered. All figures given exclude VAT, where applicable.
It is anticipated that the model ship trade will generate R120,000 of turnover in the first year of operation. Apart from
the refurbishment, the only other costs will be the acquisition of raw materials. Dylan will acquire R130,000 of new
raw materials in anticipation of the commencement of his trade. No materials used by Dylan in the course of his hobby
will be transferred to the new business.
Due to the increased workload involved with the two trades, Dylan has decided to employ Bronwyn as his personal
assistant for R100,000 per annum. A market-related rate would be R120,000. A reasonable apportionment of
Bronwyn’s time spent between the two trades (acceptable to the South African Revenue Service) is 95% for the
management consulting business and 5% for the model ship building business.
As Dylan is subject to income tax at a higher effective tax rate than Bronwyn, the couple are looking to structure their
proposals in the most tax efficient way possible.
8
Required:
Advise Dylan and Bronwyn as to the income tax and value added tax (VAT) implications of the proposals given
above. Your answer should identify any planning opportunities and/or tax risks.
The following mark allocation is provided as guidance for this question:
Dylan’s management consulting practice
Dylan’s model ship building business
Bronwyn
7 marks
10·5 marks
7·5 marks
(25 marks)
9
[P.T.O.
Section B – TWO questions ONLY to be attempted
3
Manu Co Ltd is a manufacturing company resident in South Africa conducting a process of manufacture for goods
and services. Its year of assessment ends on 31 March each year. During the year ended 31 March 2014, the
company disposed of one of its manufacturing assets, which it had held for the past 14 years. The asset was a piece
of machinery (machine A) used in the manufacture of a product. The figures given below exclude value added tax
(VAT), where relevant.
Machine A was originally acquired on 1 June 2000 for USD$68,000 (US dollars). This price included the delivery
and installation costs. On 1 October 2001, machine A was valued at R500,000.
Manu Co Ltd has its own research division and has developed a patented product. The production of this product
required certain modifications to be made to machine A. On 13 April 2012, parts and labour to make the necessary
modifications were purchased from an Australian company. AUD $65,000 (Australian dollars) was paid in respect of
consultants’ fees and a further AUD $150,000 was paid for the necessary parts. Machine A’s value lies in its ability
to manufacture the particular patented product.
Machine A was sold to a British company for GBP £230,000 (British pounds) on 15 May 2013. This sale facilitated
the acquisition of a new machine (Machine B) capable of producing a different patented product. The purchase took
place as Manu Co Ltd considers that the South African market for the older product is now exhausted and wishes to
pursue a new product line. Machine B cost R4,000,000 from a South African company.
Additional information:
Currency
Date
United States
dollar
Australian
dollar
British pound
1 June 2000
Year of
assessment
2001
2002
2004
2013
2014
13 April 2012
15 May 2013
Spot rate
Year of
assessment
2001
USD 1 =
R6·9562
AUD 1 =
R8·243
GBP 1 =
R14·0282
2013
2014
Average rate for year of assessment
USD 1 =
R7·3114
AUD 1 =
R8·7608
GBP 1 =
R16·046
USD 1 =
GBP 0·676
AUD 1 =
GBP 0·6527
GBP 1 =
GBP 1
Average for relevant
year of assessment
GBP 1 = R10·806
GBP 1 = R13·6269
GBP 1 = R12·062
GBP 1 = R13·418
GBP 1 = R16·046
Required:
Explain and calculate the income tax implications of the above disposal of machine A. Your answer should provide
brief explanations of any alternative computations of the tax liability and advise as to the appropriate option for
Manu Co Ltd.
(20 marks)
10
This is a blank page.
Question 4 begins on page 12.
11
[P.T.O.
4
You are a tax adviser for an accountancy firm in South Africa. Your manager has asked you to respond to certain
queries from a client, In-and-Out Ltd (‘IAO’), a company which operates an import and export business. IAO imports
a variety of products for South African customers and exports South African products to Europe and the United States
of America. The company is a ‘Category C’ VAT vendor.
IAO’s accountant has approached your firm for advice on the value added tax (VAT) and income tax implications of a
number of transactions entered into during the tax period ended 30 November 2014. The relevant transactions are
outlined below:
Item 1
One of the organisations from which IAO obtains its products is a South African branch of a German company. The
branch has been classified as a permanent establishment under the terms of the South Africa–Germany double tax
treaty. This permanent establishment supplies IAO with South African curios which it acquires from informal traders,
none of which are registered for VAT. The permanent establishment has never registered for VAT. However, IAO wishes
to increase the volumes of local curios acquired for export into the United States of America which would raise the
turnover of the permanent establishment above R1 million. The German company has no regular consultants and thus
has asked IAO for assistance as to any VAT registration requirements or issues to consider. IAO in turn has approached
your firm for advice to be provided to the German company and for information as to the effect on IAO of the
permanent establishment becoming registered for VAT.
Item 2
Certain goods were imported by IAO from Kenya for export to Europe. The goods cost R270,000 with an associated
customs value of R280,000. The goods were subsequently exported for a consideration of R350,000 to IAO’s
European distributors.
Item 3
One of the foreign distributors was liquidated at a date when it still owed IAO R210,000. IAO received only 40c in
the Rand when the foreign distributor was liquidated and no further payments are expected.
Item 4
IAO sold some solar lights, solar panels and related accessories, which it imported at a cost of R450,000 with a
declared customs value of the same amount. The solar equipment was sold locally for R550,000 (excluding VAT).
IAO also acquired some locally-made solar lights and accessories from Street Solar (Pty) Ltd, a wholly owned
subsidiary of IAO. Street Solar (Pty) Ltd is not a VAT vendor. The goods were similar in type and quantity to those
imported but the price paid by IAO to Street Solar (Pty) Ltd was R550,000. IAO’s accountant specified a high
purchase price as Street Solar (Pty) Ltd has an assessed loss available to utilise whilst IAO is profitable. IAO sold the
equipment acquired from Street Solar (Pty) Ltd for only R530,000 (excluding VAT) to a third party customer.
Item 5
IAO would like to purchase a company vehicle (not a motor car) for its managing director. IAO will pay for all fuel.
The vehicle has a cash cost of R986,000 (including VAT) with a five-year maintenance plan. IAO does not have
sufficient available cash to acquire the vehicle now and has been offered two alternatives by the dealership, as
outlined below:
Option (a)
The vehicle is leased for R18,662 per month for five years with a balloon payment of 20% of the cash cost at the
end of the lease, after which the vehicle can be traded in (with a trade-in value equal to the balloon payment) for
another vehicle of the same or higher specification.
Option (b)
The vehicle is purchased for the full cash value, but is financed through the dealership for monthly instalments of
R21,685 for 60 payments (five years). The interest on the first instalment would be R9,449.
Item 6
IAO’s offices were burgled and trading stock, office computer servers and a company pool car were stolen. The
insurance company paid IAO R650,000 on 2 November 2014 in full settlement of the insurance claim made. The
claim can be broken down into the following: R300,000 for the trading stock, R200,000 for the computer servers
and R150,000 for the pool car. IAO had replaced all of the stolen assets by 28 November 2014. The stock was
replaced at a cost of R410,000 (as a result of currency fluctuations), the servers at a cost of R220,000 and the pool
car at a cost of R205,000. All of the acquisition figures are inclusive of VAT.
12
Note: IAO has all the necessary documentation, wherever relevant.
Required:
Advise In-and-Out Ltd as to the income tax and value added tax (VAT) implications of items 1 to 6 above. Your
answer should include calculations, where relevant.
(20 marks)
13
[P.T.O.
5
(a) You are employed by a tax consulting practice and have received a number of queries from a Trust and Estate
Management company (TEMC) with respect to their clients to whom they provide trustee and deceased estate
services.
Query 1:
A bad debt was recovered by the executor of an estate. The original debt was in respect of a business carried on
by the deceased. The business had been bequeathed to the deceased’s son under the terms of his will.
Query 2:
Another, now deceased, client has bequeathed, under the terms of her will, her interest in a private company to
her son. With the permission of all the parties, the executor has sold the shareholding and has distributed the
cash from the sale to the son.
Required:
For queries 1 and 2, advise the Trust and Estate Management company of the tax implications for the
deceased estate, the deceased and the ascertained heir.
(6 marks)
(b) The Joyce Family Trust has two beneficiaries, Rowan, aged 20, and Mikaela, aged 17. Each beneficiary has a
50% vested income right. The trustees may exercise their discretion as to the distribution of any capital of the
trust.
The trust previously owned a residential property comprising flats, which were let to third party tenants. This
property was the trust’s only asset and the trust has no other income. The property was acquired from Wim, the
grandfather of the two beneficiaries, by way of a market-related sale of the property to the trust during 2005.
The acquisition was funded by way of an interest-free loan account between Wim and the trust. All of the parties
are South African residents as defined by the tax legislation.
During the year of assessment ended 28 February 2014, the trust earned rental income of R1·8 million from the
residential property and incurred deductible expenditure totalling R2·3 million. None of the rental income was
distributed to the beneficiaries.
The trustees decided to sell the property as the rental market was deteriorating. A capital loss of R600,000 was
realised on the sale. The proceeds are currently held by the trust in cash with a view to being placed in
investments once the tax position has been established.
The trustees would like to distribute half of the capital loss to the beneficiaries and retain the other half.
Required:
Advise the trustees on whether or not they may distribute the capital loss and discuss the tax effect which
the revenue loss on the trust’s rental activities will have on the vested income rights of the beneficiaries.
(5 marks)
(c) Group Ltd (GL) owns 100% of the equity shares of Op Co (Pty) Ltd (OCPL). OCPL is GL’s only subsidiary and is
a trading company.
GL wishes to issue equity shares in OCPL to a Broad Based Black Economic Empowerment company
(BBBEE Co).
Financial Institution SA (FISA), an unconnected bank, has advised GL that it should first incorporate a new
subsidiary. It can then structure a deal through this newly-formed tax-neutral subsidiary, in order to reduce the
tax payable by the GL group, and increase its profit after tax.
In order to do this, FISA proposes that GL form a new subsidiary, known as New Op Co (Pty) Ltd (NOCPL). 100%
of the shares in NOCPL will be issued to GL. GL will then sell a 26% holding in NOCPL to BBBEE Co.
Subsequently, all of the trading assets of OCPL will be sold to NOCPL as a going concern, at their market value
of R5m.
It has been suggested that the group make use of the intra-group corporate rule, which allows for a roll-over of
any tax consequences on the sale of the assets (e.g. recoupments and capital gains) from one group company
to another. Use of this provision will enable the intra-group transfer of trading assets from OCPL to NOCPL to
take place without any immediate charge to tax.
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In order to fund the transfer of assets from OCPL, a tax-neutral subsidiary of FISA will lend R5m to NOCPL at a
market-related interest rate of 10% a year. The trade to be transferred to NOCPL is very profitable and will fully
absorb the interest deductions arising from the loan agreement with FISA’s subsidiary.
OCPL will then distribute the R5m proceeds to GL as a dividend and GL will invest this amount in preference
shares to be issued by FISA. GL will earn preference dividends of 9% a year on the R5m of preference share
capital, all of which would be exempt from tax under the terms of the Income Tax Act. The 9% rate is considered
to be market-related return for such shares.
Required:
Advise whether or not the Commissioner could apply the general anti-avoidance (GAAR) provisions to the
proposed transaction.
(9 marks)
(20 marks)
End of Question Paper
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