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Tax Update Critical Changes and Case Law

Tax Update Critical Changes and Case Law. Jerry Botha CFP ®. Tax Environment. 1999/2000 = 579 Pages Since then = 1,868 Pages 2011: Tax Law Amendments 135 pages 2011 Response Documents from SARS 110 pages and Explanatory Document on Amendment Act 185 pages

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Tax Update Critical Changes and Case Law

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  1. Tax Update Critical Changes and Case Law Jerry Botha CFP®

  2. Tax Environment 1999/2000 = 579 Pages Since then = 1,868 Pages 2011: Tax Law Amendments 135 pages 2011 Response Documents from SARS 110 pages and Explanatory Document on Amendment Act 185 pages Tax Administration Bill (National Assembly) 204 pages

  3. Tax Environment Complexity of tax law Quantum of legal provisions Strength of anti avoidance and penalty provisions Court decisions Pressures on collection

  4. Raubenheimer v Raubenheimer (1 June 2012) Interpretation of a will made by the appellant’s husband prior to his death (accepted under 2(3) of the Wills Act). The will had not been properly witnessed and contained a clause that although the estate was bequeathed to the appellant she was to have a usufruct over the matrimonial home in Pretoria until her death or remarriage. It also referred to a list of specific bequests which was not attached thereto. After death, two children born from a previous marriage contended that this will was invalid as, it failed to comply with the relevant statutory provisions as to its signature and, secondly, as it was void for vagueness.

  5. Per LEACH JA “It is a never-ending source of amazement that so many people rely on untrained advisors when preparing their wills, one of the most important documents they are ever likely to sign. In Ex Parte Kock NO,1 a high court decried the number of instances in which wills had to be rejected as invalid due to a lack of compliance with prescribed formalities and the regularity with which the courts were being approached to construe badly drafted wills, before urging intending testators ‘in their own interests as well as in the interests of those whom they intend to benefit when they die. To consult only persons who are suitably trained in the drafting and execution of wills and other deeds containing testamentary dispositions’. Despite this, the courts continue all too often to be called on to deal with disputed wills which are the product of shoddy drafting or incompetent advice. This is another such case”

  6. Medical Aid ChangeWhere the Credit Comes into Play

  7. Medical Aid ChangeMonthly Credit

  8. Medical Aid ChangeEnd of Year Claim A – Medical Scheme Expenses B & C – Local and foreign medical expenses (out of pocket) D – Physical impairment / Disability expenses

  9. Medical Aid ChangeEnd of Year Claim Above 65 – A, B, C and D Physical impairment / Disability B, C, D Actual contributions – 4 x credit (R24,000 – (R230 x 12 x 4) = R12,960

  10. Medical Aid ChangeEnd of Year Claim Rest (normal taxpayers) Actual contributions – 4 x credit (R24,000 – (R230 x 12 x 4) = R12,960; AND - (B + C) over 7.5% of taxable income (excluding retirement fund withdrawal / benefit)

  11. Fit and ProperLegislated Reporting Section 105A – Reporting of Unprofessional Conduct Any professional association, body or board, such as FPI and FSB. Affairs of taxpayer, including personal affairs Done or omitted to do anything in opinion of Commissioner -

  12. Fit and ProperLegislated Reporting Avoid, postpone any duty or obligation under the Income Tax Act Includes negligence Or contravened any rule or code of conduct of any professional body SARS may report you to said body …

  13. Reportable Arrangements Section 76A of the Act Arrangement – transaction, scheme, operation Tax Benefit Various exclusions 60 days to report to SARS (website) Reportable Arrangement Number

  14. Tax Offences Section 104 of the Act Any person with intent to evade or to assist any other person to evade Includes any false answers, including verbally, false books or records or any fraud, art or contrivance Imprisonment up to 5 years

  15. 200% Tax Penalty Default in rendering a tax return Omit any amount Incorrect statement in return that reduces tax 200% penalty must be imposed. Commissioner may then remit the penalty as thinks fit, except where intention to evade (when extenuating circumstances come into play). Rare that courts override the 200% penalty where SARS wins case.

  16. Section 11(w) & Deferred Compensation and Employer Insurance Significant changes were introduced 01 March 2012. Covered by Beatrie Gouws from National Treasury during Tax Workshop sessions, as well as Marius Botha case studies. Follow-up sessions with National Treasury. Further refinements will follow -

  17. Section 11(w) & Deferred Compensation and Employer Insurance Deductibility of premiums on Contingent Liability Policies Administrative issues around unapproved PHI policies (can there be approved PHI policies?) Employer accident cover parameters confirmed. Taxation of proceed from 11(w)(i) policies

  18. Section 11(w) & Deferred Compensation and Employer Insurance Exemption from tax of policy benefits where premiums are not tax deductible on – Old employer-owned policies with cash values Employer owned policies with risk benefits only (not for key person purposes, such as contingent liability policies) Certain endownment policies, such as where employer takes for savings purposes. Deferred compensation policies to be ceded to pension or provident fund.

  19. Section 11(w) & Deferred Compensation and Employer Insurance Problem cases for members We will raise them with National Treasury But we need exact facts (not client information) and full details to raise NOTE: ITEMS FOR SUBMISSION CAN JUST BE EMAILED TO jerry@taxconsulting.co.za or almo@fpimail.co.za

  20. Dividends Tax

  21. Dividends Tax Personal income tax 40% above R617,000, thus saving minimal. Foreign clients should have branches (28% only) and not subsidiaries. Small business corporations becoming very attractive – 0% on the first R 63,556 7% on R 63,556 to R 350,000 28% in excess of R 350,000

  22. Severance Benefit 55 years Sickness, accident, injury or incapacity through infirmity of mind or body Retrenchment = no more R30,000 or average tax rates = lump sum benefit table

  23. Withdrawal Rules

  24. Withdrawal Lump Sum Benefits October 2007 – “retire” Lump Sum Withdrawal Benefits March 2009 – “take cash” Severance Benefits March 2011 – “not retrenchment” Operates cumulatively (of course)

  25. Retirement Lump Sum on Retirement Retrenchment amounts Cumulated and recomputed on retirement table Less Tax Payable on early withdrawals / severance on same table

  26. The Hitchhicker’s Guide to the Galaxy "The answer to the ultimate question of life, the universe and everything is 42." For decision on withdrawal = max R49,950 (2011) and R59,400 (2012) Reconcile – (R300,000 – R22,500) x 18% = R49,950 (do re-computation on any amount of R945,000) and delta = R59,400 Is the tax impact enough to influence a decision?

  27. Provisional Tax Rules Taxpayers must do estimates now for 1st and 2nd No more SARS basic amounts. This necessarily requires information from financial advisors before provisional deadlines. Above R1m = 80% accuracy Below R1m = 90% accuracy

  28. Tax Filing Obligation Where you had more than one source of income, even where you worked on a week somewhere else or had any interest or other income. Where you did not work the full 12 months – this is where you will also qualify for a tax refund. Where your employment income equals or exceeds R120,000 for the year. Where you are older than 65 years. New exemptions – below tax threshold (65 and 75). Where you had a retirement annuity, medical aid expenses, made donations, received a travel allowance etc. - all these will allow you to qualify for a tax refund

  29. Tax Filing Obligation Recommend cases of uncertainty uses SARS tax wizard. http://www.sars.gov.za/Wizard2012/Wizard.htm Make sure you have a copy hereof for future tax reference.

  30. Non-Compliance PenaltySection 211 of Administration Act

  31. Penalty Regime Not only tax returns but any administrative non-compliance (request to update banking details), applied per month Taxpayer only notified when imposed, amended / adjusted or cancelled. Initial notice also serves as final notice before debt collection. SMS only send monthly.

  32. Understatement penalty percentage table – section 223 of TAB

  33. Employees’ Tax Planning Company vehicles and travel allowance 20% rule (only 20% of taxable value collected as PAYE) - Whole amount taxable on IRP5 Claim with logbook on personal tax assessment More than 80% business with vehicle – Company vehicles makes most financial sense. Business equipment and related services exempt from Fringe Benefit tax where more than 50% used for business

  34. Employees’ Tax Planning Business equipment and related services exempt from Fringe Benefit tax where more than 50% used for business – Cellular Phones Home Phones 3G cards Home ADSL lines Laptops Hardware (printers, backup devices etc.) Software Etc

  35. Residency Transfer Disposal of residency from company to a trust into hands of individual extended to 31 December 2012. Free from transfer duty, capital gains tax, secondary tax on companies and dividends tax. Detailed SARS guide (Issue 2) hereon. Take note CGT cost increased 13.32% (individuals and special trusts), 18.65% (companies) and 26.64% (trusts)

  36. Tax Administration Act Passed National Assembly Creates “serious tax offence” category – imprisonment for period exceeding two years. Compulsory identity cards for officials SARS is internally only bound to – “Practice generally prevailing” – official publication regarding application or interpretation of the Act. Binding Ruling (section 75) Creates Tax Ombudsman – appointed Minister, but staff seconded from SARS. 5 year retention period remains, but where audit, until audit is concluded.

  37. Tax AdministrationSelection for Inspection, verification or audit Senior SARS official must authorise field audit or criminal investigation and person must produce the authorisation Obligation to keep taxpayer informed – 21 days Serious tax offense appears committed – must be referred for criminal investigation

  38. Tax AdministrationInspection May arrive at premise without prior notice to determine (a) identity of occupant (b) registered for tax (c) whether person is keeping and retaining records. Relevant material may be obtained from a 3rd party and this may be obtained under oath. May request any person to attend interview to clarify issues of concern or produce material under control.

  39. Tax AdministrationInquiries Notice to appear and produce documents to inquiry. You may not refuse to give incriminating evidence. Incriminating evidence not admissible in criminal proceedings.

  40. Tax AdministrationSearch and Seizure Warrant must be issued May search without warrant in various cases Incriminating evidence not admissible in criminal proceedings.

  41. SARS v Van Kets Australia Revenue requested SARS for information. SARS invoked section 74 to obtain information from taxpayer. Taxpayer refused. SARS application granted. Take note: Exchange of information contained in all DTA’s. Make sure that local and offshore tax positions synchronise

  42. SARS v Van Kets Australia Revenue requested SARS for information. SARS invoked section 74 to obtain information from taxpayer. Taxpayer refused. SARS application granted. Take note: Exchange of information contained in all DTA’s. Make sure that local and offshore tax positions synchronise

  43. ITC 1835 vs. ITC 1793 Deceased and husband executed a joint will, with first dying spouse bequeathed household possessions to survivor and residue to inter vivos trust, with life long usufruct for survivor and the to son for one year. On death of testatrix the trust owned her some R500k. Winding up of the estate, executor neither demanded nor received payment of debt from trust and merely reflected in L&D. The debt as a claim was awarded to the trust as sole heir of the residue. SARS raised assessment same basis as ITC 1793 – shares sold to family trust on loan account and bequeathed the debt to the trust. CGT under 12(5) of the Eight Schedule (debt discharged for no consideration). Court found 12(5) did not apply – intention of the creditor is key in disposing of debt. How estate administered not important

  44. JDW vs. SARS No 11537 Tax assessments 1996 to 2002. 3 rental properties registered in children’s names Rental income not disclosed in his name. Liable to 20% donations’ tax. Rental income deemed to be that of the parent – Section 7(3) and application confirmed in Commissioner for SARS v Woulidge. 200% SARS penalty confirmed. Case referred by Judge to Director of Public Prosecution for criminal charges

  45. CSARS vs. Tradehold Deemed disposal of assets when become non-resident Claimed the Double Tax Agreement did not allow the Eight Schedule provision Amazingly, SCA agreed with taxpayer. Decision is wrong (perhaps more correctly, badly argued by SARS) SARS agrees wrong and will change the law

  46. ITC 11038 (King Decision) Not disclosed sale of shares in tax returns and claimed CGT in nature (disposed before CGT) Around R1.5b in play and 2/3rd were penalties (200%) Compulsory reading for anyone who wishes some insight into what our courts think of offshore trusts and aggressive evasion.

  47. Future Proposals Be on the lookout for – New retirement tax regime Tax Preferred savings and Investment accounts

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