TAX AVOIDANCE
Difference between tax evasion (illegal, offence, jail) and tax avoidance (legal).
Impermissible tax avoidance arrangements (ss 80A-80L - GENERAL ANTI AVOIDANCE RULES
‘GAAR’)
Applies to any arrangement or part of an arrangement after 2 November 2006.
REQUIREMENTS TO BE MET FOR “GAAR” TO APPLY:
1. Was an arrangement entered into? - any transaction/operation/scheme – WIDE;
2. Does the arrangement result in a tax benefit? BENEFIT IS ALWAYS PRESUMED, THE ONUS OF
PROOF IS ON THE TAXPAYER TO DISPROVE THIS;
3. Is the sole purpose of the arrangement to avoid tax?
4. Is the avoidance “IMPERMISSABLE” ?
i.e.
Abnormal;
Lack of commercial substance (NB exam question will state whether it is or not);
Misuse or abuse of act.
IF GAAR APPLIES SARS must:
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notify the taxpayer;
levy tax as if the arrangement had not been entered into;
and levy interest on the tax that was not paid as a result of the arrangement.
Section 103 and Assessed Losses
Trafficking in Assessed Losses – the practise of “obtaining” a c.c. or company or trust with and
assessed loss, diverting income into the entity and setting off such income against the assessed loss.’
S 103 was introduced to prevent to prevent this.
S103 APPLIES WHEN:
1. an agreement affecting the entity/change of shareholding/members interest or trustees;
2. the above results in income or capital gain for the entity;
3. the purpose of the above is solely/mainly to utilise the assessed loss/assessed capital loss to
avoid or reduce tax.
IF S103 APPLIES THEN THE USE OF THE ASSESSED LOSS IS DENIED
Note: The application of S103 is subject to the normal rules of prescription (3 years after the
assessment becomes final) and SARS cannot indefinitely reopen an assessment in order to apply
s103.
Study Beancounter Scenario
TAX AND ESTATE PLANNING
TAX PLANNING
Read p 47-56 TUT 107
Considerations when giving investment advice (Exam Question)
Usually a comparison between options – select uniform base eg after tax returns
Remember:
Effective tax rate of company before 2013 – 34.55% (28% plus 10%STC)
Use effective rate unless a large shareholders credit loan – loan should be repaid
before declaring a dividend – 28%
Individual – 40%
Trust – 40%
Considerations for Individuals
Interest exemption: R22800/R32000 therefore investment that yields interest to this amount – tax
free. When comparing this tax free investment to another investment remember to divide the yield
required by 60 (assuming a tax rate of 40%) Thus an investment yielding 12 % interest where the
interest is fully deductible can be compared to a taxable investment which would have to yield 20%
(12/60) before tax in order to be as profitable.
Foreign Dividends: SA residents are taxed on worldwide income – Local dividends are exempt ito
s10(1)(k)(i) but dividends from a foreign company may be taxable with a foreign tax rebate.
Specific Investments
Remember:
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Certain expenses for certain investments are tax deductible
An investor holding shares for 3 or more years deemed to dispose of a capital asset (S9C)
Interest exemption R22800/R32000)
Foreign dividend taxable with R3700 exemption and s6quat rebate
Deductions against investment income:
 S11(a) allows deduction of expenditure incurred in the production of income in the carrying
on of a trade.
 The passive earning of income/dividends/pensions and annuities do NOT fall under the
above carrying on of a trade but this has been relaxed somewhat and interest incurred on
funds borrowed for the purpose of lending such funds out at a higher rate of interest is
deductible as well as interest incurred in the production of any INTEREST to the extent that it
does not exceed such interest income.
Study Integrated Example p 57
ESTATE PLANNING
1. Transfer of Assets to Trust/Company
Any growth of assets over time leads to an increase in Estate Duty.
Solution: Dispose of growth assets to a trust and leave purchase price of such assets as a loan
owing by the trust. Estate dust only then payable on the outstanding amount of loan at death.
This can be done in a company as well BUT shifts liability for estate duty to shareholders as the
increase in value of shares included in their estates.
BUT REMEMBER S3(3) and (5) of Estate Duty Act: Deems assets transferred (to trust etc.) to be
deceased’s property at his death if he was competent at the time of his death to have disposed
of them for his own benefit i.e. no independant trustees or no unanimous trustee votes.
ALSO REMEMBER: Assets must be sold at market value for no donations tax/ deemed
donations.
If asset donated remember that a donation is treated as a sale at market value for CGT
purposes and CGT is payable by the donor on any capital gain.
Also if asset donated s7 of InT Act can be applied (income thereof axed in hands of donor in
certain circumstances) BUT s 7 only applies to living persons.
2. Donation of Assets to Children
Annual exemption of R100 000. But merely shifts estate liability to children. Donor may also be
liable for CGT as donation is deemed to be a sale at market value for CGT purposes.
3. Use of Deductions Permitted by S4 Estate Duty Act
NB Sec 4 (q) deduction for value of property left to surviving spouse. Remember the unused
portion of R3.5m abatement may now be transferred to surviving spouse (1 Jan 2010) therefore
NOT merely a shift of estate duty liability.
S 4 (q) also applies if the surviving spouse has a vested right in the income of a trust to the value
of the bequest to the trust. (BUT not for a discretionary trust where other beneficiaries may
benefit from the income – no vested right)
The deceased will not be liable for CGT but the spouse acquires the assets at their base cost for
CGT purposes therefore “rolled-over” for the spouse to pay.
ANTI AVOIDANCE PROVISIONS
S 7 , pa 6 – 72 of 8th schedule and GAAR of IT Act applies here as well.
Note: s 7 only applies to living persons.