WILL SARS ALLOW YOU TO DEDUCT YOUR COMPANY/CLOSE CORPORATION’S ASSESSED LOSS?

a4_bUnder normal circumstances SARS will allow a taxpayer to carry forward the previous tax year’s assessed loss and set it off against the current tax year’s taxable income. However, there are certain circumstances under which SARS will not allow a taxpayer to carry forward the previous year’s assessed loss and the assessed loss will be lost or set off against future taxable income as well.

If the following two requirements are not met, SARS may not allow a business to carry forward its assessed loss to the current tax year:

Requirement 1: Carrying on a trade during the current year of assessment (the “trade” requirement)

The onus rests on the company/close corporation to prove to SARS that it was indeed trading during the current tax year. In deciding whether the taxpayer carried on a trade, SARS will take into account, amongst others, the following factors as they apply to the taxpayer’s specific business:

  1. The amount and type of expenses incurred during the tax year.
  2. The extent of the business activities.
  3. The nature of its general business activities.
  4. Whether the business activities were actively pursued.
  5. The number of transactions entered into during the tax year.

The following aspects are not necessarily enough to prove that a trade has been carried on:

  1. An intention to trade in the future
  2. Activities to prepare for future trading
  3. Holding meetings
  4. Preparing financial statements

Requirement 2: Earning income from trading (the “income from trade” requirement)

A company/close corporation may indeed have traded (and incurred expenses) during a tax year, but the related income will only be realised in the following or a later tax year due to the type of industry in which the business operates. Once again, the onus rests on the business to prove to SARS that it was actually trading in the current tax year despite the fact that no income was earned.

SARS acknowledges that it is possible that a business may have carried on a trade without earning an income in the same tax year. Take a property rental company for instance. The company could have been actively advertising and marketing available rental properties without finding any suitable tenants. This would result in a loss for the tax year as expenses were incurred but no income earned in the same period. In this case it is clear that a trade was carried on and SARS should allow the set off of an assessed loss in the current tax year. However, SARS will only consider allowing the set off of the assessed loss if:

  • It was incidental that no income was earned during the current tax year despite the fact that the business was actively trading; or
  • No income was earned during the current tax year as a result of the business cycle or nature of the trade in which the business operates.

As can be seen from the above discussion, the deduction of assessed losses is a grey area. The onus rests on the business to prove to the satisfaction of SARS that it meets the “trade” and “income from trade” requirements as set out above. SARS will assess each individual business based on its unique facts and circumstances, taking into account the above-mentioned factors to determine if the business will be allowed to carry forward its assessed loss.

Reference:
www.sars.gov.za

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

HOW TO REGISTER A NEW COMPANY

a3_bThe basic steps to register a company under the Companies Act of 2008 at the Companies and Intellectual Property Commission (CIPC) involves certain forms and supporting documentation that must be lodged and the accompanied fees paid.

The steps

The first step in registering a new company is optional. A CoR9.1 form must be completed and lodged with the CIPC in order to reserve a name for the company to be registered. However, the Act does make provision for a company to be registered without a name. The company registration number will then be the name of the company until such time as the company properly registers a name. A certified copy of the identity document of the applicant must be submitted as supporting documentation with this form and a filing fee is payable.

The next step is to complete and lodge the CoR14.1 Notice of Incorporation form together with the CoR15.1 Memorandum of Incorporation.

The Notice of Incorporation specifically contains information regarding the type of company to be registered, the incorporation date, financial year end, registered address, number of directors and the company name if applicable. A certified copy of the identity document of the applicant must be submitted as supporting documentation and a filing fee is payable. A CoR14.1A form contains specific information about the directors of the company who will be appointed at registration, and this form must be lodged together with the Cor14.1. Certified copies of the identity documents of all directors to be appointed must be submitted as supporting documentation. An optional form CoR14.1D may be lodged together with the CoR14.1, which indicates any company appointments to be registered with the CIPC, such as a company secretary or auditor.

The Memorandum of Incorporation is probably the most important document when registering a company, since the provisions contained herein will govern the company. It can be short and simple, or long and extremely technical, depending on what type of company is being registered. In this regard, it is best to seek professional advice. The supporting documentation and filing fees applicable will depend on what type of Memorandum of Incorporation is being registered.

If an auditor or company secretary is appointed at registration as contained in the CoR14.1D, a CoR44 form must also be completed and submitted. No filing fee is payable for this form. An original acceptance letter and certified copy of the identity document of the auditor or company secretary must be submitted as supporting documentation.

The CoR21.1 Notice of Registered Address must be completed with the particulars of the registered address of the company. Again a certified copy of the identity document of the applicant must be submitted as supporting documentation, but no filing fee is payable.

Once all the necessary forms and supporting documentation has been submitted and applicable fees paid, the CIPC will issue a Registration Certificate form CoR14.3 if it is satisfied that all provisions in the Act has been satisfied.

Any changes to the information placed on record at the CIPC at the original registration of the company, must be registered without delay and on the proper forms and possible payment of applicable filing fees.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

DO I HAVE TO PAY CGT WHEN I SELL MY THINGS?

a2_bIndividuals who are residents for the purpose of the Income Tax Act, 58 of 1962, are liable for CGT (capital gains tax) on the disposal of South African and foreign assets. In addition, non-residents who dispose of immovable property in South Africa are liable for CGT as well.

What is a disposal of an asset?

As a disposal is the event that can trigger a taxpayer’s liability for CGT, it is important to know what type of transactions SARS will view as a disposal. The following actions are considered to be a disposal for CGT purposes:

  1. Selling of an asset
  2. Donating an asset
  3. Destruction, scrapping or loss of an asset
  4. Abandonment of an asset
  5. Change in the use of an asset

Please note: The above actions are not a complete list of what constitutes a disposal. Please contact your tax adviser for more detailed information.

What is excluded from CGT?

The rule of thumb is that if an asset is disposed of it will be subject to CGT, except if the capital gain/loss is specifically excluded. A capital gain/loss on any of the following disposals will not trigger CGT:

a)Disposal of a primary residence

The capital profit/loss on the disposal of a primary residence will not be taxable for CGT purposes if all the following requirements are met:

  1. The proceeds are not more than R2 000 000;
  2. It is owned by a natural person (not by a company, close corporation or trust);
  3. The owner or his/her spouse normally lives in the house as their main residence; and
  4. More than 50% of the house is used for private purposes.

b)Disposal of personal use assets

The disposal of personal use assets which are owned by a natural person and not used for trade purposes, will not give rise to a liability for CGT. Some examples of personal use assets which are excluded for the purpose of calculating a potential CGT liability, are the following:

  1. Personal belongings used more than 50% for personal purposes, for example a car, a caravan, an art collection or household furniture.
  2. The capital gain/loss on the disposal of a boat up to a maximum length of ten metres and which was used for private/personal purposes.
  3. Aircraft with an empty weight of 450 kilograms or less.

Please note: The above-mentioned circumstances are not a complete list of exclusions on the disposal of personal use assets. Please contact your tax adviser for more detailed information.

c)Disposal of an interest in a small business

The exemption of the capital gain/loss is limited to R1 800 000 if:

  1. The gross asset value of the small business is less than R10 000 000, and
  2. The individual is: a sole proprietor or partner or has held 10% or more of the shares in the small business for five years or more, and
  3. is at least 55 years’ old
  4. suffers from ill-health or infirmity, or deceased

Although the above exclusions are very specific, it is still possible to plan a transaction in such a way that will minimise the taxpayer’s liability for CGT. If you need more information on this topic, please do not hesitate to contact your financial advisor.

References:

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

HOW IS A DECEASED’S ESTATE ADMINISTERED?

a1_bThe administering of a deceased estate is regulated by the Administration of Estates Act No 66 of 1965 (as amended) and divided according to a valid will or the Intestate Succession Act No 81 of 1987 (as amended) or a combination of both acts.

Various other acts and regulations may, however, also be applicable, like those applicable to income tax (with due allowance for VAT and CGT), Estate duty and Donations tax, and support of surviving spouse.

After a death

When someone dies, his/her estate must be reported to the Master of the High Court as soon as possible, and certain report documents, together with the original will, where applicable, should be delivered to the Master.

In the case of estates with a gross value of less than R250 000 the Master may dispense with an official appointment of an Executor to execute the required administering process. In all other cases, an Executor will be appointed by the Master, who will issue an Executor’s letter to the appointed Executor.

The Executor

As soon as the Executor’s letter has been issued the formal administering of the estate, which the Executor has to follow, will commence. One of the Executor’s first tasks would be to announce to the creditors, acquire details regarding estate assets and have it valued if necessary, and recover certain assets. Known and filed liabilities should be investigated and attention must be paid to income tax.

The Executor is now compelled to submit a liquidation and distribution account (statement of assets and liabilities) to the Master of the High Court within six months after being issued with the Executor’s letter, or ask for a formal postponement. This estate account will indicate all assets and liabilities, distribution of heirs and details of assets outside the estate which are directly payable to beneficiaries.

The Master will check the estate account and then issue a questionnaire to the Executor. As soon as the Master has granted approval the Executor may proceed to announce the account as being open for inspection for 21 days at the Master and the nearest Magistrate’s Office.

Should any written challenges be submitted, it should be dealt with according to the regulations in the Administration of Estates Act. Should there be no challenges, or when the Executor has disposed of all challenges, the Executor may proceed to make payments to heirs and carry over any other assets to the beneficiaries.

Administering obstacles

In most cases the administering process should not be complicated, therefore it would be possible to finalise within a fair period of time (approximately six to nine months). There are, however, many obstacles which may slow down this process and even bring the administering process to a virtual standstill. Some of the most well-known and general obstacles are poor service from government and private institutions, invalid and unpractical wills, shortage of cash, quarrels and disputes among family members and beneficiaries, lack of information, disorder in the tax and other affairs of the deceased, lawsuits before and after death, and legal post-mortems in case of an unnatural death, which may sometimes be required before policies can be paid out.

Conclusion

The administering of an estate is a specialised environment which should be left to capable people with knowledge of the Administration of Estates Act and years of experience. Ignorance regarding the run of events as well as errors of judgement may eventually cost you dearly if you don’t make use of the available expertise.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)