Page 203 - SAIT Compendium 2016 Volume2

IN 7
Income Tax acT: InTeRPReTaTIon noTes IN 8 (3)
(iii) is or was a personal service company as de ned in the Fourth Schedule; or
(iv) is or was a personal service trust as de ned in the Fourth Schedule,
to the extent that such amount constitutes or will constitute income of the person to whom it is paid: Provided that the amount allowed to be deducted under this paragraph shall not exceed for any one year the lesser of —
(aa) so much of such amount so incurred as is equal to such amount divided by the number of years, or part thereof,
during which the restraint of trade shall apply; or
(bb) one-third of such amount so incurred;’
Section 23 provides:
‘No deductions shall in any case be made in respect of the following matters, namely — (a) – (k)
(l) any expense incurred in respect of the payment of any restraint of trade, except as provided for in section 11 (cA).’
The effect of the amendment is that restraint of trade payments incurred in carrying on a trade will be deductible from the income derived from such trade on the following conditions:
• The amount constitutes or will constitute income in the hands of the person to whom it is paid.
• The qualifying amount will be deductible in equal instalments over the longer of —
- three years; or
- the period of the agreement.
For example, if a restraint is to endure for one year, the taxpayer may only deduct a third of the amount in the rst year of assessment and a third in each of the next two succeeding years. The recipient of the amount will be taxable in full in the year of receipt or accrual.
Employees’ tax
A further amendment was also inserted into the Act to subject restraint of trade payments to the deduction of employees’ tax with effect from 6 December 2000. All such payments received or accrued on or after this date are, therefore, subject to employees’ tax deductions. Paragraph (a) of the de nition of ‘remuneration’ in paragraph one of the Fourth Schedule to the Act was, therefore, amended to include amounts referred to in paragraph (cA) of the de nition of ‘gross income’. [Section 53 (1) (b) and (2) of the Revenue Laws Amendment Act 59 of 2000]
2.3
Interpretation Note: No. 8 (Issue 3) Insolvent Estates of Natural Persons
DATE: ACT: SECTION: SUBJECT:
Preamble
28 August 2013
INCOME TAX ACT 58 OF 1962 (the Act) Section 25C and related provisions Insolvent Estates of Natural Persons
In this Note unless the context indicates otherwise –
• ‘date of sequestration’ means –
- the date of voluntary surrender of an estate, if accepted by the Court; or
- the date of provisional sequestration of an estate, if a nal order of sequestration is granted by the Court;*
• ‘Schedule’ means a Schedule to the Act;
• ‘section’ means a section of the Act;
• ‘TA Act’ means the Tax Administration Act 28 of 2011; and
• any word or expression bears the meaning ascribed to it in the Act.
1. Purpose
This Note provides guidance on the tax treatment of insolvent estates including the application of section 25C of the Act. Issue 2 of this Note, issued on 22 March 2006, is hereby replaced.
2. Background
A person is said to be insolvent when their liabilities exceed their assets. Depending on the circumstances, a debtor (that is, the insolvent) or a creditor may apply to the court for sequestration of the debtor’s estate. The effect of sequestration is, amongst others, to ‘divest the insolvent of his estate and to vest it in the Master until a trustee has been appointed, and, upon the appointment of a trustee, to vest the estate in him.’ Section 20(1)(a) of the Insolvency Act No. 24 of 1936† Before 4 July 1997 it was SARS’s practice to regard insolvent estates as taxable entities and to treat the trustees of these estates as representative taxpayers. However, in the case of Thorne & Molenaar NNO v Receiver of Revenue Cape Town‡ the Supreme Court held that this practice was incorrect. The court had to decide whether a trustee of an insolvent estate was liable to pay income tax on income accruing to an insolvent estate in the capacity of a representative taxpayer or any other capacity.
* Section 1 (1) and section 1 of the TA Act.
† Section 20(1)(a) of the Insolvency Act No. 24 of 1936 ‡ 1976 (2) SA 50(C) (38 SATC 1)
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 195