Page 215 - SAIT Compendium 2016 Volume2

IN 9 (5) Income Tax acT: InTeRPReTaTIon noTes IN 9 (5)
The 20% limitation will only be applicable to any investment income received by or accrued to the company during the year of assessment if the activity carried on by a company is one of the activities listed under the de nition of a ‘personal service’, but the company employs three or more full-time employees (excluding shareholders and connected persons to the shareholders) who throughout the year of assessment render the speci c service. The 20% limitation is, therefore, not applied to income from services rendered if the services cannot be regarded as ‘personal service’. The 20% limitation for investment income will similarly be applicable if the activity carried on by the company is not one of the activities listed under ‘personal service’ as de ned, irrespective of the number of persons employed by the company.
The Act does not prescribe any speci c method of record-keeping in calculating the20% limitation for personal service income. The fact that the personal service income does not exceed 20% of the company’s total receipts and accruals (including all capital gains but excluding amounts of a capital nature) must, however, be substantiated and this may be done either by means of a charge-out system per hour or per job or any other method used by the taxpayer. Calculation of 20% limitation
The 20% limitation for the receipts and accruals attributable to investments and personal service income is calculated as follows:
Example 3 — Calculation of limitation on investment income and income from rendering a personal service
Facts:
For the year of assessment ending 31 March 2009, a close corporation, which renders consulting services to a large number of clients, has two members and two full-time employees. The two full-time employees have no interest in the close corporation and are engaged in the business of the close corporation, that is, the rendering of consulting services. Consulting services is one of the listed activities under the de nition of a ‘personal service’.
The requirement that the close corporation should, throughout the year of assessment, employ three or more full- time employees (excluding members or connected persons to the members) so as not to fall within the de nition of a ‘personal service’ has not been met. The service rendered by the close corporation is therefore regarded as a personal service and the 20% limitation for receipts or accruals attributable to personal service and investment income must be applied.
The close corporation’s total of all receipts and accruals [for purposes of section 12E(4)(a)(iii)] for the year of
assessment from 1 April 2008 to 31 March 2009 consists of:
Income from services rendered by two full-time employees Income from services rendered by members
Royalties received
Bene t received under a will (capital receipt)
Total of all receipts and accruals
Capital gain on disposal of an SBC asset *
Result:
* The capital gain is in respect of the sale of a depreciable asset. This capital gain cannot be deferred as the close corporation indicated that it did not intend acquiring any replacement asset. An election to defer the gain under paragraph 65 or 66 of the Eighth Schedule is therefore not available in this instance.
The total of all receipts and accruals and all capital gains for the purposes of calculating the 20% limitation is R5 063 000 (R5 973 000 — R950 000 + R40 000). (The capital receipt of R950 000 is excluded from total receipts and accruals and the capital gain of R40 000 is added to the net result.)
The investment income (royalties) and income from the rendering of personal service expressed as a percentage of the total of all receipts and accruals and all capital gains is calculated as follows:
[(R23 000 + R1 100 000)/R5 063 000] 3 100 = 22.18%.
Investment income and income from the rendering of a personal service exceed the 20% limitation for the relevant year of assessment and the close corporation will not qualify as an SBC, despite the fact that the members’ interest (ownership) and gross income requirements may have been met.
Note: If the above close corporation had employed three or more full-time employees (excluding the members or connected persons to the members) throughout the year of assessment to render the consulting services, the 20% limitation for the income from rendering a personal service would not have been required, as the service would not be regarded as a personal service. The 20% limitation would, however, have to be applied to any investment income received or accrued during the year of assessment, as follows:
The following is assumed:
The close corporation employed three full-time employees who also render consulting services. The following income and capital gain was received for the nancial year ending 31 March 2009:
R
3 900 000 1 100 000
23 000 950 000 5 973 000 40 000
Income from services rendered by employees (3) Income from services rendered by members Royalties received
Bene t received under a will (capital receipt) Capital gain on disposal of an asset
Total of all receipts and accruals and capital gains
R 2 800 1 000 1 113 950 40
5 903
000
000
000
000
000
000
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