Page 441 - SAIT Compendium 2016 Volume2

IN 44 (2) Income Tax acT: InTeRPReTaTIon noTes IN 44 (2)
Result:
Under paragraph 63A(a) the capital gain of R100 000 must be disregarded as the asset was used exclusively on or after the valuation date (1 May 2006) to carry on PBAs. Any trade usage before valuation date is disregarded.
Example 3 – Asset ‘held’ not ‘used’
Facts:
An approved PBO conducts the sole activity of caring for homeless children. It has invested surplus funds in a collective investment scheme. The PBO disposes of its participatory interest in the collective investment scheme at a capital gain to fund the purchase of additional accommodation.
Result:
The capital gain must be disregarded under paragraph 63A(a) since the participatory interests were ‘held’ by the PBO and are not ‘used’ in carrying on a business undertaking or trading activity.
5.3.2 Category 2: Minimal trading assets [paragraph 63A(b)(i)]
This category applies when substantially the whole of the use of the asset by the PBO on or after valuation date was directed at a purpose other than carrying on a business undertaking or trading activity. An example of such an asset is one that is used 10% of the time for trading purposes and 90% of the time to conduct PBAs. Of critical importance are the words ‘substantially the whole of the use’. As explained in 4, the expression ‘substantially the whole of’ is interpreted by SARS to mean 90% or more. However, SARS is prepared to accept a usage of not less than 85%. The assets referred to in this category are excluded from the rst category (see 5.3.1) as they are used, albeit to a limited extent, in carrying on a business undertaking or trading activity. The percentage of the asset used for trade or business purposes must be determined using a method appropriate to the circumstances, for example, one based on time or oor area.
Example 4 – Determination of ‘substantially the whole of the use’ on a time basis
Facts:
The nancial year of a religious institution ends on 30 April. The institution has been approved as a PBO under section 30. It acquired a manse in 1995 for occupation by its resident minister. The minister’s term of of ce ended on 30 June 2006 and the manse was let to a third party from 1 July 2006 to 30 June 2007. The newly appointed minister took occupation on 1 July 2007 and continued to occupy the manse until it was sold on 30 April 2013.
Result:
The PBO’s valuation date is 1 May 2006, being the rst day of its rst year of assessment commencing on or after 1 April 2006. The asset was held for 84 months from valuation date to the date of sale (1 May 2006 to 30 April 2013). During this period the manse was used to carry on PBAs for 72 months and let for 12 months. This represents a usage of 85,71% (72 / 84 × 100) for carrying on PBAs from the valuation date. This means that the PBO has used substantially the whole of the manse from the valuation date in carrying on its PBAs. Paragraph 63A(b)(i) applies and the PBO must accordingly disregard any capital gain or capital loss on the disposal of the manse.
5.3.3 Category 3: Permissible trading assets [paragraph 63A(b)(ii)]
This category applies when substantially the whole of the use of the asset by the PBO on or after valuation date was
directed at carrying on a business undertaking or trading activity which quali es for exemption in terms of items (aa), (bb), or (cc) of section 10(1)(cN)(ii).
Note: Any capital gain or capital loss made on the disposal of an asset used in a trading activity or business undertaking as contemplated in the basic exemption rule described in item (dd) of section 10(1)(cN)(ii), will not be disregarded. The permissible business undertakings or trading activities are as follows:
(a) Related trade [section 10(1)(cN)(ii)(aa)]
Under this exclusion rule the receipts and accruals derived from a trading activity or business undertaking of a PBO will not be subject to income tax if the trading or business activity –
is integral and directly related to the sole or principal object of the PBO,
is carried out or conducted on a basis substantially the whole of which is directed towards the recovery of cost, and does not result in unfair competition with taxable entities.
Example 5 – Asset used to carry on a permissible trading activity contemplated in section 10(1)(cN)(ii)(aa) Facts:
An approved PBO conducts PBAs of providing facilities for the care of disabled persons. As a therapeutic and remedial activity, the PBO has acquired land on which the residents are taught to grow vegetables. The produce is primarily used for own consumption and any surplus is sold to a local home industry. All the labour is undertaken by the residents. The PBO disposes of the land on which the vegetable gardening takes place resulting in a capital gain.
Result:
The vegetable gardening activity falls within the permissible trading rules of section 10(1)(cN)(ii)(aa) as it forms part of the PBA of caring for and providing training for the residents. The capital gain realised on the sale of the property is disregarded for CGT purposes.
(b) Occasional trade [section 10(1)(cN)(ii)(bb)]
In order to qualify under this category the trading activity must – take place on an occasional basis, and
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