Page 442 - SAIT Compendium 2016 Volume2

IN 44 (2) Income Tax acT: InTeRPReTaTIon noTes IN 44 (2) be undertaken substantially with assistance on a voluntary basis without compensation.
(c) Ministerial approval [section 10(1)(cN)(ii)(cc)]
Under this category the Minister of Finance may approve a speci c business undertaking or trading activity by notice in the Gazette having regard to factors such as –
• the scope and benevolent nature of the activity;
• its relationship with the sole or principal object of the PBO;
• its pro tability; and
• the economic distortion that may result from the exemption.
To date the Minister has not approved any such an undertaking or activity. Any capital gain or capital loss made on the disposal of assets used in carrying on the speci c trade or business as approved by the Minister must be disregarded.
6. Practical examples
Example 6 – Asset used to carry on a permissible trading activity contemplated in section 10(1)(cN)(ii)(bb) Facts:
A PBO conducts PBAs of caring for poor and needy persons 60 years and older. The PBO holds an annual fete as a fundraising event for which it has acquired a marquee. The fundraising event is undertaken with assistance from volunteers and the items which are sold were all donated.
Result:
This event quali es as an occasional trading activity which falls within the ambit of section 10(1)(cN)(ii)(bb). Any capital gain or capital loss on the sale of the marquee must be disregarded for CGT purposes.
Example 7 – Determination of valuation date values
Facts:
A PBO with a nancial year ending on 31 March owns immovable property on which it carries on its PBAs. The property was acquired on 1 June 1996 at a cost of R40 000. No expenditure was incurred on improvements to the property from date of acquisition. The PBO determined that the market value of the property on 1 April 2006 was R80 000. With effect from 1 June 2006 the PBO let 20% of its property to a commercial business at an arm’s length rental. On 31 December 2013 the PBO disposed of the property for proceeds of R110 000. The PBO paid estate agent’s commission of R7 000.
Determine:
The capital gain or loss on disposal of the property assuming that the valuation was performed on – • 31 March 2008, or
• 31 August 2008
Result:
The valuation date of the PBO is 1 April 2006, namely, the rst day of its rst year of assessment commencing on or after 1 April 2006. A PBO wishing to adopt the market value method for determining the valuation date value of an asset must have performed the valuation within two years of its valuation date. In the instant case the valuation should have been done on or before 31 March 2008.
It follows that –
• the valuation performed on 31 March 2008 was determined within two years of valuation date and the PBO may
therefore adopt the market value of the property on 1 April 2006 as the valuation date value of the property. The PBO
is also entitled to use the time-apportionment or ‘20% of proceeds’ method if it so chooses, and
• the valuation done on 31 August 2008 was done outside the prescribed period of two years from the valuation date and the PBO must accordingly resort to the time-apportionment or the ‘20% of proceeds’ method to determine the
valuation date value of the property as at 1 April 2006.
Time-apportionment method
Valuation date = 1 April 2006 (Note 1)
N = Number of years before valuation date (1 June 1996 to 31 March 2006), determined as follows: 1 June 1996 to 31 May 2005 = 9 years
1 June 2005 to 31 March 2006 = 10 months (treated as a full year)
N = 9 + 1 = 10
T = Number of years after valuation date (1 April 2006 to 31 December 2013)
1 April 2006 to 31 March 2013 = 7 years
1 April 2013 to 31 December 2013 = 9 months (treated as a full year)
T = 7 +1 =8
P = Amount received or accrued reduced by selling expenses (Note 2)
= R110 000 – R7 000 = R103 000
Y = B + [(P – B) × N / (N + T)]
= R40 000 + [(R103 000 – R40 000) × 10 / (10 + 8)]
= R40 000 + (R63 000 × 10 / 18)
= R40 000 + 35 000
= R75 000
434 saIT comPendIum oF Tax LegIsLaTIon VoLume 2