Page 452 - SAIT Compendium 2016 Volume2

IN 47 (3) Income Tax acT: InTeRPReTaTIon noTes IN 47 (3)
The allowance is based on the market value of the asset acquired by a taxpayer by way of donation, inheritance or as a distribution in specie. This market value is determined under paragraph (vii) of the proviso to section 11(e) (see 4.2.1).
The Commissioner’s discretion in this regard will usually be exercised upon audit of the case. Taxpayers must ensure that they have the necessary information or documentation readily available when requested by the Commissioner to substantiate the arm’s length price of an asset and the inclusion of any amount in the determination of the value of an asset. 4.2.5 Limitation of allowance granted on a qualifying asset previously held by a connected person (section 23J)
(a) Years of assessment ending before 1 January 2008
Before paragraph (viii) of section 11(e) was deleted by section 17(1)(a) of the Revenue Laws Amendment Act 35 of 2007, it provided that when a section 11(e) deduction or a deduction under section 11B(3), 11D(2), 12B(1), 12C(1), 12E or under section 27(2)(d) prior to its deletion by section 28(b) of the Income Tax Act 129 of 1991, was previously granted to a connected person in relation to a taxpayer on any asset acquired by the taxpayer on or after 21 June 1993, the allowance had to be calculated on an amount not exceeding the lesser of—
• the cost of the asset to the connected person; or
• its market value as determined on the date upon which it was acquired by the taxpayer.
The term ‘connected person’ is de ned in section 1(1).
The market value in this context is the price which a willing buyer would pay a willing seller at the time and place and under the conditions under which the applicable assets are offered for sale.
(b) Years of assessment ending on or after 1 January 2008
Section 23J was inserted into the Act by section 38 of the Revenue Laws Amendment Act 35 of 2007, and replaced the connected person rule that was previously provided for under paragraph (viii) of the proviso to section 11(e).
Section 23J
23J. Limitation of allowances granted in respect of assets previously held by connected persons.—
(1) Where a depreciable asset acquired by a taxpayer was held within a period of two years preceding the acquisition by a person who was a connected person in relation to that taxpayer at any time during that period, the cost or value of the depreciable asset for the purposes of this section and any deduction or allowance claimed by the taxpayer in respect of that asset shall not exceed an amount determined in accordance with subsection (2).
(2) The amount to be determined for purposes of subsection (1) is the sum of—
(a) the cost of the depreciable asset for purposes of any deductions allowable in respect of that asset to the most recent
person contemplated in subsection (1) that previously held that asset (hereinafter referred to as the ‘connected person’), less the sum of—
(i) all deductions which have been allowed to the connected person in respect of the asset; and
(ii) all deductions that are deemed to have been allowed to the connected person in respect of the asset in terms of section 11(e)(ix), 12B(4B), 12C(4A), 12D(3A), 12DA(4), 12F(3A), 13(1A), 13bis(3A), 13ter(6A),
13quin(3) or 37B(4);
(b) any amount contemplated in paragraph (n) of the de nition of ‘gross income’ in section 1 that is required to be
included in the income of the connected person that arises as a result of the disposal of the asset by the connected
person; and
(c) the applicable percentage in paragraph 10 of the Eighth Schedule, of the capital gain of the connected person that
arises as a result of the disposal of the asset by the connected person.
Section 23J brought the various depreciable-asset-connected-person provisions in the Act under a single section. While the ‘connected person’ rule in section 11(e) limited the cost to the purchaser to the lower of the cost to the connected person (seller) or the market value at the time of the disposal by the connected person, section 23J gives credit to intervening taxation arising from the disposal by the connected person. More speci cally, under section 23J(2) the cost for the purchaser equals the sum of—
• • •
the cost (taking into account any subsequent tax adjustments) of the depreciable asset to the connected person (seller);
all inclusions in gross income by way of the recoupment of amounts allowed as a deduction upon the disposal by the connected person; and
any inclusion stemming from any capital gain triggered on the disposal by the connected person.
Example 1 – Determination of the value on which the allowance is to be based when a qualifying asset is acquired from a connected person
Facts:
Company X owns 60% of the shares in Company Y and Company Z. The nancial years of both companies end on the last day of February.
On 1 March 2012 Company Y sells a motor vehicle to Company Z for R110 000. Company Y initially purchased the vehicle for R100 000 and claimed allowances on it of R30 000. The following are triggered on disposal of the vehicle:
• First, a recoupment is triggered under section 8(4)(a) of R30 000 which results in an inclusion in the gross income
of Company Y under paragraph (n) of the de nition of the term ‘gross income’.
• Secondly, a taxable capital gain of R5 000 is triggered and should be included in the taxable income of Company Y
under section 26A, determined as follows:
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