Page 496 - SAIT Compendium 2016 Volume2

IN 53 (2) Income Tax acT: InTeRPReTaTIon noTes IN 53 (2)
The noun ‘ nance’ is de ned in the same dictionary* as –
‘1 the system of money, credit, etc., esp. with respect to government revenues and expenditures. 2 funds or the provision of funds. 3 (pl) funds; nancial condition. Vb 4 (tr) to provide or obtain funds, capital, or credit for. 5 (intr) to manage or secure nancial resources’.
The nance industry includes amongst others, debt factoring businesses, businesses carrying on the letting of assets, investment banks, credit-card providers, foreign exchange service providers, hedge funds and collective investment schemes.
In South Africa the Insurance business is regulated by the Financial Services Board Act 97 of 1990. This act does not provide a de nition of the word ‘Insurance’ or ‘Insurance business’.
The word ‘insurance’ is also not de ned in the Act. For income tax purposes, the insurance business is divided into long-term insurance and short-term insurance and is governed by the Long-Term Insurance Act 52 of 1998 and the Short- Term Insurance Act 53 of 1998. These two acts provide the de nitions of ‘long-term insurance business’ and ‘short-term insurance business’ respectively as meaning –
‘the business of providing or undertaking to provide policy bene ts under long-term policies’and ‘the business of providing or undertaking to provide policy bene ts under short-term policies’.
The Collins English Dictionary (above)† de nes the word ‘insurance’ as–
‘1a the act, system, or business of providing nancial protection for property, life, health, etc., against speci ed contingencies, such as death, loss, or damage, and involving payment of regular premiums in return for a policy guaranteeing such protection. 1b the state of having such protection. ... 2 a means of protecting or safeguarding against risk or injury’.
For the purposes of section 23A it is submitted that the word ‘insurance’ comprises short-term insurance business and long-term insurance business. In order to qualify as an ‘operating lease’, all three requirements listed in the de nition of that term must be met.
First, the de nition requires that the asset in question ‘may’ be hired by members of the general public for a period of less than one month. The question arises whether the word ‘may’ is used in the obligatory sense of ‘must’ or in the permissive sense. It is submitted that the word ‘may’ was used in the de nition in the sense of ‘permitted to’ or ‘capable of’. Accordingly under the lessor’s general modus operandi the asset must be made available for hire for a period of less than a month. In making this determination, the terms on which the asset is advertised for hire will be a relevant factor, as will the standard-form lease agreement used for the pool of assets available for hire.
Although an asset is not automatically excluded from the de nition when it is let for a period of one month or longer, an asset which is let on a xed basis for a period of, say, six months, will be incapable of being let for a period of less than one month by reason of its extended lease period. By contrast, the position would be different in the case of a car-hire rm having a eet of, say, 15 000 vehicles which it leases under a standard-form lease agreement providing for daily or weekly hire. If the occasional customer happens to hire a vehicle for, say, 40 days, such a contract would not cease to be an operating lease merely because the lease period exceeds one month.
The facts and method of operation of each lessor must be considered in determining whether an asset ‘may’ be hired for a period of less than one month.
Furthermore, a lease entered into on the basis that the lessee is entitled to exercise options which will result in the asset being leased for consecutive terms continuously by the same lessee, will disqualify the lease as an operating lease. By implication, the property will not be available to the general public for a period of less than one month.
The term ‘members of the general public’ means members of the community at large.‡ The requirement that such property be capable of hire by members of the general public directly from the lessor under the lease for a period of less than one month means that the general public may not hire the property from a third party such as a sub-lessee. If members of the general public hire the property from third parties, the lease will not qualify for exclusion from section 23A even if the lease is for a period of less than one month. Thus, if A lets an aircraft to B who lets it to the general public, the lease concluded by A will not be regarded as an ‘operating lease’. See Example 1 in the Annexure.
A second requirement listed in the de nition of an ‘operating lease’ is that the lessor should bear any costs incurred for maintenance and repair of the property as a result of normal wear and tear. For more information on the meaning of repairs and maintenance, see Interpretation Note No. 74 dated 6 August 2013 ‘Deduction and Recoupment of Expenditure Incurred on Repairs’.
The nal requirement listed in the de nition of an ‘operating lease’ is that the risk of destruction or loss of or other disadvantage to the property is not assumed by the lessee, unless the lessor has a claim against the lessee as a result of the lessee’s failure to take proper care of the property.
4.1.3 Rental income
The term ‘rental income’ is de ned in section 23A(1) as –
• income derived by way of rent from the letting of any affected asset for which an allowance has been granted to the
lessor under section 11(e), 12B, 12C, 12DA or 37B(2)(a), whether in the current or any previous year of assessment; and includes
• any recoupment under section 8(4) of an amount deducted in any year of assessment for any affected asset;§ and
* www.collinsdictionary.com/dictionary/english/ nance [Accessed 9 October 2015].
† www.collinsdictionary.com/dictionary/english/insurance [Accessed 1 October 2015]. ‡ CIR v Plascon Holdings Ltd 1964 (2) SA 464 (A), 26 SATC 101 at 109.
§ Paragraph (a) of the de nition of ‘rental income’.
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