Page 518 - SAIT Compendium 2016 Volume2

IN 58 (2) Income Tax acT: InTeRPReTaTIon noTes IN 58 (2)
to SARS for all life rights granted.) SARS has accepted this method as a basis for calculating the amount to be included in gross income. This deduction accommodates the owner of the unit who gives a right to occupy the unit as a quid pro quo for the right to use an interest-free loan.
Formula: A = (B × C × D) – E × (B × C × D)
* The life expectancy of the life-right holder and the present value of R1 a year for the life of the life-right holder may be determined by using the life-expectancy table issued under Government Notice No. R1942 of 23 September 1977 under section 29 of the Estate Duty Act 45 of 1955 (see Annexure).
The monetary value of the right to use the interest-free loan in the year in which it is granted and paid must be determined by multiplying the amount of the loan by the present value of R1 a year for the lifetime of the life-right holder and the weighted-average prime overdraft rate determined for the relevant year of assessment. The amount so calculated is then reduced by 93,1%. Note: This is a once-off calculation of the amount to be included in the gross income of the borrower in the year of assessment in which the borrower becomes entitled to the right to use the loan. The amount is therefore not re-calculated and included in the borrower’s gross income in each subsequent year until the loan is repaid (see 6.1.2).
Example 1 — Calculation of the monetary value to be included in gross income
Facts:
A retirement village is held under sectional title by the owner. The scheme is governed by the Housing Development Schemes for Retired Persons Act 65 of 1988. On 1 June 2011 the owner enters into an agreement, under which the owner grants a life right of occupation over a sectional title unit in the village to a person aged 75.
Under the agreement, the 75-year-old person and that person’s spouse will be entitled to occupy the unit in exchange for the grant to the owner of the use of an interest-free loan of R400 000. The life-right holder advanced the loan on 1 July 2011.
The person turned 75 on 16 February 2011.
According to the life-expectancy table (see Annexure) the present value of R1 a year for the life of the 75-year-old male is 4,59354 (age next birthday = 76).
The interest-free loan is repayable by the owner of the village to—
• the life-right holder upon cancellation of the agreement under various circumstances, which include the life-right
holder falling ill and requiring full-time medical care; or
• his or her estate when he or she dies.
The weighted-average prime overdraft rate for banks during the relevant year of assessment is 13,44%.
The nancial year of the owner of the retirement village commences on 1 March 2011 and ends on 29 February 2012.
Result:
The monetary value of the right to the use of the interest-free loan is calculated as follows: A = (B × C × D) – E × (B × C × D)
= (R400 000 × 4,59354 × 13,44%) – 93,1% × (R400 000 × 4,59354 × 13,44%) = R246 948,71 - R229 909,24
= R17 039,47
An owner that is obligated to refund only a portion of the loan on death or cancellation of the agreement must include the amount not refundable in gross income in the year of assessment in which the loan is granted and paid by the person acquiring the life right.
Example 2—Full loan amount not refundable
Facts:
The agreement between the owner and the life-right holder provides that only 80% of the interest-free loan of R900 000 is refundable on death.
Result:
The owner must include R180 000 (20% × R900 000) in gross income in the year of assessment in which the loan is granted and paid by the life-right holder.
In addition, an amount equal to the monetary value, calculated in respect of the right to use the interest-free loan, must be included in the owner’s gross income in the year of assessment in which the loan is granted and paid.
Note: For purposes of calculating the monetary value, symbol ‘B’ in the formula is 80% × R900 000 = R720 000.
In the case of an interest-free loan, the bene t to retain and use the interest-free loan will accrue to the owner on the date the loan has been granted and paid by the person acquiring the life right.
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