Page 565 - SAIT Compendium 2016 Volume2

IN 64 (3)
Income Tax acT: InTeRPReTaTIon noTes
IN 64 (3)
Levies received from members Rent from cell mast
Interest on investment
Total income
Result:
Income exempt from income tax
Levies – exempt from normal tax under section 10(1)(e)(i)
Receipts and accruals subject to income tax
Rent from cell mast
Interest on investment
Total receipts and accruals subject to income tax
Less: Basic exemption
Income subject to income tax (before allowable deductions)
5. Application for exemption
5.1 Bodies corporate and share block companies
R 460 240 120 000
80 000 660 240
460 240
120 000 80 000 200 000
(50 000) 150 000
A body corporate or share block company is not required to apply for exemption under section 10(1)(e)(i)(aa) or (bb) respectively. These entities are not registered at the TEU for income tax but are required to register at a branch of ce and submit annual income tax returns even if they are unlikely to have an income tax liability. The levy income exemption and the basic exemption are applied on assessment.
5.2 Association of persons
An association of persons must lodge an application with the Commissioner at the TEU in order to qualify for exemption from income tax under section 10(1)(e)(i)(cc). The contact details of the TEU and the application procedure are available on the SARS website. It will be determined on application whether the requirements discussed in 4.1.3 have been met. Additional conditions may be prescribed to ensure that the above requirements are met.
The following should be included in the founding document:
• The sole object of the association of persons must be to manage the collective interests common to all its members,
which includes expenditure applicable to the common immovable property and the collection of levies for which such
members are liable.
• The association of persons is not permitted to distribute its funds to any person other than to a similar association of
persons.
• Any amendments to the founding document of the association of persons must be submitted to the Commissioner.
• On dissolution of the association of persons, its remaining assets must be distributed to a similar association of persons
that is also exempt from income tax under section 10(1)(e).
An association of persons will be fully taxable on all its receipts and accruals in the absence of approval by the
Commissioner.
6. Prohibited transactions, operations or schemes
The exemption under section 10(1)(e) does not apply to a qualifying entity that is a party to a transaction, operation or scheme the sole or main purpose of which is or was to reduce, postpone or avoid any tax, levy or duty otherwise payable by any person under the Act or any other Act administered by the Commissioner.* The denial of the relief will apply only if the entity was knowingly a party to such an arrangement. This rule will apply irrespective of whether the entity itself or any other person, for example a shareholder or unit holder, bene tted from the reduction, postponement or avoidance of any applicable tax, duty or levy. The type of tax, duty or levy that has been so reduced, postponed or avoided may arise under the Act, for example donations tax, income tax, or dividends tax, or under any other Act administered by the Commissioner, for example value-added tax or transfer duty.
7. Determination of taxable income
7.1 Receipts and accruals
7.1.1 Levy income
Levy income received by or accrued to qualifying entities is exempt from income tax. Expenditure incurred by a qualifying entity in relation to the management of the collective interests of members and which is funded by the levies from the members is not allowable as a deduction in determining its taxable income because it is incurred in the production of exempt income.† Consequently, such expenditure in excess of the levy income may not be set off against other income which is subject to income tax and must be disregarded in determining taxable income.
* The Acts administered by the Commissioner involving tax, duties or levies are set out in Schedule 1 of the South African Revenue Service Act No. 34 of 1997.
† Section 11(a) and 23(f).
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