Page 596 - SAIT Compendium 2016 Volume2

IN 67 (2) Income Tax acT: InTeRPReTaTIon noTes IN 67 (2)
Paragraph 42(3) of the Eighth Schedule
A connected person in relation to a natural person does not include a relative of that person other than a parent, child, stepchild, brother, sister, grandchild or grandparent of that person. A connected person in relation to a fund of an insurer contemplated in section 29A does not include another such fund of that insurer in respect of the disposal of an asset by such fund to another such fund
3.11 Application of the de nition of a ‘connected person’
The application of the de nition of a ‘connected person’ can be illustrated by the following examples:
Example 33 – Application of the de nition of a ‘connected person’
Facts:
C, an individual, sold a xed property that was acquired for R500 000 to XYZ (Pty) Ltd for R600 000. The market value of the property at the date of disposal was R2 million. C holds 20% of the equity shares in XYZ (Pty) Ltd. For the purposes of this example ignore any donations tax that may become payable.
Result:
C and XYZ (Pty) Ltd are connected persons in relation to each other under paragraph (d)(iv) and paragraph (e). Paragraph 38(1)(a) of the Eighth Schedule determines that if a person disposes of an asset to a connected person for a consideration that does not re ect an arm’s-length price, the person who disposed of the asset is treated as having disposed of it for an amount equal to its market value on the date of the disposal. The person who acquires the asset is treated as having acquired it at a cost equal to the same market value under paragraph 38(1)(b). C is therefore deemed to have disposed of the property at market value of R2 million and must declare a taxable capital gain of R499 500 [(R2 000 000 – R500 000) × 33,3%*] instead of a taxable capital gain of R33 300 [(R600 000 – R500 000) × 33,3%] which would have been the case if the parties had not been connected persons. XYZ (Pty) Ltd is deemed to have acquired the property at a cost of R2 million.
Example 34 – Application of the de nition of a ‘connected person’
Facts:
B and C are connected persons in relation to each other. At the beginning of year 1, B acquired of ce equipment at a cost of R1 million. For years 1 and 2 B claimed a wear-and-tear or depreciation allowance under section 11(e) at the rate of 20% a year (R200 000) on the straight-line basis.† At the beginning of year 3 B sold the of ce equipment to C at its written-down tax value of R600 000 (R1 000 000 – R400 000). The market value of the of ce equipment at the time of disposal was R800 000. Calculate the amount to be recouped by B on disposal of the equipment under section 8(4)(a).
Result:
Section 8(4)(k) applies because the of ce equipment was disposed of to a connected person for an amount which was less than its market value. Under that provision B is deemed for purposes of section 8(4)(a) to have disposed of the equipment for an amount equal to its market value of R800 000 at the time of disposal. The amount to be recouped by B under section 8(4)(a) is thus determined as follows:
Original cost of of ce equipment
Less: Wear-and-tear allowance (R200 000 × 2) [section 11(e)]
Tax value
Deemed consideration received by B
Amount recouped and included in B’s income under section 8(4)(a) Capital gains tax
Amount deemed to be received or accrued
(paragraph 38 of Eighth Schedule)
Less: Amount included in income under section 8(4)(a)
(paragraph 35(3)(a) of Eighth Schedule)
Proceeds (paragraph 35 of Eighth Schedule)
Less: Base cost
Original cost
(paragraph 20(1)(a) of Eighth Schedule)
Less: Allowances claimed
(paragraph 20(3)(a) of Eighth Schedule)
Capital gain or loss
1 000 000 (400 000)
600 000 (800 000) (200 000)
800 000 (200 000)
600 000 (600 000)
1 000 000
(400 000)
Nil
Under paragraph 38 of the Eighth Schedule, C is treated as having acquired the of ce equipment at a cost of R800 000.
* Capital gains inclusion rate for C.
† See Binding General Ruling (Income Tax): NO. 7 “Wear-and-tear or depreciation allowance” dated 2 November 2012.
588 saIT comPendIum oF Tax LegIsLaTIon VoLume 2