Page 597 - SAIT Compendium 2016 Volume2

IN 67 (2) Income Tax acT: InTeRPReTaTIon noTes IN 67 (2)
Example 35 – Application of the de nition of a ‘connected person’
Facts:
The facts are the same as in Example 34, except that the equipment was disposed of 1 year after acquisition and its market value on date of disposal was R600 000. Calculate the amount of the loss incurred by B on disposal of the equipment.
Result:
The tax value of the equipment on date of disposal was R800 000 (R1 000 000 – R200 000). B therefore incurred a loss on disposal of R200 000 (R600 000 – R800 000). B is prohibited from claiming the loss under section 11(o) since the equipment was disposed of to a connected person [further proviso to section 11(o)]. The loss is also disregarded as a capital loss under paragraph 39(1) of the Eighth Schedule but may under paragraph 39(2) be deducted from future capital gains determined in respect of disposals of assets to C. Under paragraph 38 of the Eighth Schedule, C is treated as having acquired the of ce equipment at a cost of R800 000.
4. Conclusion
The de nition of a ‘connected person’ in section 1(1) identi es those persons that are connected persons in relation to – • an individual,
• a trust,
• a connected person in relation to a trust,
• a member of a partnership or foreign partnership, • a company, and
• a close corporation.
The de nition also establishes the reverse relationship between the persons that are connected persons in relation to the above persons.* The wording of a particular provision of the Act will determine the time at which the existence of any ‘connected person’ relationship must be determined. It will also determine whether an expanded or restricted meaning of the term as de ned in section 1(1) must be applied.
* That is, if A is connected to B then B is connected to A.
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 589