Page 731 - SAIT Compendium 2016 Volume2

BGR 8 INCOME Tax aCT: BINdINg gENERaL RuLINgS BGR 8
Agreements in the retirement industry are frequently structured in such a way that one person (the owner of a unit) grants a lifelong right of occupation over that unit to another person (the life-right holder). As compensation the life- right holder advances the owner an interest-free loan for the duration of the period of occupation.
Only amounts received by or accrued to a taxpayer during a particular year of assessment must be included in that taxpayer’s gross income for that year of assessment.* e value of a right that accrues to a taxpayer in a particular year of assessment must be determined in that year.†
In calculating the monetary value of the right to use an interest-free loan in the year in which it is granted, it should be taken into account that the owner of the unit has given something in exchange to the life-right holders. e quid pro quo is the granting of the lifelong right of occupation of the unit. e owner is therefore le only with the bare dominium of the unit for the full period of the loan. Only when the loan is repaid and the life right is re-united with the bare dominium, will the owner be in a position to deal freely with the complete ownership of the unit.
e value of this quid pro quo given by the owner of the unit to the life-right holder should therefore be determined and taken into account in the valuation of the right to use the interest-free loan.
e right to use an interest-free loan granted by an occupant in a retirement village to the owner of that unit in exchange for the granting of a life right of occupation in respect of that unit usually does not relate to a xed period. Instead, the period over which the right to the use of the loan is to be enjoyed depends on the life expectancy of the life- right holder and certain other contractually agreed contingencies (such as the possibility that the life-right holder may cancel the loan before his or her death).
In view of the above, it may be accepted that the value of the right to use the interest-free loan should be calculated in the year that the loan is granted with reference to the following factors:
A = e monetary value of the right of use of the interest-free loan which must be included in gross income
B = e amount of the interest-free loan
C = e present value of R1 a year over the life expectancy of the life-right holder*, or in the case of more than one life-
right holder, the youngest of them
D = e weighted-average prime overdra rate for banks in respect of the relevant year of assessment
E = 93,1% ( e percentage to be allocated to the monetary value of the life right of a unit, as opposed to the value of the
complete ownership of the unit. is average percentage has been determined actuarially and is acceptable 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. is 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 x C x D) – E x (B x C x D)
* e 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 R1942 of 23 September 1977 under section 29 of the Estate Duty Act 45 of 1955 (see Annexure).
e 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 overdra rate determined for the relevant year of assessment. e amount so calculated is then reduced by 93,1%. Note: is is a once-o 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. e 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. e 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. e life-right holder advanced the loan on 1 July 2011.
e 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).
e 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.
* De nition of ‘gross income’ in section 1.
† CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9.
SAIT CompendIum oF TAx LegISLATIon VoLume 2 723