Page 720 - SAIT Compendium 2016 Volume1

CASE DIGEST 2009–2010
It was held that the donations in question did not qualify for exemption from donations tax in that they had not been made under or in pursuance of a trust as contemplated in s. 55 (1) since the recipient trusts were not bene ciaries as de ned in the trust deed.
It was accordingly held that the trust was liable for donations tax in respect of the awards, notwithstanding the fact that the donations may have been void between the parties, as being ultra vires in terms of the trust deed. Moreover, that the trust had, by its conduct, either waived or renounced its right to reinstate the amounts owing under loan account and that its inaction amounted to a donation that gave rise to a liability for donations tax.
13. Whether audit fees and professional fees were partly of a capital nature and were apportionable
[ITC 1842 (2010) 72 SATC 118]
The Commissioner for SARS had apportioned audit fees claimed by the taxpayer as a deduction for income tax
purposes on the basis of the ratio between the (exempt) dividends and the (taxable) interest that made up the taxpayer’s gross income, and had disallowed the proportion of the audit fees relating to those dividends. Also disallowed were professional fees in respect of services rendered.
The issue before the court was whether the audit fees in question constituted expenditure incurred ‘in the production of income’ for the purposes of s. 11 (a) of the Income Tax Act and whether the disallowed portion of the audit fees was to be regarded as expenditure of a capital nature as envisaged in that provision, in which event those fees would be non-deductible. Also in issue was the deductibility of certain fees for professional services that had been rendered to the taxpayer.
It was held that expenditure could be incurred for a dual purpose, one purpose being the production of income and the other the production of amounts that are not ‘income’. It was held that in such circumstances, the court was empowered to apportion the expenditure between those two purposes. It was held that an apportionment of the audit fees in question based on the ratio of taxable income and exempt income would be unfair in the circumstances of this case and that a 50/50 apportionment would be just and equitable, with the result that the taxpayer would be entitled to deduct 50% of the audit fees in each of the tax years in issue.
As regards the professional fees that the taxpayer had claimed as a deduction, it was held that the services in question were intended to add value to the taxpayer’s income-earning structure, and that such expenses were consequently of a capital nature and were not deductible.
14. Whether the issuing of its own shares by a company constituted expenditure that had been ‘actually incurred’
[CSARS v Labat Africa Ltd (2010) 72 SATC 75]
The question before the court was whether the issuing by the company of its authorised capital in consideration for the
acquisition of a trademark constituted ‘expenditure actually incurred’ for the purposes of s. 11 (gA) of the Income Tax Act.
The Commissioner contended that no expenditure had been actually incurred.
It was held that, for expenditure to have been actually incurred for the purposes of s. 11 (gA), such expenditure must have been unconditionally incurred in the sense that the taxpayer must have incurred an unconditional legal obligation. If this requirement was ful lled, then this criterion for deductibility had been met, and actual payment of the amount in question was not a requirement.
It was held that, in the circumstances of this case, the issuing of the shares in question by the taxpayer company in consideration for the acquisition of the trademark constituted expenditure for the purposes of s. 11 (gA).
15. The exemption from STC in terms of s. 64B (5) (c) (ii) [Defy v CSARS (2010) 72 SATC 99 (SCA)]
This decision concerned the liability or otherwise of the taxpayer company for the payment of secondary tax on companies (‘STC’) on a particular amount, and the issue turned on the nature of the exemption provided for in s. 64B (5) (c) (ii) of the Income Tax Act.
In terms of this provision, a dividend quali es for exemption from STC where it is distributed ‘in the course or in anticipation of the liquidation or winding up or deregistration of a company’ and if it is shown to be a ‘distribution of a capital nature’.
In this case, the taxpayer company was an investment company which held shares (which were accepted to be capital assets) comprising the entire share capital of a number of subsidiaries. The taxpayer company had decided to dispose of its business and then be wound up. The taxpayer company received a dividend from a subsidiary company, which had been distributed in anticipation of the winding up of the latter company. The taxpayer company distributed this dividend to its own shareholders. The issue before the court was whether the amount received by the taxpayer from this subsidiary was exempt from STC in terms of s. 64B (5) (c) of the Act.
It was held that s. 64B (5) (c) exempted from STC the pecuniary gain derived from the disposal by a company of a capital asset, and that the dividend received by the taxpayer company from its subsidiary was not a gain from the disposal of an asset.
Consequently, the amount in issue had not been derived by the taxpayer as a capital pro t, and consequently did not qualify for exemption from STC.
16. Whether ore, not acquired for the purpose of sale, constituted trading stock
[CSARS v Foskor (Pty) Ltd (2010) 72 SATC 174 (SCA)]
The issue was whether certain phosphate-bearing ore belonging to the taxpayer, a mining company, constituted
‘trading stock’ for the purposes of, and as de ned in s. 1 of the Income Tax Act 58 of 1962.
712 SAIT CompendIum oF TAx LegISLATIon VoLume 1