#192358 SAICA Communication & Marketing Strategy 2008

Capital allowances

Capital allowances Residential and commercial buildings Section 13ter Before Section 13ter (Housing project) Residential accommodation that are used for: Rental Capital allowance of 12% of cost in 1st year and 2% in succeeding 44 years OR Employee housing Section 13quin used for the purpose of producing income Capital allowance of 5% of cost of new and unused buildings and improvements (over 20 years) Commercial buildings

Capital allowances Residential and commercial buildings Before Capital allowance: New and unused buildings: 20% of cost in 1st year, 5% in succeeding 16 years Section 13quat Situated in the urban development zone New and unused buildings and improvements New and unused improvements: 20% of cost over 5 years Sunset clause: 03-03-2009

Capital allowances Residential and commercial buildings New definition of ‘residential unit’ means a building or self-contained apartment mainly used for residential accommodation, unless the building or apartment is used by a person in carrying on a trade as an hotel keeper.

Capital allowances Residential and commercial buildings New definition of ‘low cost residential unit’ stand alone unit an apartment qualifying as a residential unit in a building located within the Republic, where a building qualifying as a residential unit located within the Republic, where OR the cost of the apartment does not exceed R250 000 the cost of the building does not exceed R200 000 AND AND the owner of the apartment does not charge a monthly rental in respect of that apartment that exceeds 1% of the cost the owner of the building does not charge a monthly rental in respect of that building that exceeds 1% of the cost plus a proportionate share of the cost of the land and the bulk infrastructure annual inflation adjustment of 10% for each year succeeding the year in which the apartment or building is first brought into use

Capital allowances Residential and commercial buildings New definition of ‘low cost residential unit’ In 2010 Company X constructs a residential apartment building at a cost of R250 000 per apartment. These apartments are rented out: In order to qualify as a ‘low cost residential unit’ the maximum rent that may be charged for a specific unit is: 2010: 1% of R250 000 = R2 500 2010: 1% of R275 000 (R250 000 x 110%) = R2 750 2011: 1% of R302 500 (R275 000 x 110%) = R3 025

Capital allowances Residential buildings s 13sex Residential buildings Section 13ter is amendment to apply only in respect of residential units constructed by the taxpayer on or before 21-10-2008. New section 13sex: Deduction in respect of certain residential units (acquire / construction commence on or after 21-10-2008): Used solely for purpose of the taxpayer’s trade Capital allowance of 5% of the cost to the taxpayer AND New and unused residential unit (or improvement thereto) Situated in RSA AND An additional 5% of the cost to the taxpayer if the unit is a low cost residential unit Taxpayer owns at least 5 residential units in the RSA that are used for purposes of a trade

Capital allowances Residential buildings s 13sex Residential buildings Where the taxpayer acquires a residential unit (or improvement to a residential unit) that represents part of a building (i.e. not a stand alone unit), without constructing that unit or improvement: the taxpayer is deemed to have incurred 55% of the acquisition price in the case of a unit being acquired the taxpayer is deemed to have incurred 30% of the acquisition price in the case of the improvement being acquired Prevent taxpayers from artificially allocating the cost of non-depreciable land to the building or improvement

Capital allowances Residential buildings s 13sept Residential buildings Deduction in respect of sale of low-cost residential units on loan account (disposal on/after 21-10-2008): The taxpayer may deduct 10% of the amount owing to the taxpayer by the employee at the end of the taxpayer’s year of assessment (for 10 years after disposal) Where a taxpayer dispose of a low-cost residential unit to an employee of the taxpayer or associated institution No deduction if: If the amount owing (or part thereof) is paid to the taxpayer, the taxpayer is deemed to have recouped the lesser of: Disposal subject to conditions OR Loan bears interest OR The amount paid Unit is disposed of for an amount exceeding the cost to the taxpayer OR The amount allowed as a deduction in current and previous year

Capital allowances Urban development zone (UDZ) s 13quat Urban development zone (UDZ) UDZ incentive is extended to 31-03-2014 Capital allowances increased in respect of erection, extension, addition or improvement that commences on or after 21-10-2008 20% of the cost in 1st year Erection of new building / extension of a building 8% of the cost in succeeding 10 years (was 5%) 25% of cost in 1st year If relating to a low-cost residential unit 13% of cost in succeeding 5 years 10% of cost in 7th year

Capital allowances Urban development zone (UDZ) s 13quat Urban development zone (UDZ) Improvements where exterior framework is preserved 20% of the cost over 5 years If relating to a low-cost residential unit 25% of cost over 4 years

Capital allowances Urban development zone (UDZ) s 13quat Urban development zone (UDZ) Where the taxpayer purchased part of a building from a developer: the taxpayer is deemed to have incurred 55% of the acquisition price in the case of a unit being acquired in respect of the erection, extension, addition or improvement of that part of the building the taxpayer is deemed to have incurred 30% of the acquisition price in the case of the improvement being acquired in respect of the erection, extension, addition or improvement of that part of the building applicable from 1-10-2008

Trade must constitute one of the following: Capital allowances s 11(gD) Expenditure on Government business licenses Trade must constitute one of the following: the provision of telecommunication services, the exploration, production or distribution of petroleum; or the provision of gambling facilities Requirements: The licence is required to carry on that trade The expenditure is incurred in terms of the licence, and The licence is acquired from the Government, provincial administration, municipality or institution or entity contemplated in the PFMA

Capital allowances Expenditure on Government business licenses s 11(gD) Expenditure on Government business licenses The amount of expenditure = any expenditure incurred to acquire a licence BUT NOT expenditure in respect of infrastructure The deduction is the amount of expenditure incurred divided by the number of years (limited to 30) for which the taxpayer has to right to the licence after the date on which the expenditure was incurred Expenses incurred in maintaining the licence is deductible in terms of s 11(a) (i.e. annual registration)

Small businesses Venture capital companies Effective 1 Jul 09 s 12J Venture capital companies Purpose is to provide an incentive for equity investments in small and medium-sized businesses and junior mining companies Qualifying company Investors acquire equity share capital VCC acquire qualifying share 100% of expenses incurred is allowed as a deduction for the investor natural person R750 000 per year (max R2,25m) listed company to the extent that the company (+group companies) do not hold more than 10% of equity shares of VCC controlled group company of a listed company

Small businesses Venture capital companies s 12J Venture capital companies S12J deduction not available for unlisted companies. Normal income tax and CGT rules applies in respect of the shares acquired in a VCC. On disposal of the VCC shares, the amount deducted under s12J is recouped. R2,25m threshold ‘opens up’ to the extent of a recoupment.

Small businesses Venture capital companies EXAMPLE s 12J Venture capital companies EXAMPLE A natural person expended R2,25m in acquiring shares in a VCC in year 1. An amount of R750 000 may be deducted in year 1, 2 and 3. If the shareholder dispose of 50% of his VCC shares in year 4 for R2m, an amount of R1,125m is recouped. The tax consequences will be as follows: Recoupment (s12J) R1 125 000 Proceeds (capital nature – s9C) (R2 000 000 – R1 125 000 (recoupment)) R875 000 Base cost (R1 125 000 – R1 125 000 (s12J deduction) (Rnil) Capital gain R875 000 Taxable capital gain (excl rebates) R218 750 Taxable income R1 343750 If the person thereafter again acquires shares in a VCC, he may claim up to R1,125m as a deduction (the amount recouped) in terms of s12J (limited to R750 000 per year).

Small businesses Venture capital companies s 12J Venture capital companies In order to qualify as a VCC it has to comply with strict requirements with regards to: Minimum assets (R30m / R150m) Gross income (90% from financial instruments) (within 36 months) Portfolio requirements (within 36 months) If VCC status is withdrawn due to non-compliance, an amount of 125% expenditure incurred by investors to acquire VCC shares must be added to the VCC’s income

Corporate Taxation Intellectual property arbitrage Purpose of s 23I: Comes into operation on 1 January 2009 and applies in respect of any expenditure incurred on or after that date Purpose of s 23I: Avoid arbitrage opportunities whereby income is shifted from parties fully within the tax net to parties wholly or partly outside the tax net. Effect of s 23I: To disallow or limit the deduction of royalty payments incurred for the use of ‘affected intellectual property’ to the extent that the royalty receipts do not constitute income of the licensor Except if the expense is deductible in terms of s 11(gC) (allowance for the acquisition of intellectual property), or as trading stock.

Corporate Taxation Intellectual property arbitrage RSA CO Foreign CO s 23I Intellectual property arbitrage RSA CO sells the patent to Foreign CO RSA CO developed a patent RSA CO Foreign CO Affected IP Foreign CO grants the right of use of the patent to RSA CO RSA CO incurs royalty expense / royalty related payment / corresponding derivative or other contractual obligation RSA CO is denied the deduction in respect of the royalty expense to the extent that that amount of expenditure does not constitute an amount of income received by Foreign CO Or to the extent that the amount is not required to be included in the income of any resident in terms of the provisions of section 9D (in case of a CFC)

Corporate Taxation Intellectual property arbitrage RSA CO Foreign CO s 23I Intellectual property arbitrage HOWEVER: RSA CO sells the patent to Foreign CO RSA CO developed a patent RSA CO Foreign CO Foreign CO grants the right of use of the patent to RSA CO RSA CO pays royalties AND the amount is subject to WHT in terms of s 35 (at a rate of at least 10%) Then RSA CO may deduct 1/3 of the royalty expense