1. #192358 SAICA Communication & Marketing Strategy 2008

2. Capital allowances

3. 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

4. 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:

5. 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.

6. 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 R
the cost of the building does not exceed R
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

7. 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 R 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 R = R2 500
2010: 1% of R (R x 110%) = R2 750
2011: 1% of R (R x 110%) = R3 025

8. 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
New section 13sex: Deduction in respect of certain residential units (acquire / construction commence on or after ):
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

9. 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

10. Capital allowances Residential buildings
s 13sept
Residential buildings
Deduction in respect of sale of low-cost residential units on loan account (disposal on/after ):
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

11. Capital allowances Urban development zone (UDZ)
s 13quat
Urban development zone (UDZ)
UDZ incentive is extended to
Capital allowances increased in respect of erection, extension, addition or improvement that commences on or after
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

12. 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

13. 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

14. 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

15. 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)

16. 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
R 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

17. 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.

18. 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 R 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) R
Proceeds (capital nature – s9C)
(R – R (recoupment)) R
Base cost
(R – R (s12J deduction) (Rnil)
Capital gain R
Taxable capital gain (excl rebates) R
Taxable income R
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 R per year).

19. 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

20. 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.

21. 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)

22. 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