Hi I need assistance with the following query from a client as a south afrcian tax practitioner "Joel Brown made an appointment to visit you on 21 January 2025 to get an opinion on his tax issues for the year of assessment ending 29 February 2024. Joel is registered for all the taxes he must pay in the Republic. He is a provisional taxpayer, and his tax return had to be submitted on 20 January 2025. Due to his circumstances, he got an extension from SARS to submit his tax return no later than 20 February 2025. Background information Joel Brown lived in Mauritius until he immigrated to the Republic. He is a property development consultant who works in the Southern African Development Community (SADC) countries. He met his wife, Lulu (a resident of the Republic), in Mauritius several years ago when she was on vacation there. They got engaged soon after they met. Lulu cannot relocate to Mauritius due to her substantial business interests in Cape Town. They decided then that a long-distance relationship would work, and that Joel would not need to immigrate to the Republic soon, a decision they later changed. Residency status Joel visited South Africa periodically and was present in the Republic during the following periods, namely: 1 April 2019 to 15 February 2020 (321 days). 1 June 2021 to 31 December 2021 (214 days). 1 November 2022 to 31 December 2022 (61 days). In 2023, he spent 58 days in the Republic during March and April 2023. He immigrated to the Republic and became ordinarily resident of the Republic on 1 September 2023. According to the DTA between the Republic and Mauritius: Royalties During his visit in 2022, Joel wrote a book about sustainable property development in the SADC countries and sold it to a South African publisher in Cape Town. Royalties are paid every six months, namely at the end of August and February each year. He received R250 000 royalties in the 2023 year of assessment (R150 000 in August 2022 and R100 000 in February 2023) and R120 000 on 31 August 2023, and R100 000 on 29 February 2024). According to the DTA, South Africa may only charge a withholding tax of not more than 5% of royalties paid. Estate agent’s commission As a registered estate agent, he facilitated a property transaction in Sea Point. His estate agent's commission on the sale of the property amounted to R1 million. The property transfer took place on 30 November 2023. Joel only received his commission on 15 March 2024. Cape Town Property During the 2019 year of assessment, he acquired a property in Sea Point for R9,1 million. He spent R1,1 million on maintenance before moving in. During the current year of assessment, Lulu started to suffer from asthma due to the air pollution in the city. Her asthma became so bad that she could hardly breathe at night and had to start sleeping with an oxygen machine. They decided to move to a small town near the coast. In January 2024, he sold the house for R15,8 million. REQUIRED: You need to start with your tax opinion today, and you have about two hours to prepare a preliminary report for Mr Brown. Due to the time constraint, you will use bullet points and write in short sentences. Joel asks you to address the following issues, namely: 1. Resident status Whether Mr Brown might be considered a resident before immigrating to the Republic. (You decided to base your opinion on the definition of a resident and relevant case law). 2. Royalties How would Mr Brown be taxed on the royalties he earned during the year of assessment ending 29 February 2024? (You decided to base your opinion only on the relevant legislation, namely, the gross income definition, section 10(1)(l) exemption and the withholding tax on royalties in terms of section 49A and section 49B). 3. Estate agent’s commission How will Mr Brown be taxed on the estate agent’s commission? (You decided to base your opinion on the gross income definition and relevant case law). 4. Cape Town property What are the tax consequences of selling the Cape Town property? (You decided to base your opinion on the gross income definition and relevant case law)." will you also use the following guidelines in answering the above "Identifying the problem/s The most logical, and important, starting point is to establish what issues are involved in the tax scenario under discussion. Are there receipts and accruals, and therefore could the question revolve around gross income? Is expenditure involved, and might some discussion of the general deduction formula be required? Or does the problem deal with a more specific deduction or form of income – lease premiums or a particular allowance, for example? Do both parties to a transaction – seller/purchaser or lessor/lessee – need to be discussed? If that is the case, then discussing the issues of inclusions in gross income and general and specific deductions may be required. Introduction Having established the essential issues, it can be worthwhile – but not necessarily essential – to open your discussion with a brief introductory paragraph in which you outline, in your own words, what the fundamental tax problems are that need to be addressed. The opening paragraph can provide a useful ‘big picture’ overview of the core issues that need to be examined, without reaching any conclusions – which obviously come later. Legislation: Laying the foundation The basis of resolving or clarifying any tax problem is the relevant underlying legislation, supported by case law. After establishing and briefly describing the fundamental issues in your introduction, go on to outline what the relevant legislation has to say, early on in your discussion. It is important to note here that the quoted legislation should be concise and relevant. A common error made by students is to quote extracts of legislation (relevant or otherwise) that are far too long. Remember that ‘more’ does not necessarily mean ‘better’. If necessary, make use of an ellipsis […] so that only the wording of the most pertinent parts of a particular section of the Act is cited. In addition, where the quoted legislation is fairly complex, it may be helpful to clarify and explain the key points in your own words, in language that is plain and understandable – and which indicates your understanding of the law’s effects and implications. Application Having provided a solid legislative background, go on to apply the facts of the question to the legislation that you have already outlined. In what way are the facts of the case affected by the legislation, and in what way are they not? Methodically analyse – in your own words – the taxpayer’s circumstances, in the context of the legislation that you have already cited. The same methodical approach should be used regardless of whether the taxpayer is an individual, company or trust. Does the legislation indicate that there could be deemed recoupment for Company A? Does a section of the Act show that certain income is taxable in Trust B, or is it taxable in the hands of the trust’s founder and beneficiaries? Is a particular expense in the production of income, and can Taxpayer C claim it as a tax deduction? The application part is where many students have difficulties and where they tend to gloss over the discussion. It is particularly important here to discuss the facts and the legislation in plain and clear language, which demonstrates your understanding of the taxpayer’s key issues, and your ability to explain how they tie into the relevant legislation. This is not the place for extended quotes from the Income Tax or VAT Acts. Conclusion A concise final paragraph is usually sufficient to conclude on the topics discussed above. Once again, it should be in your own words. This is where you arrive at your conclusions – based on what you have already discussed – on whether an amount is taxable or tax deductible, or on whatever the topic was that needed to be addressed. Some additional points to consider • There should be a logical flow from one paragraph to the next. Ensure that you have completed one aspect of your discussion before moving onto the next. Raising points in a haphazard way is confusing to read and indicates an inability to communicate and clarify your thoughts and arguments. • When dealing with both sides of a transaction – for instance, seller and purchaser – it is usually makes for a more comprehensible structure if one party is dealt with first [Introduction/Legislation/Application/Conclusion] before separately dealing with the second party in a similar manner [Introduction/ Legislation/Application/Conclusion]. • Tax legislation has numerous provisos and exclusions. After applying the facts of the case to the relevant legislation it may be necessary to consider whether there are any provisos to the main enactment that also need to be examined and discussed. This can be done in a separate paragraph or woven into your general discussion. • To further bolster and motivate your arguments, consider whether it may be appropriate to cite some additional sources such as a SARS Practice Note or an authoritative textbook. Once again, the use of any quotations should be selective and well judged. • Where a question is broken down into separate parts, you may have to apply a briefer, more abbreviated, version of the above structure. • In some cases, a question divided into separate parts may deal with different aspects of the same section of legislation. It should be unnecessary to repeat the wording of the legislation in each part of the answer. Providing the legislation text in the first part should suffice. In subsequent parts, a brief reference in your own words to the legislation that has already been quoted, should be enough.". I have also an example of how the answers should be constructed for your reference " Example The two relevant cases in connection with the “old” general anti-tax avoidance legislation you were requested to highlight, are • SIR v Geustyn, Forsyth and Joubert; and • CIR v Louw In the Geustyn case, the absence of the “purpose” prerequisite was successfully used as a defence by the taxpayer. In Louw’s case, both the “purpose” and the “abnormality” requirements (only as far as incorporation was concerned) were held to be in favour of the taxpayer. In terms of the “old” section 103(1) (under which these cases were decided), whenever the Commissioner was satisfied • a transaction, operation or scheme has been entered into; • which has the effect of reducing a tax contained in the Income Tax Act; • if it is a “business” transaction, it has been carried out not for bona fide business purposes or has created abnormal rights and obligations, or if it is not a “business” transaction, it has been carried out in an abnormal manner or has created abnormal rights and obligations; and • was entered into solely or mainly for the purpose of reducing a tax collected by the Commissioner, the Commissioner must apply its provisions. In terms of the section, the Commissioner was entitled to presume that the “purpose” element (see above) was present until the taxpayer could prove otherwise. It is further clear from the judgment in (inter alia) SIR v Geustyn, Forsyth and Joubert that all four of the above criteria had to be present before the Commissioner could successfully rely on section 103(1). In the absence one of any of these criteria, the Commissioner could not rely thereon. Note that the requirements of the “new” section 80A closely resemble those posed under the “old” section 103(1). Looking at the requirements of both the “old” and “new” general anti-tax avoidance provisions individually and applying it to the situation under consideration, we find the following: Transaction, operation or scheme It would seem that there are a few transactions at stake. One transaction that took place, was the sale of the going concern (business), including its goodwill, by Peter Rhine and Paul Rhone to the newly formed company. Under section 80A, this would qualify as an ‘arrangement’ as well, as this word is defined in section 80L to mean any transaction, operation, scheme, agreement or undertaking (whether enforceable or not), including all steps therein or parts thereof, and including any of the foregoing involving the alienation of property. Brief overview What does the relevant legislation say? Explaining the legislation Applying the legislation to the facts of the question Result (effect of reducing a tax) Before the company’s incorporation, the individual partners would have been the taxpayers who had a normal tax liability with regards to the taxable income generated by the partnership. The partnership itself is not a taxpayer for the purposes of the Income Tax Act. The company, in turn, is a “new” taxpayer in its own right, separate from and distinct to its shareholders and directors. The company, therefore, has not saved a tax contained in the Income Tax Act, as it has never been assessed to normal tax. Being its first year of assessment, there is no previous normal tax liability to compare its current income tax liability with. Prior to incorporating their business, Peter Rhine and Paul Rhone successfully operated their business and, we can thus assume, earned a generous taxable profit (and therefore had taxable income) each year. After incorporating their business, they are likely to earn a taxable salary, receive a tax-free loan repayment (not a “receipt” for gross income purposes – Genn & Co) and, possibly, an exempt ‘local’ dividend (subject to dividends tax of 20%) from this company. Their respective individual taxable incomes and normal tax payable are likely to be less than in the previous year of assessment. They may be replacing taxable amounts with tax-free amounts and also earn lower amounts of income due to admitting new partners (shareholders) into their business. This should lead to a corresponding saving in their normal tax liabilities due to the progressive nature of the tax table, meaning lower tax rates applied to lower levels of taxable income earned. It would therefore seem that Peter Rhine and Paul Rhone, in their individual capacities, are likely to save a tax contained in the Income Tax Act (normal tax) – this fact is confirmed by the information provided. Under section 80A, this would mean that there is a “tax benefit” (any avoidance, postponement or reduction of any liability for tax – section 1) and, thus, an “avoidance arrangement”. Business purposes The sale of the business to the company by Peter Rhine and Paul Rhone would clearly be a transaction “in the context of business”. Therefore, it must first be decided whether this transaction was carried out “in a manner that would not normally be employed for bona fide business purposes, other than the obtaining of a tax benefit”. The transaction does result in a “tax benefit” arising. Yet, the question must be asked whether the transaction was carried out for “bona fide business purposes other than the obtaining of a tax benefit”? The sole or main reason for the incorporation was not to take advantage of the lower effective rate of corporate tax (28% vs 45%) or to reduce their personal income tax liabilities. Four other non-“tax benefit” and business-related purposes are given as reasons as to why the business was incorporated. It would appear from this as if the transaction was carried out for bona fide business purposes other than to obtain a tax benefit. The “bona fide business purpose” criteria is, therefore, present. Under the new section 80A, an “impermissible tax avoidance arrangement” can also arise where an arrangement lacks commercial substance. If the arrangement would result in a significant tax benefit for a party, but it does not have a significant effect upon either the business risks or the net cash flows of that party, it can be an impermissible tax avoidance Applying the legislation to the facts of the question Brief conclusion Applying the legislation to the facts of the question arrangement for the purposes of section 80A. In this particular case, it does not seem as if the legal substance or effect as a whole is inconsistent with or differ significantly from the legal form of its individual steps, amount to round trip financing, accommodating a tax indifferent party or contain elements offsetting or cancelling each other. It, therefore, does not seem to lack commercial substance. Abnormal rights or obligations The sale of the business was carried out at its market value. The sale of the goodwill also seems to have been effected at its market value. The purchase consideration payable by the company was left owing as and was financed by way of shareholders’ loan accounts. These loan accounts were between Peter Rhine and Paul Rhone’s new company and its supposed main shareholders and supposed main directors (Peter Rhine and Paul Rhone). Due to this special relationship, it would seem that no abnormal rights or obligations have been created between these parties. In CIR v Louw it was held that “the directors’ loans seen in the context of the amounts allocated to directors by way of salary and dividend, were “abnormal”, both as to the means or manner employed in granting them and as to the rights and obligations created thereby”. However, the loans in Louw’s case were debit loan accounts, made by the company to the directors and shareholders of such company (meaning that the company refunded more than the amounts respectively advanced to it by the shareholders), and not an advance of loans made to the company by the shareholders. Peter Rhine and Paul Rhone’s positions are therefore distinguishable from those that applied in Louw’s case. In Louw’s case, while the directors’ loans advanced, were being repaid by the company, the provisions of section 103(1) were not applied – it was only when they became debit loans that these provisions were applied. The “bona fide business purpose” criteria seems to have been met (see above), no abnormal rights or obligations exist and there is no lack of commercial substance (neither of the two alternatives under section 80A(a) and (c) are present). This will result in the absence of an “impermissible tax avoidance arrangement” that is required before the provisions of section 80A can be invoked. Purpose One reason why Peter Rhine and Paul Rhone formed the company was to save normal tax. However, it was only one of five purposes as to why they decided to incorporate their business. They will therefore be able to argue that a tax saving was not the sole or main purpose of the transaction, operation or scheme. Four purposes other than a tax saving purpose motivated them to incorporate their business. Conclusion As all of the requirements of the section have not been met, the Commissioner will be unable to successfully invoke the provisions of section 80A against Peter Rhine and Paul Rhone. It should be noted that there are other aspects to section 80A, but none of them are relevant to Peter Rhine and Paul Rhone. "

**Preliminary Tax Report for Mr. Joel Brown** **1. Resident Status** - **Issue**: Determine if Joel was a resident before 1 September 2023. - **Legislation**: South African tax residency is based on the "ordinarily resident" test or the "physical presence" test. - **Application**: - Joel became ordinarily resident on 1 September 2023. - Physical presence test: Requires 91 days in the current year, 91 days in each of the preceding five years, and 915 days in total over those five years. - Joel's presence: 321 days (2019-2020), 214 days (2021), 61 days (2022), 58 days (2023). - Conclusion: Joel did not meet the physical presence test before 1 September 2023. **2. Royalties** - **Issue**: Taxation of royalties received. - **Legislation**: - Gross income includes worldwide income for residents. - Section 10(1)(l) exempts certain foreign income. - Section 49A & 49B: Withholding tax on royalties capped at 5% per DTA. - **Application**: - Royalties received after 1 September 2023 are part of gross income. - Withholding tax of 5% applies to royalties paid by the South African publisher. - Conclusion:

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