General Tax queries

[Greg C]

I know it was income, but it was not profit which means that it shouldn't have an impact on the tax due. The problem with it not being on my name is that the expenses might be rejected. I don't have a problem with paying tax where due but there is no way that I'm going to pay tax as if the full income was clean profit when that is not the case.

The property (a 7ha plot) was on my parents name. However, they never used it so a couple of years ago, I decided to build houses on it and develop it further. They took the bond out in their name which I basically paid from my side. They didn't want to transfer the property to me back then because they still had ideas to build a house there themselves someday but eventually decided against it which is why I then could to "buy" it from them, but it had to be at an inflated price to keep Sars happy.

No need to be mean to the revenue service.If it were a normal buyer and seller deal then both of you would be hunting for the best price however because you are connected persons and disposing of this property at less than its true MV will be seen as a donation.So in a way its good that you are keeping them happy.Gz on the house btw.

[Greg C]

He can deduct stuff like electricity, gardening, insurance, security, rates too, and wear and year on appliances, furniture and fittings but think you got those. Generally, if the place is newly on bond, you would probably make a loss. With the ring fencing means he can't keep on using his rental loss to decrease his tax liability from other sources like salary. If losses are continued then SARS will reverse all those previous losses claimed. This is to prevent doctors, lawyers and other rich people to start hobbies like farming disguised as a "business" in order to use the intentional loss to lessen their high tax burden, effectively loring their tax bracket. If I remember correctly, ring fencing used to be 5 years and only for people already in the too bracket of 40%?.

Otherwise, making losses for more than the ring fence time is allowed as long as you do receive income and are carrying on a business to make profit, but you can only use this loss against future income from the same business (renting). That is how I understand it so correct me if I'm wrong.

Stefan I am confused as to why you continue to post almost identical information as myself and say it differently.A side from the fact that for the ring fencing to occur you must be in the highest tax bracket the rest has all been said to him.

To clarify its 3 out of 5 years or 6 out of 10 years of consistently making a loss. Please do read above much of what you have already said has been mentioned.Anyway thanks for the post

[Celine]

I know it was income, but it was not profit which means that it shouldn't have an impact on the tax due. The problem with it not being on my name is that the expenses might be rejected. I don't have a problem with paying tax where due but there is no way that I'm going to pay tax as if the full income was clean profit when that is not the case.

The property (a 7ha plot) was on my parents name. However, they never used it so a couple of years ago, I decided to build houses on it and develop it further. They took the bond out in their name which I basically paid from my side. They didn't want to transfer the property to me back then because they still had ideas to build a house there themselves someday but eventually decided against it which is why I then could to "buy" it from them, but it had to be at an inflated price to keep Sars happy.

to SARS it doesn't matter whose name the bond was in. WHO was receiving the income! you were therefore you are responsible to declare the income and claim any expenses relating that income. if the bond was only transferred 8 months later, then too bad. you enjoyed the benefit of the income so pay the tax on it, be it a loss or otherwise.

[ViperGTI]

to SARS it doesn't matter whose name the bond was in. WHO was receiving the income! you were therefore you are responsible to declare the income and claim any expenses relating that income. if the bond was only transferred 8 months later, then too bad. you enjoyed the benefit of the income so pay the tax on it, be it a loss or otherwise.

If I can deduct my expenses for the first 8 months against the income, then I have no issue with declaring it. Declaring it however will not have any effect on the amount of money that will be paid over.

My question though, is as what do I claim the interest / instalment that I paid for the first 8 months. Do I claim the interest (even though the bond was not in my name) or do I claim it as "Rent Paid" or something like that?

[Celine]

you can only claim interest on bond from the time the bond went into your name.

[Stefanmuller]

you can only claim interest on bond from the time the bond went into your name.

If he owned the property and if he was paying the bond, even though the bond was not registered in his name, the interest can still qualify as a deductable expense if he can prove that he paid said interest or paid the bond in order to make taxable income (or to have full use of the property in his favour to rent out). Whether the bond is in his name or in his parents name, he is paying it just as if it was in his name and the bond payment still carries a interest portion. Effectively he is borrowing the money from his parents which in turn is borrowing it from the bank at the same interest rate. I think he should be able to argue this as in the end the property was in the process of being transferred to his name, so in the end he owns it. In the mean time he had to pay the bond to use the property as he likes (renting out). So by paying the bond he was "buying" the property or doing so to own it or to have use of it. Thus, the source of the funds is not important, but what it is used for.

What you can't do is take an advance on your bond to pay studies or go on holiday or pay for medical bills and then deduct the increased interest against your rental income. So the funds from the bond must have been used to buy, improve, renovate, or repair the property or for expenses relating to the business of renting.

Not sure if the fact that he did not own the property changes anything - you don't often see someone renting out a property that he does not own or does not sublet as per rental contract. But on the other hand I can fully understand the situation he is in, and as a matter of fact he does not seem to be in any advantage over a person owning as he still pays the same and have full use.
Question: For the first part of the year he did not in fact own the property. Usually you need to own an asset to claim the expenses relating to it. In this case he is paying to have full usage of the property - so then he should also be able to deduct the expenses. Only thing is, is his bond payment to his parents then seen as payment for full usage (as in rent Rent - thus fully deductable) or can full use be seen as an asset (Capital) as in the case of owning (thus only rent portion deductable). Obviously if it is rent, then it has to be fully declared on the parent's side. Interesting.

[Greg C]

If he owned the property and if he was paying the bond, even though the bond was not registered in his name, the interest can still qualify as a deductable expense if he can prove that he paid said interest or paid the bond in order to make taxable income (or to have full use of the property in his favour to rent out). Whether the bond is in his name or in his parents name, he is paying it just as if it was in his name and the bond payment still carries a interest portion. Effectively he is borrowing the money from his parents which in turn is borrowing it from the bank at the same interest rate. I think he should be able to argue this as in the end the property was in the process of being transferred to his name, so in the end he owns it. In the mean time he had to pay the bond to use the property as he likes (renting out). So by paying the bond he was "buying" the property or doing so to own it or to have use of it. Thus, the source of the funds is not important, but what it is used for.

What you can't do is take an advance on your bond to pay studies or go on holiday or pay for medical bills and then deduct the increased interest against your rental income. So the funds from the bond must have been used to buy, improve, renovate, or repair the property or for expenses relating to the business of renting.

Not sure if the fact that he did not own the property changes anything - you don't often see someone renting out a property that he does not own or does not sublet as per rental contract. But on the other hand I can fully understand the situation he is in, and as a matter of fact he does not seem to be in any advantage over a person owning as he still pays the same and have full use.
Question: For the first part of the year he did not in fact own the property. Usually you need to own an asset to claim the expenses relating to it. In this case he is paying to have full usage of the property - so then he should also be able to deduct the expenses. Only thing is, is his bond payment to his parents then seen as payment for full usage (as in rent Rent - thus fully deductable) or can full use be seen as an asset (Capital) as in the case of owning (thus only rent portion deductable). Obviously if it is rent, then it has to be fully declared on the parent's side. Interesting.

Well lets put you in the banks shoe quickly or for that matter an insurer.
Like many households in South africa,loving parents purchase a vehicle and give it to their children but dont always diclose or nominate properly who the main driver of the vehicle will be as they are aware that if they name their children ,a higher premium will be paid which IS FAIR because of the risk.Same goes with the bank.

So yes in fact it is important for who the bonds name is in because if not the risk is not correctly adjusted for.His parents may be taking his bond repayments and passing it along,but what if they relied upon it and he defaults.There will be huge reprecussions as the bond was given to them under the premise that they can repay it.

Clear cut its not normal its LAW that in order to claim the expenses he must own the building.If he leases it then relevent lease expenses etc will relate but it will be a formal agreement that SARS will be informed of.


QUOTE In this case he is paying to have full usage of the property - so then he should also be able to deduct the expenses.
I like the idea of allowing transfer costs when its in his name but to have the use of it during this process...There are huge ramifications here.
By merely having the use of the asset during the period of transfer he can do as he pleases but actually NEVER pass the final ownership on ie delay and delay the transfer but in the end deciding not to OWN the asset but he got full use of it during the period he was attempting to transfer.Im sorry but this is a crazy thought.

I am completely with SARS on this one.I stick with what is and written by the ACT that if you do not own the asset you do not get the benefits, The costs in between are difficult in attempting to get it into your name and can be hotly debated but the fact remains he DOES NOT OWN IT,he should not get the benefits.

It just sets to many possibilities for further problems obviously.
Person pays you rent(not formally) says he has and should get the benefit of the Place,
If you owned the place and declined him but he still gets full use?Wouldnt you be a tad peeved?

SARS does tax for everyone not clauses and differences for connected persons and family members.
I am agreeing with SARS and the inability to allow what they allow in this case...not saying theyre perfect in anyway or that there arent flaws in the ACT

[Greg C]

Oh and I like the general idea of the question but I throw something back at you once again.

If they were not family and in some way connected persons would you believe that this transaction would take place the same way or do you think there would be a contract stipulating certain things relating to the lessor and lessee.If the answer is yes,your questions is in some form void,if No I ask you this.

When can I informally pay you money to have full usage of your place seeing as we are family? you know tax family after all

Note:No advantages should be given to family and connected persons as this is where all the dirty deals happen.

[Stefanmuller]

Oh and I like the general idea of the question but I throw something back at you once again.

If they were not family and in some way connected persons would you believe that this transaction would take place the same way or do you think there would be a contract stipulating certain things relating to the lessor and lessee.If the answer is yes,your questions is in some form void,if No I ask you this.

When can I informally pay you money to have full usage of your place seeing as we are family? you know tax family after all

Note:No advantages should be given to family and connected persons as this is where all the dirty deals happen.

We (I) are getting way too technical here, and the property is now in his name anyway. But it would have been an interesting situation if it kept going on. I find the situation interesting, and although I am not sure how SARS sees this, I am just trying to give my opinion of the scenario. If it was me, I would either:
1) Include the rent in my income, and deduct all the expenses including the bond interest
2) Include the rent and all the expenses in my parent's income, and then maybe just treat the net rent as a loan from/to them.
3) Treat the bond payment I pay as actual rent expense for the use of the business, and the rent I receive as subletting rental income. The parents then include the rent (bond amount) as rental income. Then decide which expense I want to claim on my side, and which should be claimed on my parents side. Generally the owner pays the maintenance and rates. In all cases a contract agreement would remove all doubt as to how to treat it.

The simplest and technically correct thing to do in this case would have been for the rental income from the third party to be included in the parent's income, as they own the house. The bond interest can then be deducted against that, and all the expenses paid by the son can then also be deducted as he effectively borrowed them the money to do it by paying it on their behalf. If all above gets included in the son's income and he treats the bond as a loan from the parents, effectively you will be getting at the same "net profit from rental". So he is not being put in a better position, and SARS is not losing out. But if you look at substance above form (Afr: wese bo vorm) then he is effectively using the property as if he owns it, so should be able to deduct expenses as if he owns it.

I can for instance borrow money from my dad's flexi bond to buy a bakkie for my business, and then pay him back at the same rate. I can then deduct the interest portion using a amortisation table. I am borrowing money from him that he borrowed from the bank and paying it back (which he pays to the bank). If the bond was zero when he took the advance for my bakkie, I might as well just service the bond directly. So the loan does not need to be from a bank or whatever or if it is it need not be in your name. As long as he also includes the interest I paid him in his taxable income, which will be partially exempt on his side. But yes, contracts or written agreements in the case of rent agreements and loan agreements are recommended - Celine would know what SARS require. This would obviously be the case if people are not connected in any way, for obvious reasons.

To include the rental income in his taxable income, and not the bond on the interest he is paying, seems to not be fair - as no-one else is claiming the interest already. And he is paying this bond in order to use the property and earn that rental income. If he is not allowed to claim the interest, then he also should not be allowed to deduct the other expenses because the expenses relate to a asset he does not own nor one he is paying rent on.

[marco]

Greg,
I have been trading on the JSE like in buying stocks and selling when appropriate and buying again. This is considered as Trading and not investing.
At no stage have I "Cashed in" or withdrawn into my bank account any money. I keep it all on the JSE's account.
The interest that I get on my cash I add to my Efilling work page.
Question now is, what happens to the the gains I made over the years and the dividends that I reinvested ?
Too many trades to remember and too many divs that I reinvested.

[marco]

Greg,
I have been trading on the JSE like in buying stocks and selling when appropriate and buying again. This is considered as Trading and not investing.
At no stage have I "Cashed in" or withdrawn into my bank account any money. I keep it all on the JSE's account.
The interest that I get on my cash I add to my Efilling work page.
Question now is, what happens to the the gains I made over the years and the dividends that I reinvested ?
Too many trades to remember and too many divs that I reinvested.

[ViperGTI]

Hi... by the way, thanks everyone for your input... Appreciated

[Greg C]

Greg,
I have been trading on the JSE like in buying stocks and selling when appropriate and buying again. This is considered as Trading and not investing.
At no stage have I "Cashed in" or withdrawn into my bank account any money. I keep it all on the JSE's account.
The interest that I get on my cash I add to my Efilling work page.
Question now is, what happens to the the gains I made over the years and the dividends that I reinvested ?
Too many trades to remember and too many divs that I reinvested.

Hello there,

She pointed out to me that as an investor one needs to remember the following:

Shares attract two kinds of returns, capital growth (appreciation) and dividends. Based on current South African tax laws, dividends are not taxed (tax-free) but capital growth is subject to tax.

SARS taxes you on your share gains in one of two ways. It may subject your gains to either capital gains tax (CGT) or income tax.

The one big thing to remember is that the rate of Income Tax is higher than Capital Gains Tax

In your case as you have no intention of keeping the shares,and sell them for a profit in the relative short term your gains will be taxed as income tax,this goes for the derivatives as well.

Hope this helped.

[Greg C]

Apologies for the she part,was an email I was corresponding with.Ignore the she first part the rest is all relevent for your case.