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23 November 2018
On 31 August 2018 the South African Revenue Service (SARS) published Binding Private Ruling (BPR) 309, which deals with the disposal of assets by public benefit organisations (PBOs). Specifically, the ruling deals with the application of the definition of 'gross income' in Section 1 of the Income Tax Act (58/1962) and the capital gains tax exemption in Paragraph 63A of the Eighth Schedule to the act.
Under Section 1(1) of the act 'gross income', in relation to any year or period of assessment, means the total amount, in cash or otherwise, received by, accrued for or in favour of a South African resident, excluding receipts or accruals of a capital nature.
Paragraph 63A of the Eighth Schedule to the act states that a PBO, approved by SARS in terms of Section 30(3) of the act, must disregard any capital gain or capital loss realised in respect of the disposal of an asset if:
In Binding General Ruling (BGR) 20 (Issue 2), SARS stated that in the strict sense, the phrase 'substantially the whole' means 90% or more. However, BGR 20 states that SARS will accept a percentage of no less than 85%. BGR 20 further states that the percentage must be determined using a method that is appropriate for the circumstances.
In the case at hand, the applicant owned three adjacent properties. The properties each consisted predominantly of vacant land with a few buildings grouped together on sections of the land. The properties were used to:
The properties were acquired with the proceeds of donations received.
The applicant's income eventually decreased and it expected that this trend would continue in future. It further expected that it would become increasingly difficult for it to sustain and maintain its properties and to earn sufficient income to continue to fulfil its core function of carrying on public benefit activities. In response, the applicant decided to generate additional income by using the properties for business. However, that income was insufficient and the applicant then decided to sell the properties.
The aggregate footprint of the buildings on the properties constituted 4.9% of the aggregate extent of the properties. As the properties were to be consolidated on disposal, the usage area calculations had been applied to the whole area of the properties and it was determined that only 8% of the consolidated property was used for business. Therefore, the applicant had not violated the allowable 15% requirement in respect of business usage. It was thus determined that substantially the whole use of the asset was directed at a purpose other than a business undertaking or trading activity.
The applicant proposed to sell the three properties to an unconnected and independent third-party developer. The title of the properties would be consolidated as one in the deeds registry and it would be sold as a single property.
Regarding the proposed transaction, SARS ruled as follows:
For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (firstname.lastname@example.org). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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