James Sharpe, a South African tax resident who lived in Johannesburg, retired on 30 November 2006 at the age of 60. James Sharpe had set up an inter vivos trust in January 2003 and made a cash donation of R10 to the trust. This money was placed in a bank account, but earned no interest. Between January 2003 and August 2005 the trust earned no income and its sole asset was the R10 deposited in the bank account.
In August 2005, Roger Sharpe (James's father) died. Roger Sharpe bequeathed R1 million in cash as well as equity shares in a number of foreign companies to the trust. Each of these shareholdings amounted to less than 5% of the issued equity shares of the relevant underlying company. The trust obtained Exchange Control approval to hold the foreign equity shares. The trust used the cash to earn interest income and continued to hold the shares in the foreign companies, on which it earned dividend income.
In addition, Roger Sharpe bequeathed a flat in Durban in equal shares to James Sharpe's two children, Michael and Gina. Michael and Gina have retained the flat and earn rental income from it. They employ a rental agent to administer the letting of the flat. The flat in Durban generated a total net rental income during the February 2007 year of assessment of R114 000. The net rental income is the same as the taxable income.
On 1 March 2006, and in anticipation of his retirement and his plans to emigrate with his wife to Australia, James sold the following assets to the trust:
1 Shares in South African resident companies for R2,3 million (the market value).
• The purchase of the shares by the trust was financed by means of an interestfree loan from James. A market related interest rate is considered to be 9%. James received the shares from his father in 1990 when their market value was R250 000.
• The shares had a market value of R998 800 on 1 October 2001 and James will elect this value for any capital gains tax (CGT) calculations.
• James held the shares for investment purposes.
2 A block of residential flats for R6 million (the market value).
• The purchase by the trust was financed by a loan from James which carries interest at 9% per annum. This is considered to be a market related interest rate.
• James acquired this block of flats on 1 October 1995 for R2,7 million. The block was valued at R4 million on 1 October 2001 for CGT purposes, at which date the time apportionment base cost was R4,5 million. James will elect the most favourable method for purposes of establishing any possible capital gain or loss on disposal.
• James held the block for investment purposes.
On 1 December 2006 James and his wife emigrated to Australia and from that date ceased to be South African residents for tax purposes. The only assets owned by James at the date of his emigration were his private residence with a market value of R3,5 million and his personal use assets which had a market value of R800 000. Gina continues to live in the residence rent-free.
James originally acquired the residence in 2002 for R1,8 million. 15
The following persons are income and capital beneficiaries of the trust:
• James and his wife;
• Michael, their son, aged 28. He has been an Australian tax resident since 2003 and was not physically present in South Africa at all during the February 2007 year of assessment; and
• Gina, their daughter, aged 19. She is a full-time student and was a South African tax resident for the entire February 2007 year of assessment.
In terms of the trust deed the beneficiaries only have a contingent right to the income and capital of the trust. The trustees (James, his accountant and his attorney) have an absolute discretion to pay out some or all of the income or capital to the beneficiaries. The beneficiaries do not have any vested rights in respect of any of the income or capital. The income, expenditure and distributions of the trust for the February 2007 year of assessment were as follows:
Asset R1 million
cash
Shares in
foreign
companies
Shares in
RSA
companies
Block of
flats
Nature of receipt
/ accrual
Interest Foreign
dividend
Local
dividend
Net rental
income
Total
R R R R R
Receipt / accrual 80 000 40 000 60 000 660 000 840 000
Deductible
property
expenses
(60 000)
(60 000)
Interest paid on
loan for the
purchase of the
block of flats
(540 000) (540 000)
Income
distributions:
James Sharpe (25 000) (20 000) (45 000)
Michael Sharpe (25 000) (20 000) (20 000) (65 000)
Gina Sharpe (20 000) (20 000) (40 000)
Income retained
in the trust
30 000 20 000 20 000
20 000 90 000
The trustees exercised their discretion on 28 February 2007 in making the income distributions to the beneficiaries.
16
The following additional information relates to James Sharpe for the February 2007
year of assessment:
1 Employment
R
Salary and bonus for the period 1 March 2006 to 30 November 2006 540 000 Retirement gratuity paid by his employer (first payment of this nature) 160 000 James had the use of an employer owned motor vehicle with a "determined value" of R300 000. James paid all the private fuel and maintenance in respect of the vehicle and the vehicle was returned to the employer on his retirement.
James belonged to a medical scheme to which his employer contributed R1 500 per month and James R900 per month. On his retirement James resigned from the scheme. James, his wife and Gina were the beneficiaries of the medical scheme. Qualifying medical expenses paid by James and not covered by the medical scheme amounted to R99 500 during the February 2007 year of assessment. 2 Investment income
R
Interest on a South African bank account
For the period 1 March 2006 to 30 November 2006 30 000
For the period 1 December 2006 to 28 February 2007 24 000
Interest on the loan account to the trust
For the period 1 March 2006 to 30 November 2006 405 000
For the period 1 December 2006 to 28 February 2007 135 000
Apart from James Sharpe's employer, none of the parties are VAT vendors and none of the
beneficiaries of the trust are VAT vendors.
REQUIRED
Marks
(a) Calculate James Sharpe's taxable income for the February 2007 year of assessment.
• Ignore the application of any double tax agreements. 31
(b) Calculate the taxable income of the trust for the February 2007 year of assessment.
• Provide brief reasons to support your calculations.
• Ignore the application of any double tax agreements.
• In your answer separately address each component of the total income retained in the trust.
9
(c) Calculate the taxable income of Michael and Gina Sharpe for the February 2007 year of assessment.
• Provide brief reasons to support your calculations.
• Ignore the application of any double tax agreements.
• Assume that Michael and Gina Sharpe earn no other income other than that detailed in the question.
• In your answer separately address each component of the distributions received from the trust.