[Question] Taxation

[Amalya]

Hi there

Please assist. I need tax advise.

A plot was bought by 2 friends.
One of the friends have a CC, the CC was contracted by the 2 friends to build a house on the plot. Therefore all the building costs are reflected in the CC.

The plot and house were sold, in their personal capacity. A profit of +- R 200 000 were made.

The 2 friends wants to share the profit. I need tax advise.

I thought of leaving all the profit in the CC. The CC qualifies as a SB, therefore minimal taxation. Declare a dividend of the profit in the entity to the 1 friend that is the member of the CC. This member will then distribute half to the friend (donation tax implication)??

Any other ideas?

[Dave A]

Obviously the CC is going to have to invoice the partnership for building the house.

And obviously if the CC invoices at a profit that happens to swallow up most of the profits of the partnership, the Receiver can hardly object. Much the same in paying a dividend to the member/s of the CC.

When it comes to donations tax, that only kicks in from R100k per annum nowadays. But it's the donation where things deviate from "normal business."

The concern would be that your proposed distribution process would be seen as an avoidance mechanism. Is the saving worth what it might cost to defend?

[geraldenek]

If i do understand correctly - you bought the plot in your personal capacity?

Your now dealing with two parts of tax one being normal tax and the other capital gains tax.

Firstly the CC: (if i am making the assumption that the cc's main operation is building/construction)
All the expenses (cost of sales) is in the CC's name - and i guess you paid all those amounts back at the same price acquired so the effect is zero. If the cc did make a profit of say 20-30% which is in normal building industry you will have the profit which you will be taxed on at the small business corporation rate (and an increase in the base cost of the property - see explanation for capital gain). But please make sure if you do make a profit that the amount charged is still market related because of the fact that there is a related party in this transaction.

if the cc's main business activity is not building/construction then you will be crossing the line in terms of mercantile law - you will have to amend the main purpose of the business or you will have to put all the expenses incurred against a loan account which in turn will not influence the cc's profit/loss.

For you personal tax (if the plot was bought in your own capacity):
split the profit say 50/50 thus R100 000 for each individual
this amount is capital gain and you can deduct R17500 (yearly exclusion) from it and 25% is included in your taxable income thus you will be taxed on R20 625

Your capital gain is the proceeds from the sale less your base cost (cost price plus improvements)

I don't know if the cc is registered for vat and if you have claimed back the vat but either way you will have to pay the vat back.

hope this all makes sense

[Amalya]

Hi there

Thanks a lot for the reply. Yes the plot was bought in the 2 friends personal capacity.

The CC's main activity is for building.

One of the friends owns the CC. The other friend supplied the finances for the building.

They are planning to build more house as per this example. About 3 in the 2011 financial year, with an estimate of R200 000 profit on each house. What would you consider will be the best tax for the year 2011? Do you suggest that the other friend also become a member of the CC, take the income out the CC as dividends?

[geraldenek]

hi

on a profit of R600 000 you will in each individuals name be taxed on R75,000 ((200 000 x 3 x 0.25)/2) given this is the only income the individuals receive you will be taxed R3240 each.

in a cc you will be taxed on R300 000 (200 000 x 3 x 0.5). given that this is the only income you will pay tax of R24 300. Declaring a dividend on R243000 (first R57 000 is taxed on 0%) you will also have to pay tax of R24 300.

it all comes down to proper tax planning - knowing exactly how much your income will be for the year.

then again if the person who is going to join the business is a member/director of a other cc/company then this cc will no longer be a small business corporation and will pay tax of R84 000

i can't give my opinion just bases on the capital gain portion, you will have to take all profits also normal business profit into consideration.