Is Practice Note 37 (1995) still in effect? I have a client who is a pensioner and her investments are administered by Sanlam Wealth. They charge her Trustee Broker Fees. According to PN37 she can claim those expenses but the ITR12 does not provide an inp
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
In order for a taxpayer to make a deduction of these fees (or other expenses) it is necessary that the taxpayer must be able to meet the burden of proof that a trade was being carried on, and that the amount of the expense was incurred in the production of the income. Judge Heher of the Supreme Court of Appeal made the following obiter comment in the Scribante case:
“In addition, borrowing money and re-lending it at a higher rate of interest, thereby making a profit, constitutes the carrying on of a trade...” The Judge used the Burgess case as authority for this. Based on the facts we can’t comment on whether or not the taxpayer will be able to prove that a trade is carried on in this respect. It may well be the passive investment of funds which would not constitute a trade.
The next issue is section 23(f). In terms of this no deduction is possible in respect of the income (or part thereof) that is exempt from normal tax – the dividend will not be income or of a foreign dividend the deduction will be denied. The fees expense will therefore have to be apportioned and only deducted from the “income” portion. Section 23(g) may also present a problem in this instance.
We are aware that SARS’s Practice Note: No 37 (13 January 1995) states the following:
“In the case of a pensioner whose financial affairs (pensions, annuities, investment income, etc.) are administered by a banking institution, board of executors or similar institution the administration fees, including any fees for the completion of tax returns, paid to the institution will qualify for deduction.
… fees paid will only be allowed as a deduction to the extent that they do not create a loss.
Where the taxpayer receives income from exempt interest, other interest and dividends, the fees will be allocated on the income basis between the various sources of income.”
The code 4016 is used where taxpayer earns remuneration mainly in the form of commission and he or she has incurred expenses that are not specifically addressed in the other sections of the ITR12. Code 4043 should be used.
What is important to remember is that ‘trustee broker ees’ (as you refer to the expense) may be directly related to the acquisition of the asset. Then paragraph 20(1)(c) of the Eighth Schedule to the Income Tax Act would apply to it. The other fees, that don’t relate to the acquisition (or purchase) of the investment, can’t be added to the base cost and are dealt with as explained above.