SA Resident 61 years old Local Interest Foreign Dividends Local rental Foreign Rental Foreign CGT Foreign Property Income Tax Withholding Tax on Foreign Div Management fees Ashburton and JPMorgan Question: My understanding is that I cannot claim the fees
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.
With respect of making a deduction against a foreign dividend, you are correct. Section 23(q) is important - it specifically prohibits the deduction of “any expenditure incurred in the production of income in the form of foreign dividends”.
An amount of expenditure can only be added to the cost of acquisition, for purposes of base cost (capital gain), if it is an expense listed in paragraph 20 of the Eighth Schedule to the Income Tax Act.
The relevant part of paragraph 20 reads as follows:
(1) Despite section 23(b) and (f), but subject to paragraphs 24, 25 and 32 and subparagraphs (2) and (3), the base cost of an asset acquired by a person is the sum of –
(c) the following amounts actually incurred as expenditure directly related to the acquisition or disposal of that asset namely –
-
the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered;
-
transfer costs;
-
stamp duty, transfer duty, tax payable in terms of the Securities Transfer Tax Act, 2007 (Act No. 25 of 2007), or similar duty or tax;
-
advertising costs to find a seller or to find a buyer …
This is in terms of paragraph 20(1)(c). But, Paragraph 20(2) states that the expenditure incurred by a person in respect of an asset does not include any of the following amounts –
-
-
borrowing costs, including any interest as contemplated in section 24J or raising fees;
-
expenditure on repairs, maintenance, protection, insurance, rates and taxes, or similar expenditure; and
-
the valuation date value of any option or right to acquire any marketable security contemplated in section 8A(1),
-
other than borrowing costs and expenditure contemplated in subparagraph (1)(g).
It is an established principle, at common law, that an apportionment of a dual purpose expense is allowed. One could therefore apportion it to interest income (if that was derived from the carrying on of a trade) and a foreign dividend (and the make a deduction from the interest or rental income).
What is important is that the ‘management fees’ must be directly related to the acquisition of the asset. These fees generally don’t relate to the acquisition (or purchase) of the shares, and they can’t be added to the base cost.