2007 income tax amendments – part 2

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

WE look at some more of the amendments that have been proposed in the Income Tax Amendment Bill that was tabled in October. The aggregate deduction allowable in respect of contributions made during the tax year to approved retirement funds and educational policies for dependents to determine the taxable income of any individual who carries on a trade for income tax purposes has been increased to N$40 000 (previously N$30 000) per tax year with effect for all tax years commencing on or after March 1 2007.This increase in the tax-deductible limit is long overdue and very welcome.There still seems to be a mismatch between the rules of pension or provident funds and the Income Tax Act in so far as tax-deductible contributions are concerned.Virtually all pension or provident funds place an obligation of the member to contribute a fixed percentage of pensionable earnings to the retirement fund.On the basis that this obligatory contribution is 7,5 per cent, taxpayers with pensionable earnings in excess of N$533 333 per year will not receive the full tax benefit of their contributions.Even though taxpayers with earnings in excess of N$533 333 are not in the majority, it appears that the disallowance of part of an obligatory contribution to a retirement fund is blatantly unfair.The definition of the term ‘person’ has also been amended to include any trust with effect from March 1 2009.It is currently the Receiver of Revenue’s practice to tax trusts as individuals at present.The amendment now puts it beyond all doubt that trusts are indeed taxpayers.In a Namibian tax court case of the early nineties (Esselman vs SIR) the court found that the definition of person as it currently reads does not include a trust and therefore some trustees have been of the view that a trust is not a taxpayer for income-tax purposes.At least this amendment clarifies the tax status of trusts once it becomes effective.The definition of capital expenditure for farmers has also been amended with effect from March 1 2007.Capital expenditure as defined can be deducted in the tax year incurred but is limited to the taxable income derived from farming.Capital expenditure incurred in excess of the current year’s farming income can be carried forward for deduction from farming income in a following tax year.Capital expenditure will now include expenditure incurred to acquire any structure that is used in connection with farming operations.Previously the definition was limited to expenditure incurred relating to buildings.The purpose of this amendment appears to cover expenses incurred by farmers who acquire mobile structures for accommodation purposes of employees and any other structure used in connection with farming operations.In addition, the limit in respect of any building erected or structure acquired for domestic purposes of a farmer’s employees has been increased to N$50 000 (previously N$15 000) per employee.A new expense has also been added to the list of capital expenditure.Amounts paid to a supplier of electricity to carry electric power from the main transmission lines to the farm must now be included in the total capital expenditure and is deductible to the extent that there is farming income in the year the expense is incurred.Previously, farmers probably deducted the expense in full in the year it was incurred or treated it as a capital expense and did not deduct it at all.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comThe aggregate deduction allowable in respect of contributions made during the tax year to approved retirement funds and educational policies for dependents to determine the taxable income of any individual who carries on a trade for income tax purposes has been increased to N$40 000 (previously N$30 000) per tax year with effect for all tax years commencing on or after March 1 2007.This increase in the tax-deductible limit is long overdue and very welcome.There still seems to be a mismatch between the rules of pension or provident funds and the Income Tax Act in so far as tax-deductible contributions are concerned.Virtually all pension or provident funds place an obligation of the member to contribute a fixed percentage of pensionable earnings to the retirement fund.On the basis that this obligatory contribution is 7,5 per cent, taxpayers with pensionable earnings in excess of N$533 333 per year will not receive the full tax benefit of their contributions.Even though taxpayers with earnings in excess of N$533 333 are not in the majority, it appears that the disallowance of part of an obligatory contribution to a retirement fund is blatantly unfair. The definition of the term ‘person’ has also been amended to include any trust with effect from March 1 2009.It is currently the Receiver of Revenue’s practice to tax trusts as individuals at present.The amendment now puts it beyond all doubt that trusts are indeed taxpayers.In a Namibian tax court case of the early nineties (Esselman vs SIR) the court found that the definition of person as it currently reads does not include a trust and therefore some trustees have been of the view that a trust is not a taxpayer for income-tax purposes.At least this amendment clarifies the tax status of trusts once it becomes effective.The definition of capital expenditure for farmers has also been amended with effect from March 1 2007.Capital expenditure as defined can be deducted in the tax year incurred but is limited to the taxable income derived from farming.Capital expenditure incurred in excess of the current year’s farming income can be carried forward for deduction from farming income in a following tax year.Capital expenditure will now include expenditure incurred to acquire any structure that is used in connection with farming operations.Previously the definition was limited to expenditure incurred relating to buildings.The purpose of this amendment appears to cover expenses incurred by farmers who acquire mobile structures for accommodation purposes of employees and any other structure used in connection with farming operations.In addition, the limit in respect of any building erected or structure acquired for domestic purposes of a farmer’s employees has been increased to N$50 000 (previously N$15 000) per employee.A new expense has also been added to the list of capital expenditure.Amounts paid to a supplier of electricity to carry electric power from the main transmission lines to the farm must now be included in the total capital expenditure and is deductible to the extent that there is farming income in the year the expense is incurred.Previously, farmers probably deducted the expense in full in the year it was incurred or treated it as a capital expense and did not deduct it at all.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com