1/4 Apple Awards

The 1/4 Apple Award for September went to two well deserving Newtons Gentleman namely Martinus de Beer and Siseko Tose. Lucha Greying presented them with the awards.

The 1/4 Apple Award for September went to two well deserving Newtons Gentleman namely Martinus de Beer and Siseko Tose. Lucha Greying presented them with the awards.

Congratulations to the following staff on their lucky draw win at the 1/4 Apple Awards : from L-R Thelma Crossman, Sane van der Watt, Martinus de Beer, Siseko Tose, Thembakazi Kojana, Lucha Greyling (Partner) Elrico Greyvenstein, Willie van der Merwe

Congratulations to the following staff on their lucky draw win at the 1/4 Apple Awards : from L-R Thelma Crossman, Sane van der Watt, Martinus de Beer, Siseko Tose, Thembakazi Kojana, Lucha Greyling (Partner) Elrico Greyvenstein, Willie van der Merwe

SANBS Blood Drive

Thank you to all the Staff that donated blood on the 9th September 2016

Bandanna Day for Sunflower Fund

Newtons Staff celebrating Sunflower Day 2016 !
Wear your “TUBE OF HOPE” TOPE

Duminque van Niekerk, Melanie van der Merwe, Jo-Mari Koorsen, Siseko Tose, Anette van Heerden

Duminque van Niekerk, Melanie van der Merwe, Jo-Mari Koorsen, Siseko Tose, Anette van Heerden

Siseko Tose, Icy Jooste, Danette Blom, Luzanne Harmse, Jo-Mari Koorsen, Melanie van der Merwe, Anette van Heerden, Helensha Cilliers, Thembakazi Kojana  Front: Duminque van Niekerk, Anze Pienaar, Thelma Crossman

Siseko Tose, Icy Jooste, Danette Blom, Luzanne Harmse, Jo-Mari Koorsen, Melanie van der Merwe, Anette van Heerden, Helensha Cilliers, Thembakazi Kojana
Front: Duminque van Niekerk, Anze Pienaar, Thelma Crossman

Melanie van der Merwe and Danie Saayman

Melanie van der Merwe and Danie Saayman

 

 

Personal service companies

Natural person taxpayers who earns a salary have very few items of expenditure available to them which they may deduct for income tax purposes (section 23(m) of the Income Tax Act, 58 of 1962). Generally, the deductions which salaried individuals may claim for income tax purposes are limited to amongst others contributions to retirement type funds, donations to approved public benefit organisations, medical aid contributions and expenditure linked to distances travelled which may be set off against a travel allowance earned.

To escape this restraint, employee taxpayers would arrange with employers not to be directly employed, but that a company (which would typically be owned by the taxpayer) will be contracted to provide the services which the employee taxpayer otherwise would have provided directly in an employment capacity. The employee will now perform these services as employee of the contracted company to the employer indirectly. In this manner, many other expense items also become potentially deductible by the taxpayer’s company which would not be limited by the provisions of section 23(m) since the company does not stand in an employment relationship with its client which would otherwise have been the natural person’s employer. A further potential advantage to be achieved by interposing a company in an employment relationship is that the income tax payable by high income earners is effectively capped at the corporate income tax rate of 28%.

To counter these instances of avoidance, the “personal service provider” regime was created. The deductions available to “personal service providers” for income tax purposes are similarly restricted as is the case for salaried individuals (section 23(k)). A “personal service provider” is defined as a company or trust on which behalf services are rendered to a client of the company or trust personally by an individual who is a connected person in relation to the company or trust, and any one of the following three criteria are also met:

• The individual would be regarded as an employee of the client if the services were rendered by the individual directly to the client;
• The duties linked to the services are required to be performed mainly at the premises of the client, or the individual, company or trust is subject to the control or supervision of the client as to the manner in which the duties to be performed; or
• More than 80% of the income of the company or trust during the tax year from services rendered consists of amounts received directly or indirectly from any one client of the company or trust.

(See paragraph 1 of the Fourth Schedule to the Income Tax Act.)

Considering what would normally be required by an employment relationship of an employee, it would be difficult to escape the above anti-avoidance provisions. One exception which exists though is if the company or trust employs at least 3 employees on a full time basis (and other than employees which are connected persons in relation to that company or trust).

The above anti-avoidance provision is important to take note of for individuals attempting to make use of companies to gain access to increased income tax deductions, or to limited their margin tax rate. It is however similarly applicable to small companies which operate in the services industry, as it may very well be that these companies too are also inadvertently caught by these anti-avoidance provisions.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Dire provisional tax penalties on underestimation of income

Provisional taxpayers are generally those taxpayers who earn income from sources other than a salary. In other words, PAYE is not deducted from these other sources of income on a monthly basis and paid over to SARS. As is the case with PAYE, provisional tax presents a cash flow mechanism to National Treasury through which to gather prepayments of an ultimate tax liability throughout a tax year on income which is not subject to the PAYE regime and which would otherwise only have been paid some time later when an annual income tax return is ultimately submitted. This can be as much as a year later.

To this end, provisional taxpayers are required to submit an estimate of their annual taxable income on a six-monthly basis. In the case of natural persons, provisional tax estimates are required to be submitted to SARS by way of a provisional tax return at the end of August each year, and again by the end of February. Legal persons similarly are required to submit estimates of taxable income at the end of the first 6 months of their financial years and again on the final day of the financial year.

For the first sixth-month estimate to be submitted an estimate is required to be made by the taxpayer of the estimated amount of taxable income that will be earned for the full year of assessment: half the amount of tax due on that estimated amount is required to be paid over to SARS at that date already, albeit after taking into account any amounts of PAYE also already deducted, where salary income is also earned. For the second provisional tax return, an estimate should again be submitted, and the tax on such estimate again be paid over (after taking into account any amounts of PAYE already deducted during the year as well as the first provisional tax payment already made).

The potential for manipulation by taxpayers is obvious and a legislated remedy is required to ensure that provisional taxpayers do not simply always submit an estimate of Rnil, thereby delaying the payment of amounts to SARS until the tax return for the applicable year itself is ultimately submitted. To this end, the Fourth Schedule to the Income Tax Act, 58 of 1962, makes provision for penalties to be levied where it appears at ultimate assessment date that a taxpayer has underestimated its taxable income for provisional tax purposes. For taxpayers earning more than R1 million in taxable income, taxpayers are allowed some leeway in that an estimate should at least have been 80% of the actual taxable income ultimately determined. This recognises that taxpayers are unlikely at yearend to be able to accurately estimate their actual taxable income for the year already. However, if the estimated taxable income proves to be less than 80% of the actual taxable income, a 20% penalty is levied on the difference between the tax payable on 80% of the actual taxable income and the tax payable on the estimated amount returned by the taxpayer.

Similarly, taxpayers earning less than R1 million taxable income are subject to the same 20% penalty, but within a 90% margin of accuracy instead of 80%. These taxpayers are afforded additional relief though in that they are permitted to submit as an estimate a factor of their last assessed taxable income without running the risk of incurring a penalty, even if this amount ultimately is less than 90% of the actual taxable income determined.

Interestingly, no underestimation penalty exists for first provisional tax estimates, however SARS may query estimates submitted and require taxpayers to submit revised first provisional tax estimates. Where second provisional tax estimates are concerned though, taxpayers should take care in preparing estimated taxable incomes which are to be submitted for provisional tax purposes as failure to do so could lead to a significantly increased tax charge when the tax year is ultimately assessed by SARS.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Registering for provisional tax

Many taxpayers file their tax returns on an annual basis unaware thereof that they may be regarded as provisional taxpayers in terms of the Income Tax Act, 58 of 1962, too. In its simplest form, provisional tax exists to provide for regular cash flows to the fiscus throughout the year. In this sense it exists for very much the same purpose as the PAYE system, with provisional tax applying though typically to non-salary type income.

The following persons are considered provisional taxpayers in terms of the Fourth Schedule to the Income Tax Act, and are thus required to file provisional tax returns and make the attendant payments of provisional tax over and above those annual obligations which exist as relates to their annual income tax returns:

• Every person (other than a company, but including a trust) who generally earns any income other than in the form of “remuneration” as defined;
• Every company; and
• Any person who is notified by the Commissioner for SARS that he or she is a provisional taxpayer.

The above however excludes:

• Any natural person who does not derive any income from carrying on a business, if the taxable income for that person does not exceed:
o the tax threshold (for 2016: R73,650 for individuals under 65, R114,800 for individuals under 75 and R128,500 for all other individuals); or
o R30,000 as relates to interest, dividends or rent received from letting immovable property;
• Deceased estates;
• Certain approved public benefit organisations;
• Body corporates; and
• Small Business Funding entities.

Many taxpayers may be completely unaware thereof that they are required to file returns as provisional taxpayers. This is especially true of typically individuals earning a salary but for example letting a second property which they may own to earn a second income stream.

These individuals will, based on the above prerequisites, have to ensure that they file bi-annual provisional tax returns and pay the requisite amount over to SARS in time (due by 31 August and 28/29 February each year). Failure to comply in this fashion will lead to significant penalties being incurred on late payment, or underestimation of the amount of provisional tax due: failure to submit a return when required is considered as the taxpayer having filed a return for Rnil.

As is the case for PAYE though, the provisional tax system does not operate as a tax per se but rather as the prepayment of a yet to be determined income tax liability. Therefore, once the ultimate amount of tax due for any given year of assessment has been determined after filing one’s annual income tax return, the resultant tax liability is reduced by provisional tax payments already made (and PAYE withheld) and the difference is then either due to SARS or to the taxpayer as a refund of the provisional tax paid too much.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Threshold registration requirement for the skills development levy

We have recently become aware of an increased level of audits being conducted by the South African Revenue Service in relation to taxpayers’ obligations in terms of the Skills Development Levies Act, 9 of 1999 (SDL Act). The focus appears to be specifically on non-compliant taxpayers who fail to register as required in terms of section 5 of the SDL Act, and thus for these employers to pay the requisite levy over to SARS. The problem is perhaps amplified thereby that the skills development levy is often considered an ‘unimportant’ tax by taxpayers (primarily due to it being less costly compared to, for example, VAT or income tax). Compliance with the SDL Act is therefore not a top priority to taxpayers, with the effect that taxpayers are also not apprised of their rights and obligations in terms of this Act when confronted by SARS to register and settle an ostensible skills development levy obligation.

The skills development levy (or SDL) is a levy upon employers required to register for SDL (see registration requirement below). It is levied at 1% of remuneration paid to employees during any month (which include directors of a company). The levy is thus also applicable to directors’ remuneration.

Even though directors’ remuneration is also subject to the SDL, what should not be forgotten, though, (especially in the context of what appears to be the focus of SARS’ audits) is that directors’ remuneration is excluded in terms of section 3(5)(e) from determining whether the threshold amount of R500,000 has been reached and which requires registration for SDL purposes (see section 4(b)).

As above, even though the threshold limit for registering for SDL is R500,000 of remuneration paid (or reasonably expected to be paid to employees in the coming 12 months), the R500,000 threshold amount is determined for private companies without having regard to any directors’ remuneration paid. Therefore, although the directors’ remuneration will be subject to SDL once the company is registered, it is ignored for purposes of determining whether a taxpayer is liable, and thus required to register, for SDL.

This is particularly relevant for SME’s conducting business through a private company, especially where remuneration is comprised largely of directors’ salaries. To give an example in illustration: assume a private company pays salaries to non-directors of R400,000, and R1,000,000 to the two directors of the company collectively. On these facts, the company need not register and pay SDL as non-director salaries amount to less than R500,000. Were the company, however, to pay salaries to non-directors of R600,000, then irrespective of the directors’ remuneration, the company would need to register for SDL and pay 1% per month on the total remuneration paid to all employees (including directors).

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

New proposed tax amendments

National Treasury releases proposed amendments to tax legislation on an annual basis. Some of the most important of these are already foreshadowed when the Minister of Finance delivers his budget speech in Parliament. The proposals made in that Budget Review are then formalised into proposed draft tax legislative amendments in the form of the Draft Taxation Laws Amendment Bill and the Draft Tax Administration Laws Amendment Bill.

This year, after the budget speech on 24 February earlier this year, the proposed amendments were released by Treasury on 8 July 2016. We set out below some of the more significant proposed amendments:

  • As announced in the budget speech, targeted anti-tax avoidance legislation is introduced as relates to trusts. However, Treasury has opted to retain the conduit pipe principle many feared would disappear, and proposes to target interest free loans made to trusts instead;
  • Further refinements to the harmonisation of the tax treatment of withdrawals from pension, provident and retirement annuity funds;
  • Repeal of the withholding tax on foreign service fees paid by SA tax residents;
  • As a result of the very complex and targeted anti-tax avoidance legislation linked to employee share incentive schemes, almost every year amendments are required to close new tax structures set up to reduce the tax consequences of these reward programmes as they relate to employees. This year is no different with certain targeted new anti-avoidance measures being proposed to the taxation of these schemes upon termination, as well as the taxation of dividends paid out on these shares throughout;
  • Significant amendments are introduced to the existing hybrid equity and debt instrument provisions in sections 8E to 8FA of the Income Tax Act, 1962. Most notably, the treatment of interest on subordinated debt as dividends for tax purposes have been addressed as relates to intra-group debt or cross-border debt issued to a South African tax resident;
  • Further relaxation of the rules as relates to venture capital companies are proposed to further entice taxpayers to make use of this very beneficial income tax incentive regime;
  • The Customs and Excise Act, 1964, is to have its own general anti-avoidance rules introduced as section 119B; and
  • A new understatement penalty category is proposed for a transaction to which the general anti-avoidance provisions in the Income Tax Act, 1962, or Value-Added Tax Act, 1991, are applied.

The public is invited to comment on the proposed changes by 8 August 2016. Please contact us should any of the above be of particular relevance to you and should it appear necessary to discuss these prior to these draft bills being passed by Parliament, very probably later this year.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Proposed amendment to the taxation of trusts

National Treasury published its much anticipated proposed annual amendments to tax legislation earlier in July. This year the proposed amendments were widely anticipated to shed led on Treasury’s proposals on how to address the perceived abuse of the trust form specifically going forward, especially as relates to the now well known ‘conduit pipe’ principle (in terms of which income received in a trust may ‘flow through’ the trust and instead be taxed in the hands of the trust beneficiaries). Many in the media, and some practitioners too, widely commented and bemoaned the widely anticipated demise of this well-entrenched South African trust law  principle at the hands of Parliament.

Instead, a far more nuanced and focussed approach is proposed by the new section 7C of the Income Tax Act, 58 of 1962. In terms of this new proposed provision the conduit pipe principle is not at all affected, but rather low-interest (or interest free) loans to trusts are being targeted. Briefly, any loan to a trust that is subject to interest at less than the prime lending rate less 250 basis points will be deemed to carry interest at that rate with interest accordingly accruing (and taxed) in the hands of the trust creditor. Consequently the trust creditor is taxed on deemed interest received, and that while typically the trust will be unable to claim a deduction on interest paid. To the extent further that the deemed interest gives rise to an increased income tax liability in the hands of the trust creditor, and the creditor does not recover said increased amount from the trust, the debtor is further deemed to have received a donation which in turn will be subject to donations tax at 20%.

We consider that the proposed amendments (proposed to be effective from 1 March 2017) should address two forms of perceived abuse of the trust for tax purposes:

  1. In the first instance, it is a common estate duty planning practice for an individual to sell assets on interest free loan account to a family trust to ensure that value-growth of the asset (and thus the estate) accumulates in the trust going forward, while the value of the estate of the individual remains the same. Individuals will now have to think twice before entering into these estate duty planning exercises: a sale on interest free loan account may very well still result in an estate duty saving ultimately (although ironically not effectively for the taxpayer but his/her heirs), but now at a cost of interest accruing to the individual throughout his or her lives and which is subject to income tax on an annual basis; and
  1. Secondly, the practice referred to as ‘income splitting’ is addressed (whereby trust distributions are made to various trust beneficiaries who are taxed at lower marginal tax rates): typically these distributions too would be made on interest free loan account, again therefore resulting in income tax consequences for the individuals in the form of ongoing income tax on the deemed interest received.

The public is invited to comment on the proposed amendments by 8 August. We are however of the view that Treasury is unlikely to make any significant concessions in this regard specifically. While we will keep our client base informed of any developments in this regard as appropriate, it may be prudent to contact us now already to start discussing how most efficiently to manage any risks emanating from the above proposals and as they may relate to existing trust structures post 1 March 2017.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Nelson Mandela Day

Wow …”spread the love” what a great way to spend your 67 minutes. We reached the target of 27 000 sandwiches in 67 minutes for Mandela Day. Thanks to the Newtons staff who assisted in making this an easy target and to Saints Bfn and Mizanne Connan for letting us be part of it.