Category Archives: Tax

“Booking” capital losses on shares is not that easy

There is a number of techniques that taxpayers use to reduce their capital gains tax (CGT) exposure on long-term share investments. A common practice is to utilise the annual exclusion of R40 000 provided for in paragraph 5 of the Eighth Schedule of the Income Tax Act[1] by selling shares that have been bought at a low base cost, at a higher market value and then immediately reacquiring those shares at the same higher value, thereby ensuring that the investments’ base cost is increased by as much as R40 000 per year. If the gain on those shares is managed and kept below the annual R40 000 exclusion, taxpayers receive the benefit of a ‘step-up’ in the base cost of the shares to the higher value for future CGT purposes, without having incurred any tax cost.

A reverse scenario is to build up capital losses for off-set against any future capital gains and taxpayers are often advised, especially during times of market volatility, to ‘lock-in’ capital losses created by the expected temporary reduction in share prices. This involves selling shares at a loss and then immediately reacquiring the same shares at the lower base cost, but with the advantage of having created a capital loss – a technique known as ‘bed-and-breakfasting’.

Without placing an absolute restriction on ‘bed-and-breakfasting’, paragraph 42 of the Eighth Schedule limits the benefit that could have been obtained from the ‘locked-in’ capital loss. The limitations of paragraph 42 apply if, during a 45-day period either before or after the sale of the shares, a taxpayer acquires shares (or enters into a contract to acquire shares) of the same kind and of the same or equivalent quality. ‘Same kind’ and ‘same or equivalent quality’ includes the company in which the shares are held, the nature of the shares (ordinary shares vs preference shares) and the rights attached thereto.

The effect of paragraph 42 is twofold. Firstly, the seller is treated as having sold the shares at the same amount as its base cost, effectively disregarding any loss that it would otherwise have been able to book on the sale of the shares and utilise against other capital gains. Secondly, the purchaser must add the seller’s realised capital loss to the purchase price of the reacquired shares. The loss is therefore not totally foregone, but the benefit thereof (being an increased base cost of the shares acquired) is postponed to a future date when paragraph 42-time limitations do not apply.

Unfortunately, taxpayers do not receive guidance on complex matters such as these on yearly IT3C certificates or broker notes, since these are generally very generic. Therefore, taxpayers wishing to fully capitalise CGT exposure on market fluctuations are advised to consult with their tax practitioners prior to the sale of shares.

[1] No. 58 of 1962

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)

Tax allowances against assets used for purposes of trade

The Income Tax Act[1] allows for various income tax allowances to be claimed in respect of moveable assets used for purposes of a taxpayer’s trade.

Most commonly, section 11(e) provides for a deduction equal to the amount by which the value of any machinery, plant, implements, utensils and articles have diminished by reason of wear and tear during the tax year. Typically, these assets must be owned by the taxpayer, or must be in the process of being acquired. Where an asset was acquired during the year, the allowance provided for in section 11(e) is proportionally reduced according to the period of use during the year.

There are however various other specific asset allowances which may rather regulate whether a wear and tear allowance is available for tax purposes, depending on the nature of the specific asset or which specific industry the taxpayer operates in. Should the relevant requirements for these provisions rather be applicable, the section 11(e) allowance will not apply.

For example, section 12B provides for an accelerated allowance (generally split over three years on a 50/30/20 ratio) for certain plant, equipment and machinery used for farming purposes, the production of renewable energy such as bio-diesel or bio-ethanol products or the generation of electricity from wind, sunlight, etc. Section 12C again provides for a tax allowance in respect of assets used for manufacturing, co-operatives, hotels, ships and aircraft. Section 12E allows for a 100% write off of the cost of plant and machinery brought into use by a “small business corporation” in certain circumstances. Other (maybe lesser known) tax allowances include section 12F (providing for an allowance for qualifying airport and port assets) and section 12I (an additional investment and training allowance in respect of industrial policy projects). There are also various provisions in the Income Tax Act providing specifically for an allowance against which the value of buildings owned by a taxpayer and used for purposes of trade can be written down for tax purposes.

It is important to note that each of these provisions has very specific requirements regarding the type of qualifying assets that could potentially qualify for the allowance. This includes whether or not the specific asset is new and unused and if any improvements to the qualifying assets may also be taken into account. Other important considerations include who the relevant taxpayer is, when the asset was brought into use by that taxpayer for the first time and the costs to be taken into account in calculating the relevant allowance.

The take away is that taxpayers must continuously evaluate their asset registers to confirm that all assets are correctly classified for income tax purposes and that the correct tax allowances are claimed in respect of these assets. The most important consideration of all though is to ensure that available allowances provided for in the Income Tax Act are utilised where appropriate to do so.

[1] No. 58 of 1962

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)

Employer Annual Reconciliation Due

Newtons_PAYE-02

Employers should be aware that Employer Annual Reconciliation submission due date is fast approaching. If the relevant deadlines are missed, certain penalties will apply.

When should it be paid?

The Employer Annual Reconciliation starts on 1 April 2018 and employers have until 31 May 2018 to submit their Annual Reconciliation Declarations (EMP501) for the period 1 March 2017 to 28 February 2018 in respect of the Monthly Employer Declarations (EMP201) submitted, payments made, Employee Income Tax Certificates [IRP5/IT3(a)], and ETI, if applicable.

What do I need to do?

Employer Annual Reconciliation involves an employer submitting an accurate Employer Reconciliation Declaration (EMP501), Employee Tax Certificates [IRP5/IT3(a)s] to be issued and, if applicable, a Tax Certificate Cancellation Declaration (EMP601).

Every employer who is registered at SARS for Pay-As-You-Earn (PAYE), Unemployment Insurance Fund(UIF) or Skills Development Levy(SDL), should submit an EMP501. An employer is required to submit accurate reconciliation declaration (EMP501) in respect of the monthly declarations (EMP201) that was submitted, payments made and the IRP5 / IT3(a) certificates for the following periods:

  • Annual period: this is for the period from 1 March 2017 to 28 February 2018
  • Interim period: this is for the period from 1 March 2018 to 31 August 2018

What is PAYE?

Employees’ Tax refers to the tax required to be deducted by an employer from an employee’s remuneration paid or payable. The process of deducting or withholding tax from remuneration as it is earned by an employee is commonly referred to as Pay-As-You-Earn, or PAYE.

What happens when you miss the deadline?

Employers who miss deadline submissions on any of the below are subject to a percentage-based penalty:

  1. Non-submission of an Employer Annual Reconciliation (EMP501) on or before the due date.
  2. Non-submission of employee IRP5 / IT3(a) certificates.
  3. Submission of incorrect or inaccurate data relating to the IRP5 / IT3(a) certificates.

This penalty will be charged for each month that the employer continues to fail to remedy the non-submission.

Avoid the confusion and late submission by contacting us for assistance.

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)

Lesotho Value Added Tax (VAT) Rates Change

Effective Date:  1st April 2018

The Minister of Finance Dr. Moeketsi Majoro in his budget speech delivered in Parliament on 28 February 2018 announced changes in rates of Value Added Tax (VAT) on the supply of goods and services. Legal Notice No 27 has been published in the Government Gazette No 24 of 23 March 2018 to effect the changes. The new VAT rates are effective from 1st April 2018 and they are as follows; 

  • The standard rate of VAT will change from 14% to 15%,
  • Electricity rate increases from 5% to 8%, and
  • Telecommunications rate increases from 5% to 9%.

Important Aspects to Note

Time of Supply 

It is important to establish when the taxable supply is made as that is the time on which VAT should be accounted for (i.e. point at which VAT becomes payable to Lesotho Revenue Authority (LRA)). In simple terms, time of supply is the date on which the transaction occurs or is deemed to occur and that in turn determines the applicable VAT rate. 

The general time of supply rule is the earlier of the date on which –

  • The goods are delivered or made available or the performance of the service is completed;
  • An invoice for the supply is issued; or
  • Payment (including part-payment) for the supply is 

This note applies to most transactions that fall within the general time of supply rule. The note does not deal with special time of supply rules which apply on some transactions like; supplies made under rental agreements, hire purchase or finance lease, auctions, own or exempt use. 

Prices Quoted or Advertised 

All prices advertised or quoted by vendors for taxable supplies must include VAT at the applicable rate (unless the supply is zero-rated). Vendors must state that the price includes VAT in any advertisement or quotation, or the different elements of the total price must be stated i.e. the total amount of VAT, the price excluding VAT and the price inclusive of VAT. Vendors must therefore ensure that all price tickets, labels, quotations, advertisements, etc., reflect the new VAT rates from 1 April 2018. 

Accounting Systems 

From 1 April 2018, vendors must ensure that their accounting systems including sales and billing systems are updated to reflect VAT at all applicable rates. Vendors should test their systems for errors, and check that transactions are processed and reflected at the correct VAT rates.

In some instances, transactions processed after 1st April 2018 may be subject to the old VAT rate e.g. 14%. This, as previously indicated will depend on the applicable time of supply rule. This therefore means that it must be ensured that accounting systems are able to accommodate the different VAT rates. 

Documents: Quotations, Cash Register Slips, Tax Invoices, Debit and Credit Notes

Vendors must ensure that any quotes received on or after 1st April 2018 correctly reflect the new VAT rates. On the other hand, cash register slips and tax invoices issued must reflect the correct VAT rate in order to avoid disputes with consumers and additional taxes and penalties where the output tax is under declared as a result of the incorrect VAT rate used. 

Supplier must be contacted if an incorrect VAT rate is reflected on a document, or the amount is incorrectly calculated. 

Vat Returns 

The correct VAT rates must be used when calculating the input tax on goods or services acquired during the tax periods before and on or after 1st April 2018. Vendors must also ensure that adjustments reflected on the VAT returns in respect of debit or credit notes, are made at the correct VAT rates.
The VAT Return has been updated to reflect the new VAT rates. 

Importation of Goods 

Registered importers or clearing agents must take note that Customs declarations reflect the new VAT rates, generally 15% in respect of goods entered for home consumption on or after 1st April 2018. Invoices issued by the clearing agent for their services of clearing the goods must reflect the correct standard VAT rate. The rate will depend on the general time of supply rules (that is, the earlier of when an invoice was issued, the performance of a service was completed or payment/part-payment was made). 

Notes 

  • This NOTICE mainly deals with the transitional aspects and does not cover all other aspects of VAT.
  • The normal requirements for a tax invoice and all other documents have not
  • VAT registration and other requirements, including thresholds for registration, have not
  • Care must be taken in filing VAT returns for periods after 1 April to ensure that there is no overstatement of input tax

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)

Medical scheme fees tax credit

Section 6A of the Income Tax Act provides for a medical scheme fees tax credit (“MTC”), or rebate, which reduces the amount of income tax payable by a natural person (hereinafter referred to as the “taxpayer”). The MTC applies to the fees paid by the taxpayer to a registered medical scheme for his or her own benefit or for the benefit of his or her dependents.

The MTC is a fixed monthly amount which increases based on the number of dependents. For the 2017/2018 year of assessment (1 March 2017 to 28 February 2018), the credit is R303 for the taxpayer, a further R303 for the first dependent and R204 for each of the taxpayer’s additional dependents.

A “dependent” in relation to a taxpayer for purposes of section 6A is defined in the Medical Schemes Act. With reference to the member of the medical scheme (here the taxpayer), it includes the spouse or partner of the taxpayer, any dependent children or other members of the taxpayer’s immediate family in respect of whom the taxpayer is liable for family care and support as well as any other person who, under the rules of the relevant medical scheme is recognised as a dependent of the taxpayer.

Contributions paid by the employer of a taxpayer are also deemed to have been paid by that taxpayer to the extent that the amount has been included in the income of that person as a taxable benefit. Contributions by an employer made after an employee has retired carries no fringe benefit value. The converse is also true: where an employer pays an ex-employee’s total contributions to a medical scheme, the benefit will have no value for tax purposes and the ex-employee will not be entitled to claim the MTC for the months after retirement. Should the ex-employee, however, pay any portion of the contributions to the medical scheme during the months after retirement, he or she will be able to claim the MTC for those months. This is due thereto that in order to claim the MTC, it is merely required that fees are paid by the taxpayer. Any contribution paid by the taxpayer should therefore give rise to the MTC.

In summary, any fees paid by the taxpayer him- or herself (whether the full contribution or not), the estate or employer (provided that the amount is taken into account as a taxable benefit) are taken into account for the purposes of MTC as contributions paid by the taxpayer.

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)

VAT Increase and Accounting Systems

As you are aware, the National Treasury announced an increase in Value Added Tax (VAT) from 14% to 15% effective 1 April 2018.

We urge you to ensure that your accounting systems are set up to process transactions at the new VAT rate of 15% from 1 April 2018. This is to avoid any penalties or interest due to an under declaration or an over claim on your VAT201return.

Also note that vendors under Category B (March/April), Category E (annual return) and most farmers registered under Category D VAT reporting periods, will have transactions subject to the VAT rate of 14% and 15% which must be correctly reflected on the VAT201 return.

Feel free to contact us should you have any questions or require assistance.

Capital Gains Tax exit charge

In terms of section 1 of the Income Tax Act a natural person will be a “resident” for tax purposes if that person is ordinarily resident in the Republic of South Africa (“the Republic”). Persons who are not at any time during the relevant year of assessment ordinarily resident in the Republic, will also qualify as “residents” if they meet the so-called physical presence test. The definition of “resident” furthermore specifically excludes any person who is deemed to be exclusively resident of another country for purposes of the application of any double tax agreement entered into between South Africa and that other country.

When leaving the Republic to go work and live in another country, it may therefore result in such person ceasing to be a “resident”. In these circumstances, careful consideration should be given to the possible capital gains tax (“CGT”) consequences which may arise.

Section 9H of the Income Tax Act provides that where a person ceases to be a resident for tax purposes, the person must be treated as having disposed of his/her assets for an amount equal to the market value of such assets (the so-called “CGT exit charge”), in other words, a price which would be obtained between a willing buyer and a willing seller on an arm’s length basis. This disposal is deemed to take place the day immediately before the individual ceases to be a tax resident. The person is furthermore deemed to immediately reacquire such assets at a cost equal to this same market value, which expenditure must be treated as an amount of expenditure actually incurred for the purposes of paragraph 20(1)(a) of the Eighth Schedule. In other words, the market value of the assets at the time of the exit will be treated as the base cost of such assets in the future.

The CGT exit charge does not apply to immovable property situated in the Republic held by that person or any asset which after cessation of residence becomes attributable to a permanent establishment of that person in the Republic. Also excluded are certain qualifying equity shares received in terms of broad-based employee share plans, as well as qualifying equity instruments or rights to acquire certain “marketable securities”.

Persons leaving the Republic either permanently or for extended periods should therefore consider whether or not they cease to be residents in the Republic for tax purposes and whether the CGT exit charges may apply to them.

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)

VAT and transfer duty

We are often asked whether the sale or purchase of immovable property is subject to VAT or to transfer duty. Confusion appears to creep in especially in those cases where only either the seller or purchaser is a registered VAT vendor.

The answer to the question lies in the Transfer Duty Act, and specifically in sections 2 and 3 of that Act which determine that the transfer duty is payable on the value of immovable property acquired by any person, and that the duty is payable by the acquirer. In other words, the transfer duty is a tax on the purchaser.

Section 8 of the Transfer Duty Act provides for instances where the purchaser of the property will be exempt from transfer duty being levied against it. The list of potential exemption includes instances where the sale is a “VATable” transaction. In other words, where the sale of the immovable property concerned is therefore a taxable supply for VAT purposes, no transfer duty will be leviable. (This is however subject to certain compliance related requirements being met, including that the prescribed declarations are submitted, that security is tendered for the tax to the extent necessary and that the Commissioner issues a certificate that this transfer duty exemption’s requirements have all been met. )

By implication therefore, since the sale will have to be a taxable supply for VAT purposes for the transfer duty exemption to be met, the implication is that the sale must be made by a VAT vendor, and therefore subject to VAT. The status of the seller (i.e. whether it is VAT registered or not) determines whether the purchaser is liable for either VAT or the transfer duty.

To summarise therefore, whether transfer duty or VAT is payable by a purchaser of immovable property is determined with reference to the status of the seller: if VAT registered, VAT is levied and not transfer duty. If the seller is not VAT registered, transfer duty is payable as the default position (and unless any of the other exemptions in section 8 of the Transfer Duty Act applies). Therefore, the purchaser of immovable property will always as a default be required to pay transfer duty, unless the seller is a VAT vendor (and the property is sold as part of its enterprise). In such an instance, the sale will be subject to VAT at 14% and payable by the purchaser, rather than transfer duty which would otherwise have been payable and according to the applicable sliding scales.

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)

Tax clearance certificates

Taxpayers may require SARS to issue them with a tax clearance certificate for various reasons. This includes a general confirmation that the relevant taxpayer’s affairs are all in order and up to date (a so-called “Good Standing” tax clearance certificate), or a certificate being required to participate in certain government tenders.

Perhaps most notably in recent times, natural person taxpayers are also requesting “FIA” tax clearance certificates, being tax clearance certificates issued to taxpayers who intend to utilise their R10m annual foreign investment allowances to transfer funds abroad for investment purposes. The South African Reserve Bank (through its authorised dealers (most commercial banks)) will not grant approval for transfer of funds in this manner without confirmation from SARS in the form of a FIA certificate being issued that the individual’s tax affairs are all up to date and in order.

Many do not realise that the issuing of tax clearance certificates is a process specifically regulated by the Tax Administration Act. Any tax clearance certificate must be requested in the prescribed form and manner by a taxpayer or his/her representative. A tax clearance certificate must be issued in the prescribed format and include at least the original date of issue of the tax compliance status confirmation to the taxpayer, the name, taxpayer number and ID number (or company registration number) of the taxpayer.

After receipt of an application in the prescribed form, SARS must either issue or decline to issue the tax clearance certificate requested within 21 business days, or such longer period as may reasonably be required if a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.

In practice, SARS often takes well in excess of the 21 business days in which to issue tax clearance certificates, especially for purposes of Foreign Investment Allowance applications. In terms of the Tax Administration Act, SARS may not take longer than the 21 days to process such an application, unless there is some form of proof that tax collections may be jeopardised if the certificate is issued (and which will rarely be the case). Where such delays are experienced though, taxpayers are in practice left with very few remedies, which are conceivably limited to either approaching the Tax Ombud (whose recommendations are not binding), the Public Protector or the High Court for an order forcing SARS to make a decision on issuing a certificate. Most taxpayers will therefore, sadly, simply have to endure SARS’ delays in processing tax clearance certificate applications.

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)

Dividends tax returns

With effect from 1 April 2012, dividends tax was introduced to replace the then “secondary tax on companies” (or “STC”). The tax is currently levied at 20%. The dividends tax regime brought with it a requirement for dividends tax returns to be submitted periodically (if even no liability for dividends tax arose) and we wish to bring to our clients’ attention when this would be required.

From 1 April 2012, dividends tax returns were required for all taxpayers who paid a dividend. Although not initially required, but the Income Tax Act was subsequently amended retrospectively to provide therefor. Returns were, from that date, not required for dividends received though. However, through various amendments being introduced, the scope of the dividends tax compliance regime was broadened significantly. With effect from 21 January 2015, dividends tax returns were also made compulsory for all dividends tax exempt (or partially exempt) dividends received. The most significant implication flowing out of this amendment is that from this date, all South African companies receiving dividends from either South African companies, or from dual-listed foreign companies (to the extent that the dividend from the foreign company did not comprise a dividend in specie). The requirement for dividends received from dual-listed foreign companies to also carry with it the requirement for a return to be submitted was however removed a year later, with effect from 18 January 2016.

Where dividends are paid by a company, or dividends tax exempt dividends are received by any person from South African companies, the relevant returns (the DTR01 and/or DTR02 forms) must be submitted to SARS by the last day of the month following the month during which the dividends in question were received or paid. In those instances, where a dividends tax payment is also required, payment of the relevant amount of tax is to be effected by the same date too.

Although the non-submission of dividends tax returns at present to not carry any administrative non-compliance penalties, we always encourage our clients to ensure that they are fully compliant with relevant requirements prescribed by tax statutes. We would therefore encourage our clients to revisit their dividends history and ensure that their records and returns are up to date and as required by the Income Tax Act.

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)