Monthly Archives: October 2014

Donations

PIC4Whether you are thinking of helping your son financially to enable him to purchase his first property or donating money towards a worthy cause, there are some things to keep in mind. A donation is defined in the Income Tax Act No 58 of 1962 as “any gratuitous disposal of property including any gratuitous waiver or renunciation of a right.” The donor may therefore not receive anything in return from the donee, as this will constitute an exchange agreement.

There are two types of donation, viz. donatio inter vivos (donation between two persons who are both alive) and donatio mortis causa (a donation where the donee will only receive the donation on the death of the donor).

The requirements for both an inter vivos and a mortis causa donation are:

  1. The donor must make an offer to donate, which offer must be accepted by the donee;
  2. The donor must have the necessary legal capacity to make the donation and the donee must have the necessary legal capacity to accept the donation;
  3. Anything that a person can trade (in commercio), can be donated;
  4. A donation must be legal and feasible; and
  5. A donation must be identified or identifiable.

Donations can also be withdrawn. In the case of an inter vivos donation, the donor can at any time before the donee accepts the donation, withdraw such donation. After acceptance of the donation by the donee, a valid contract has been formed and the donor will only be able to withdraw the donation in the case of gross ingratitude on the part of the donee, e.g. if the donee threatens the donor’s life. A mortis causa donation can be repealed at any time before the donor’s death, as the donation will only be ratified on the death of the donor.

Finally, and probably of the most importance to some people, is the matter of donations tax payable to the Receiver of Revenue. Currently donations tax is calculated at 20% of the fair market value of the property donated.

In terms of article 59 of the Income Tax Act, the donor is liable for payment of donations tax within three months after the donation was made. If the donor fails to pay the tax timeously, the donor and the donee will be jointly and severally liable for the payment thereof. An individual can make a donation of R100 000 per annum, free of donations tax.

There are also a few exemptions in terms of section 56 of the Income Tax Act, which should be noted. They include the following:

  1. A donation in terms of a duly registered prenuptial or postnuptial contract to the spouse of the donor;
  2. A donation between spouses who are still married to each other;
  3. A donation in the form of donatio mortis causa (this donation occurs in terms of the donor’s will and is therefore not subject to donations tax);
  4. A donation that was cancelled within six months after it was made; and
  5. Donations to certain public benefit organisations.

If spouses are married in community of property they should pay attention to section 57A of the Income Tax Act. If any property, which forms part of the joint estate of both spouses, is donated by one of the spouses, such donation shall be deemed to have been made in equal shares by each spouse. However, if property that has been donated by one of the spouses belongs to only that spouse (the donor), the donation shall be deemed to have been made solely by the spouse who made the donation.

There are several factors to keep in mind when making a donation and it is therefore advisable to consult with an expert to discuss the tax and legal implications before a decision is made.

This article is a general information sheet and should not be used or relied on 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.

Basic Registrations and Compliance for Businesses

PIC3It is a challenge for any business in South Africa to stay abreast of all registrations and compliance prescribed by law and other regulations. Following is a summary of the most common registrations and compliance applicable to most businesses.

1. Annual returns and annual duties (Companies): Any company that wants to remain registered with the CIPC must annually, in the company’s birthday month, submit a return with required information to the CIPC (www.cipc.co.za) and also pay the accompanying annual duties.

2. Income tax:  Any entity conducting business, whether it be an individual/one-man business, company, trust or any other person, must register as a taxpayer with the South African Revenue Service (SARS). The entity must annually complete and submit an income tax return (ITR12 or ITR14). In addition, provisional tax must be calculated and a return (IRP6) submitted every six months and, if necessary, a payment must also be made. Non-compliance can result in significant penalties. (www.sars.gov.za)

3. Value-added tax (VAT):  If the entity’s annual turnover will exceed R1 million it must register for VAT.  Voluntary registration can be done if the annual turnover will be more than R50 000. VAT returns must usually be submitted every two months and, if necessary, payment must also be made. (www.sars.gov.za)

4. Unemployment insurance:   If an entity employs staff it must register as a employer for unemployment insurance. Monthly returns for payment must be submitted. The employer must contribute an amount equal to one per cent of the salaries of its employees while a further one per cent must be contributed by each employee.  (www.labour.gov.za).

5. Employee tax:   If any employee’s remuneration exceeds the limit prescribed in the Income Tax Act, the entity must register as an employer for the purposes of PAYE (Pay As You Earn system). PAYE deductions must be made monthly from the remuneration of such employees and submitted with the required returns to SARS. Twice annually a PAYE reconciliation (IRP501) must be compiled and submitted to SARS. IRP5 certificates for all employees must also be prepared annually together with the PAYE reconciliation (www.sars.gov.za).

6. Skills development levy:  If an entity’s total annual salary account exceeds R500 000, or if the entity has more than 50 employees, it must register as an employer for the skills development levy (SDL) and monthly submit returns together with the required levy. (www.labour.gov.za / www.sars.gov.za).

7. Compensation Commissioner:  Any entity that employs staff must, regardless of the remuneration paid to its employees, register as an employer with the Department of Labour, for workmen’s compensation. The entity must annually submit a return to the department and is then assessed at a percentage of the total salary account of the entity. Employees who are injured on duty may then claim compensation from the fund. (www.labour.gov.za).

8. Employment equity:  An entity that employs more than 50 people or that exceeds the set limit for annual turnover applicable to the sector in which it trades, must compile an employment equity plan every two years and submit it to the Department of Labour. (www.labour.gov.za).

This article is a general information sheet and should not be used or relied on 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.

Zero Rated VAT: Exports and Services to Foreigners

PIC2It is often confusing to determine when to charge Value Added Tax (VAT) on goods or services at zero rate (0%) instead of the standard rate of 14%. Below are some basic examples to illustrate the charging of the correct rate by South African VAT vendors. These are general illustrations and it is prudent to contact your tax practitioner if there is any uncertainty in this regard.

1.    Direct Export of Goods – 0%

A direct export is the delivery of moveable goods to a recipient at an address outside of the Republic of South Africa (RSA) by a South African VAT vendor. The vendor must therefore physically deliver the goods to the recipient at the address outside the RSA or arrange for the delivery of the goods on behalf of the vendor with a cartage contractor (who must be a resident of the RSA as well as a registered VAT vendor). VAT at 0% may then be charged on these sales.

Strict documentation requirements are set by the South African Revenue Service (SARS) in order to charge 0% VAT, and the exports must take place through any of the 43 designated ports.

2.    Indirect Export of Goods – 14%

An indirect export is when the South African VAT vendor sells moveable goods to a foreign recipient, but the recipient will remove or arrange for the removal of the goods from the RSA to the foreign address. In such a case, the vendor will charge VAT at the standard rate of 14%.

However, the foreign recipient may be able to claim a VAT refund from the VAT Refund Administrator (Pty) Ltd (VRA) at the exit of the goods from the RSA at any of the 43 designated commercial ports. The foreign recipient must be a qualifying purchaser (as defined) and the goods must be exported within 90 days from the date of the tax invoice. Strict documentation requirements are set in order to claim the VAT refund.

The only exception to this is if the supply is made in terms of Part Two of the VAT Export Scheme. In that case, VAT may be charged at 0%.

3.    Local Services to Foreigners – 0%

Services delivered locally to non-residents by the South African VAT vendor will generally be subject to VAT at 0%. It is important to remember that the non-resident recipient of these services must not be physically present in the RSA at the time of the delivery of the service.

The exceptions to this (and therefore subject to 14% VAT) will be where the services are supplied:

  1. in respect of fixed property in the RSA,
  2. in respect of movable property in the RSA, unless the property is destined for export or forms part of a supply to a registered vendor, or
  3. to a recipient who is in the RSA when the services are rendered (unless it relates to a restraint of trade).

4. Services Delivered outside the RSA – 0%

Services that are physically delivered outside the RSA will carry VAT at 0%.

This article is a general information sheet and should not be used or relied on 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.

Taxation of Trusts

PIC1In the budget speech during February 2013 the minister of finance mentioned that the taxation of trusts will come under review to control abuse. In the 2013 budget review published by National Treasury the following was said regarding the taxation of trusts.

To curtail tax avoidance associated with trusts, government is proposing several legislative measures during 2013/14. Certain aspects of local and offshore trusts have long been a problem for global tax enforcement due to their flexibility and flow-through nature. Also of concern is the use of trusts to avoid estate duty, which will be reviewed. The proposal will not apply to trusts established to attend to the legitimate needs of minor children and people with disabilities.

The proposals are as follows:

  • Discretionary trusts should no longer act as flow-through vehicles.  Taxable income and loss (including capital gains and losses) should be fully calculated at trust level with distributions acting as deductible payments to the extent of current taxable income.  Beneficiaries will be eligible to receive tax-free distributions, except were they give rise to deductible payments (which will be included as ordinary revenue).
  • Trading trusts will similarly be taxable at the entity level, with distributions acting as deductible payments to the extent of current taxable income. Trusts will be viewed as trading trusts in that they either conduct a trade or, if beneficial, ownership interests in these trusts are freely transferable.
  • Distributions from offshore foundations will be treated as ordinary revenue.  This amendment targets schemes designed to shield income from global taxation.

From the wording above it is not clear what is meant by Treasury. To date no further information or explanations could be obtained from Treasury or other experts as to what the exact interpretation of the wording in the budget review entails.

Firstly the statement was made that there is concern about the use of trusts to avoid estate duty, and it will be reviewed. It is contrary to the information contained in the budget proposals of the previous year, where it was mentioned that consideration will be given to the abolishment of estate duty, due to certain duplication with Capital Gains Tax. This topic has been a discussion point for more than twenty years, and was also considered by the Margo Commission and the Katz Committee. Although this statement should not be ignored, nothing has materialised so far.

The paragraph dealing with discretionary trusts basically states that the flow-through (conduit) principal will no longer apply, but that distributions will act as deductible payments to the extent of current taxable income. The paragraph goes further to state that beneficiaries will be eligible to receive tax-free distributions, except where they give rise to deductible payments, which will then be included as ordinary revenue in the hands of the beneficiaries.

We interpret this paragraph to mean that any income in the trust that is distributed to beneficiaries in terms of the trust deed, will be taxable in the hands of the beneficiaries and any income not so distributed will be taxable in the trust. There is very little difference between this and the existing conduit principle. The exception may be that the income might not retain its identity as is the case with the current conduit principle.

It is also not clear why a difference is made between trading trusts and discretionary trusts, as the same tax dispensation will apply to both. The paragraph that deals with distributions from off-shore foundations speaks for itself.

The proposals in the budget review raised questions with various persons and institutions which can also be fuelled further by statements in the media. Although the proposals are aimed at preventing the misuse of trusts for avoidance of tax, it does not seem to differ materially from the current dispensation. As previously mentioned this topic has been raised from time to time, but it did not progress beyond proposals. We recommend that cognisance should be taken of the proposed developments, but decisions should only be made once more comprehensive information is available.

This article is a general information sheet and should not be used or relied on 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.