MSI Global Alliance adds two accounting members in India

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, is delighted to welcome two new accounting members in India, Paperchase Business Services Pvt Ltd. and Anjaneyulu & Co.

Paperchase Business Services Pvt Ltd, based in Ahmedabad, provides key accounting and tax services with a strong focus on book keeping, management accounting, payroll and year-end accounting. The firm also provides outsourcing services to clients from various English-speaking countries.

The three partner firm, with a team of over 50 staff, serves small and medium-sized businesses and individuals from a wide range of industry sectors, which include recruitment, construction, hospitality, charities and healthcare providers.

Maulik Patel, managing partner of Paperchase Business Services Pvt Ltd, comments, ”We are delighted to join MSI, which will help us network with lot of dynamic firms for mutually beneficial relationships.”

Located in Hyderabad, Anjaneyulu & Co. joins MSI with seven partners and a team of 30 staff. The long- established firm, founded in 1980, provides comprehensive audit and assurance services as well as accounting, tax planning and advisory services to national and international clients.

D V Anjaneyulu, managing partner of Anjaneyulu & Co., comments, “We are pleased to join MSI, a global association of dynamic professionals, which will enhance our reach globally. We look forward to a long and fruitful relationship.”

Tim Wilson, chief executive of MSI, comments, “I am very pleased to welcome our two new accounting members in India. We are looking to expand MSI’s membership coverage in India and both firms provide a strong offering for our members and their clients globally.”

The admission of Paperchase Business Services Pvt Ltd and Anjaneyulu & Co. adds to MSI’s presence in India, which comprises seven member firms located in the key business centres of Ahmedabad, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi.

For further information please contact

MSI Global Alliance
Pauline Rottstock, Marketing and Business Development Manager
Tel: +44 20 7583 7000
Email: prottstock@msiglobal.org

About MSI Global Alliance

MSI is one of the world’s leading international associations of independent legal and accounting firms with over 250 carefully selected member firms in more than 100 countries. MSI was formed in 1990 in response to the growing need for cross-border co-operation between professional services firms.

MSI members worldwide work closely together to provide integrated, multidisciplinary services to meet each client’s legal and regulatory obligations and growth ambitions. MSI is ranked among the Top 20 international accounting and legal networks, associations & alliances.

Visit our website: www.msiglobal.org

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)

Interest received by non-residents on SA bank accounts

Persons that are not tax resident in South Africa (“SA”) are only taxed in SA on income received by or which accrued to such non-resident from an SA source. This will include interest received on an SA bank account.

Non-residents may, however, be exempt from SA income tax on interest earned in terms of section 10(1)(h) of the Income Tax Act. The section 10(1)(h) exemption does not apply though to the extent that the non-resident is a natural person who was physically present in SA for a period exceeding 183 days in the 12-month period preceding the date on which the interest was received by or accrued. In these circumstances, the non-resident must register for income tax and declare such SA source interest to the South African Revenue Service. The exemption will also not apply where the debt from which the interest arises is effectively connected to a permanent establishment of that person in SA or where the interest received is in the form of an annuity.

The general interest exemptions in section 10(1)(i) may, however, still apply to non-residents that are natural persons.

Other than for an income tax effect, non-residents earning SA source interest can also be subject to the withholding tax on interest (“WTI”) at a rate of 15%, unless certain exemptions apply.

This withholding rate can be reduced by an applicable double taxation agreement between SA and the foreign country where the person (who is a non-resident for SA tax purposes) is tax resident. Two exemptions from WTI may apply to non-residents receiving interest on an SA bank account. Firstly, there is a general exemption from interest received from SA banks.Secondly, no WTI is payable where the non-resident exceeds the 183-day threshold as set out above.

In summary, non-residents are not subject to WTI on interest received on an SA bank account. Also, no liability for income tax will arise on condition that none of the exclusions in section 10 mentioned above applies. To the extent that any of these exclusions apply though, the non-resident will have to register for income tax in SA and submit an income tax return. An applicable double taxation agreement should also be considered as it may contain specific provisions relating to the taxation of interest and providing relief to the extent that none is afforded by the domestic legislation discussed in this article, although this will not affect the obligation to submit an income tax return to the South African Revenue Service.

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)

Budget 2018

Following the annual national budget speech delivered by Finance Minister Malusi Gigaba on 21 February, we highlight some of the most significant matters arising below:

  • The much-debated VAT rate has been increased from 14% to 15%, which was widely expected although hugely unpopular given the political sensitivity coupled with the effect that this will have on the poor;
  • The corporate income tax and transfer duty rates have been left unchanged;
  • The CGT inclusion rate (40% for individuals, 80% for companies or trusts) was left unchanged too (although we do expect these to go up to 50% / 100% in the near future);
  • “Bracket creeps” or “stealth taxes” had a significant impact on the current budget and refer to marginal tax brackets not being adjusted upwards for the effect of inflation annually. This year, no adjustments will be made to the top 4 tax brackets for individuals. Assuming that inflation is 6%, it will therefore be 6% “easier” for taxpayers to fall into a higher tax bracket compared to last year.
  • A new estate duty / donations tax bracket is to be introduced for donations or estates in excess of R30 million, and which will attract tax at 25%. Amounts below this threshold will still be taxed at the prevailing rate of 20%.
  • The above and other most significant changes can be summarised as follows:

 

WAS

NOW

Top marginal PIT rate

45%

45%

VAT rate

14%

15%

Tax rate for trusts

45%

45%

Estate duty for estates > R30m

20%

25%

CGT annual exclusion

R40,000

R40,000

Primary rebate for individuals

R13,635

R14,067

The Minister also alluded to the following matters which would be subject to legislative intervention or refinement during the course of the legislative year ahead:

  • Interaction of anti-avoidance rules relating to share buybacks and dividend stripping and the general reorganisation rules are to be reviewed, since current rules may affect legitimate transactions (especially in the preference share funding context);
  • Appropriateness of the current high tax exemption as part of the “controlled foreign company” (CFC) regime will be considered. However, legislation targeting foreign companies held by foreign trusts (which have SA resident beneficiaries) and classifying these as CFCs will be reintroduced;
  • To further encourage venture capital company investments, the appropriateness of the current passive investment income threshold is to be revisited, as well as the timing of the “group company” disqualification requirement;
  • The “official rate of interest” (used to calculate tax consequences of interest-free or low-interest loans), currently at prime less 2.5%, is to be increased; and
  • Further refinements will be made to the new “debt relief” legislation introduced in 2017 to remove anomalies.

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.

Borrowing to purchase listed shares – 100% tax ineffective?

Where a person borrows money to purchase shares, the general rule would be that the interest paid on the funds borrowed to fund that acquisition would not be deductible for tax purposes, the reason being that the interest expense is not incurred in the production of “income”.

Similarly, interest paid cannot be said to be a cost incurred in the acquisition of an asset (such as a share) for capital gains tax purposes: by its very nature, interest is a recurring cost only incurred after acquisition of the underlying asset if funded through debt. One would therefore imagine that interest incurred on funds borrowed to acquire an asset can similarly not form part of the “base cost” of the asset for capital gains tax purposes, in other words, used to negate the capital gains tax cost which arises when the asset purchased is eventually disposed of.

Leaving aside the commercial wisdom of borrowing money to fund the acquisition of listed shares (and probably giving up assets as security in the process), the Eighth Schedule to the Income Tax Act contains a surprising exception to the general rule against non-capitalisation of interest costs for capital gains tax purposes. Paragraph 20(1)(g) determines that “… one-third of the interest as contemplated in section 24J excluding any interest contemplated in section 24O on money borrowed to finance the expenditure contemplated in items (a) or (e) in respect of a share listed on a recognised exchange…” may be added to the base cost of those listed shares acquired. In other words, whilst all interest incurred on such debt funding will not be taken into account to calculate the base cost of the shares, 33% of all interest incurred at least may be added to the initial cost of acquisition of the shares in determining its base cost, and eventually in calculating the capital gain realised on disposal of those shares in due course.

While interest is therefore not deductible for tax purposes on the debt used to acquire shares generally – and interest would moreover typically not rank as a cost to be taken into account for purposes of calculating the base cost of an asset for capital gains tax purposes – interest incurred on the acquisition of listed shares appears to be a definite exception.

The exception is definitely one of the lesser-known provisions in the Income Tax Act, and one which is often overlooked when listed shares are sold. Where a listed share portfolio is therefore built up over time, investors should take into account borrowing costs that may have been incurred over the years to shore up further investments in their listed investment portfolios.

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)

Claiming VAT input on “pre-enterprise” expenditure

In terms of section 17 of the Value-Added Tax Act, 89 of 1991, a registered VAT vendor is entitled to claim back any amounts of VAT paid on goods and services acquired or imported that will be used in the furtherance of that particular VAT enterprise. The ability to claim input VAT in this manner is however limited to VAT vendors only and the wording of section 17(1) makes it clear that input tax may only be claimed in respect of goods and services supplied to a vendor – in other words, a person that is already a registered vendor at the time that the goods or services are supplied to him/her.

Section 18(4) of the VAT Act provides relief for persons incurring expenses in the form of goods or services being supplied to them in anticipation of a VAT enterprise being set up. In terms of that provision, and notwithstanding section 17, where VAT is paid on goods or services acquired by a person and those goods or services will subsequently be supplied as part of a VAT enterprise, those goods or services on which VAT was paid historically will be deemed to have been supplied to that VAT vendor only at the stage that those goods or services are used by it to supply its own VAT supplies. In other words, the provision enables the person, who earlier would not have been able to enter a claim for input tax, to claim input tax on those goods and services supplied to him/her previously, before becoming a VAT vendor.

The relief is not only limited to goods or services supplied to the now-VAT vendor and on which VAT was paid, but also extends to second-hand goods which were previously acquired by it and is now also used in the furtherance of its VAT enterprise.

From a practical perspective, we often find in practice that SARS disallows such claims for input tax on the basis that the claiming vendor’s VAT number does not appear on the invoice which it would submit in support of its input VAT claim subsequently. This is obviously incongruous, since the VAT-claiming vendor under these circumstances could not have had its VAT number appear on the invoice of another vendor which supplied goods or services to it, simply since the vendor would not have had a VAT number at that stage, yet is perfectly eligible to submit a VAT input claim in terms of the provisions of section 18(4). We would argue that SARS’ approach is contradictory to the wording of section 20(4)(c) of the VAT Act which requires the following to appear on invoices submitted by vendors in support of an input tax claim:

“… the name, address and, where the recipient is a registered vendor, the VAT registration number of the recipient”.

Clearly, where a vendor submits an invoice to claim input VAT on “pre-enterprise” expenditure incurred, that vendor will not have been a registered vendor at that time, therefore in our view highly arguably not required to have its own VAT number on an invoice in order to support a claim for input VAT on “pre-enterprise” expenditure.

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)

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)