Tag Archives: Tax

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)

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 made.

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 changed.
  • VAT registration and other requirements, including thresholds for registration, have not changed.
  • Care must be taken in filing VAT returns for periods after 1 April to ensure that there is no overstatement of
    input tax claimed.

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)

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)

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)

Tax residence for individuals

According to the South African Revenue Service (SARS), South Africa has a residence-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source.

In an increasingly global society where individuals travel more freely across borders and are able to hold assets in various countries, it becomes important for individuals with ties to South Africa to have certainty whether they are a South African tax resident or not. If they are, their entire income earned from wherever in the world may potentially be taxed in South Africa.

Tax residence is not linked to migration status. In other words, irrespective of which country’s passport one carries, tax residence may still be established in South Africa by virtue of the domestic tests applied by the Income Tax Act.[1] In terms of that Act, an individual will be tax resident in South Africa if either that person meets the criteria of the “physical presence” test, or if that person is “ordinarily resident” in South Africa.

The physical presence test involves a day counting exercise whereby a person will be considered to be a South African tax resident if he/she has been present in the Republic for at least 91 days every year for 6 tax years, and that the days spent in the country in total over this period amounts to at least 915 days in total. If this test is met, the individual will be tax resident from the first day of the last year forming part of the 6-year period referred to.

The question whether a person is “ordinarily resident” in South Africa is a more involved one. The term as used in the Income Tax Act is undefined, but our courts have considered the term to refer to “… the country to which [an individual] would naturally and as a matter of course return from his [or her] wanderings”.[2] The test involves a facts-based and substantive inquiry that in essence involves a person being asked: Where do you consider home to be.

Tax residence is not only relevant for purposes of where a tax liability may arise, but also to understand what tax compliance related obligations may arise for an individual. It is therefore important for individuals not to confuse migration and tax residence status; the two rather have very little to do with one another.

Reference:

[1] See the definition of “resident” in section 1 of the Income Tax Act, 58 of 1962

[2] Cohen v CIR 1946 AD 174

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 free loans cross border

A consideration of the tax consequences of interest free loans will be incomplete if not also considered in the context of interest free debt funding being provided cross-border. Typically, when “cheap debt” is encountered it is in the form of low interest or interest free loans being provided to related parties (or “connected persons” as defined) due to the non-commercial nature of such an arrangement. This is especially the case for the lender, who could typically receive far greater returns on investment if utilising excess cash in another manner. However, due to group efficiencies, it may be preferable for one group company to provide low interest or interest free financing to a fellow group company, especially if this also has the potential to unlock certain tax benefits.

One such manner in which a corporate group may save on its ultimate tax bill is to ensure that funding is provided by a company situated in a low tax jurisdiction, such as Mauritius for example (which levies a corporate tax rate of effectively 3%). Were the Mauritius company to lend cash to a South African group company, the group would prefer it to do so at a very high rate. This would ensure that the South African company is able to deduct interest in a corporate tax environment where it would create a deduction of effectively 28%, whereas the tax cost would only be 3% in Mauritius.

Where the South African company however is in the position that it sits on the group’s cash resources, it would want to lend money to the Mauritius company at as low rate as possible. Interest, to the extent charged, will now only be deductible at an effective 3% in Mauritius (where the borrower is situated), whereas interest received will be taxed at 28% in South Africa. Such a loan would therefore be most tax efficiently structured as an interest free loan.

The transfer pricing regime, contained in section 31 of the Income Tax Act,[1] seeks to legislate against this tax avoidance behaviour. The provision, which covers all cross border transactions entered into by connected persons, but specifically also cross border debt financing, determines that in such instances “… the taxable income or tax payable by any person contemplated … that derives a tax benefit … must be calculated as if that transaction, operation, scheme, agreement or understanding had been entered into on the terms and conditions that would have existed had those persons been independent persons dealing at arm’s length.”

In other words, the tax consequences of cross border debt funding with connected persons will be calculated as though arm’s length interest rates would have been attached thereto. Therefore, even though the loan extended by the South African company above to the Mauritian company would have been interest free in terms of the financing agreement, the South African company will still be taxed in South Africa as though it has received interest on arm’s length terms. The same is true for the exaggerated rates that may have been charged had the South African company been the lender: SARS would adjust these rates downward to ensure that the South African company does not claim inflated interest costs.

Using interest free or low interest loans as a tool to increase tax efficiency, especially in a cross border context, much be approached with circumspection. It may very often amount to a blunt and clumsy tax planning tool at best.

[1] 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)

Interest free loans with companies

The latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

[1] 58 of 1962
[2] Section 64F(1)(a)
[3] Defined in section 1 of 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)