Tag: Tax (page 1 of 5)

For how long can your taxes haunt you?

In terms of section 99 of the Tax Administration Act, 28 of 2011, an assessment may not be made three years after the date of an original assessment by the South African Revenue Service (SARS), or in the case of a self-assessment by a taxpayers (such as in the case of a Value-Added Tax return), five years after the date of an original assessment. These periods are generally referred to as the prescription rules and are in place to ensure that finality is eventually brought to a tax period. Essentially, therefore, the prescription rules provide that tax periods do not remain open indefinitely. There are, however, some exceptions to the general rules.

Fraud, misrepresentation and non-disclosure

Generally, the prescription period that prohibits SARS from issuing an assessment does not apply if the reason the full amount of tax was not charged was due to fraud, misrepresentation, or non-disclosure of material facts. When the tax is a self-assessment, such as VAT and PAYE, the basis on which the period of limitation does not apply differs in that it refers to fraud, as well as intentional and negligent misrepresentation or non-disclosure.

This concept was recently under the spotlight in the Western Cape High Court in the matter of the Commissioner for the South African Revenue Service v Spur Group (Pty) Ltd (A285/2019) (judgment delivered on 26 November 2019). Although the case dealt primarily with whether contributions by the respondent to an employee share scheme is deductible for income tax purposes, the matter of prescription was also relevant, since the additional assessments relate rather old tax periods (2005 to 2009).

SARS argued that since the respondent answered “no” to certain questions on an income tax return, they assessed the taxpayer on a different basis than they would have had the question been answered differently. Essentially, SARS argued that answering “no” to certain questions amounted to “misrepresentations” and “non-disclosures” and they were therefore not prohibited from raising additional assessments.

In a minority judgement, judge Salie-Hlophe did not agree with the argument from the taxpayer that, although the question may have been answered incorrectly on a tax return, it did provide SARS with all the necessary information, being its financial documents (presumably, including financial statements), and is, therefore, by default, not guilty of non-disclosure or misrepresentation.

The judge indicated that this contention would be contra bones mores as it would amount to excusing a taxpayer in circumstances where it had not properly disclosed its own information on the tax return. Differently stated, it would exonerate a taxpayer who had made improper disclosures in his return by allowing him to rely on other documents furnished to SARS, however, ex facie his return, he had clearly misrepresented the true facts. It would offend the statutory imperative of having to make full and proper disclosures in a tax return but would also allow taxpayers to omit its true affairs and subsequently claim that the onus was on SARS to have uncovered it and acted upon it in good time. Furthermore, it would impose too high a standard of care or diligence on the SARS assessing officials. Very significantly, the judge makes the following comment:

“Completion of the tax returns is on par with a statement under oath. The taxpayer effectively vouches that it contains the truth, the whole truth and nothing but the truth.”

Consequently, the judge found that Spur’s incorrect answers to the questions in the tax returns constituted misrepresentations and non-disclosures of material facts which caused the full amount of tax chargeable in the 2005 to 2009 years of assessment not to be assessed to tax by the Commissioner.

The crucial lesson from this minority judgment is that the highest degree of diligence must be exercised when completing a tax return since it could negate any chances of relying on prescription.

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)

Understanding the Diesel Refund Scheme

Farming is a qualifying activity under the Diesel Refund Scheme. Most farming enterprises will qualify to be registered for the Diesel Refund Scheme. The person carrying on the farming enterprise may, therefore, apply for registration with the Diesel Refund Scheme, provided the enterprise is registered for VAT.

In terms of section 75(1C)(a)(iii) of the Customs and Excise Act 91 of 1964 (the section):

“the Commissioner may investigate any application for a refund of such levies on distillate fuel to establish whether the fuel has been… (iii) delivered to the premises of the user and is being stored and used or has been used in accordance with the purpose declared on the application for registration…”

On 29 November 2019, the Supreme Court of Appeal (SCA), in a unanimous judgment in Commissioner for the South African Revenue Service v Langholm Farms (Pty) Ltd (1354/2018) [2019] ZASCA 163, provided guidance on the interpretation of the section.

Langholm Farms (Pty) Ltd (Langholm) operates a pineapple growing enterprise and delivers the fruit, using its own trucks, to a factory in East London for further processing. The trucks that are used for the transportation of the fruit to the factory are not refuelled on Langholm’s farm. After a diesel rebate audit was conducted by SARS on Langholm’s operations, they issued Langholm with a “Notice of intention to assess”, based on the following contentions:

  • The diesel used by Langholm for the transportation of the fruit was ‘non-eligible usage’ because they were of the opinion that a rebate could only be claimed in respect of diesel delivered, stored and dispensed from storage tanks situated on Langholm’s premises, which was not the case; and
  • SARS was of the opinion that the carting of the storage bins on the return journey from the factory’s premises to the farm was not a primary production activity

Without formally responding to SARS’s contentions, Langholm successfully approached the high court for a declaratory order that it is eligible for diesel rebate claims under the section when its trucks are refuelled at the Bathurst Co-op in East London.

Langholm interpreted the word ‘used’ in the section to mean either used on the premises or used elsewhere under schedule 6 of the Customs and Excise Act. Simply put, the case of Langholm is that ‘stored and used’ and ‘has been used’ refer to two different usages. One usage, they contend, is usage on the premises while the other is usage off the premises.

In considering this interpretation, the SCA confirms the statutory interpretation of rules in a South African context:

“A statute must be interpreted in line with ordinary rules of grammar and syntax taking cognisance of the context and purpose thereof. That approach is equally applicable to a taxing statute.”

The court finds that a plain reading of the statute does not allow for the interpretation that Langholm seeks. The language of the section is clear and unequivocal and there is nothing in the context to suggest that any departure is warranted from the words used. As a result, the court finds that the section means that a taxpayer can only claim a refund for the diesel fuel stored and used on its own premises. The declaratory orders (by the high court) were, thus, granted on a mistaken view of the law.

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)

Do you have tax debt?

With the tax filing season for individuals now closed, taxpayers may find themselves with tax debt that is due. This may be due to administrative penalties as a result of the non-submission of tax returns, the submission of a return without payment, only partial payment or debt arising from an audit assessment.

The South African Revenue Service (“SARS”) provides assistance to taxpayers in managing their tax debt. As an initial phase, SARS will remind taxpayers of the amount of tax due before the due date. This is done by way of an assessment with the relevant due date indicated thereon as well as courtesy notifications from SARS which acts as reminders to pay the outstanding amount. Paying the full outstanding tax debt at this point will ensure that no interest and penalties are levied against the taxpayer.

Once the due date has past and the debt remains outstanding, the taxpayer’s tax compliance status will change to ‘non-compliant’. SARS will, however, continue to send reminder notifications to the taxpayer to settle the debt.

At this point, it is important to note that the taxpayer may at any point request for remedial actions which could include a request to defer payment, the suspension of payment with the intention to lodge a dispute or to request a compromise.

Should taxpayers fail to settle the debt without requesting any of the remedial mechanisms, a notice of final demand will be issued. SARS may now appoint a third party who holds money on the taxpayer’s behalf to deduct the tax debt and to pay it over to SARS. For example, an employer or bank may be requested to deduct the debt from the taxpayer’s salary. Such a third party is legally obliged to act on behalf of SARS.

SARS also have other collection tools available to ensure all tax debts are paid. These include issuing a judgement against the taxpayer and having the taxpayer blacklisted as well as attaching and selling the taxpayer’s assets.

The take away is that taxpayers should ensure that all relevant tax debts are paid timeously to avoid interest and penalties being levied. Also, taxpayers should regularly update their contact details with SARS to ensure that they receive all relevant tax correspondence.

However, should taxpayers not be able to pay their tax debts in time or need assistance in managing their tax debts, they should contact SARS to request any of the remedial mechanisms. SARS’ website lists a number of contact details for taxpayers to engage with SARS on these matters depending on their location. Taxpayers could also contact their tax advisors or tax practitioners to assist them in making contact with SARS in order to settle all outstanding tax debts.

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)

What happens during liquidation?

The South African Revenue Service (“SARS”) issued Binding Private Ruling 336 on 6 December 2019.

In terms of this ruling, a listed resident company (“the Company”) previously granted a loan to its wholly-owned resident subsidiary (“the Subsidiary”) in order for the Subsidiary to acquire shares in the Company. The Company subsequently decided to deregister the Subsidiary.

In order to affect the deregistration, the Subsidiary proposed to, in anticipation of its deregistration, distribute all its assets (the Company shares) to the Company as a dividend in specie and as a liquidation distribution as contemplated in section 47 of the Income Tax Act.[1]  In return, the Company will waive the outstanding loan and cancel the Company shares so distributed by the Subsidiary to the Company. The Subsidiary will then be deregistered.

SARS confirmed in the ruling that no adverse tax consequences should arise for either the Company or the Subsidiary based on the following reasons.

SARS agreed that the distribution of the Company shares by the Subsidiary will constitute a liquidation distribution as contemplated in section 47.[2]The distribution will therefore not result in any capital gains tax consequences for either the Company or the Subsidiary. The Company should furthermore disregard the disposal or any return of capital for purposes of determining its taxable income, assessed loss or aggregate capital gain or aggregate capital losses.[3]

The liquidation distribution constitutes a dividend and must be included in the Company’s gross income. However, SARS confirmed that the dividend will be exempt from income tax in terms of section 10(1)(k)(i). The dividend will also not be subject to dividends tax (section 64G(2)(b)).

No securities transfer tax will arise on the transfer of the shares from the Subsidiary to the Company (section 8(1)(a)(v) of the Securities Transfer Tax Act[4]) and the subsequent cancellation of the shares so received by the Company will not constitute a disposal (paragraph 11(2)(b)(i) of the Eighth Schedule to the Income Tax Act).

The ruling furthermore confirms that paragraph 77 (relating to distributions in liquidation or deregistration received by holders of shares) and paragraph 43A (dividends treated as proceeds on disposal of certain shares) of the Eighth Schedule will also not apply to the proposed transactions.

There will also not be any capital gains tax consequences with regards to the loan waiver as the reduction of debt between connected persons in anticipation of deregistration is specifically excluded in paragraph 12A(6)(e) of the Eighth Schedule.

SARS granted the ruling subject to an additional condition, that is to say, that the Subsidiary takes the required steps to deregister within a period of three years as contemplated in section 41(4).

  • [1] No. 58 of 1962
  • [2] See the definition in paragraph (a) of section 47(1).
  • [3] Section 47(5)
  • [4] No. 25 of 2007

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)

Taxation of foreign employment income

South Africa has a residence-based tax system, which means residents are taxed on their worldwide income, regardless of where that income was earned.  

South African tax residents living overseas and earning remuneration in respect of services rendered outside of South Africa are exempt from tax in South Africa, provided that the individual is outside of South Africa for a period or periods exceeding 183 full days (60 of which have to be continuous days of absence), during any 12 month period. 

There is currently no limitation on the foreign employment income exemption. 

From 1 March 2020, the first R1 million earned from foreign service income will be exempt from tax in South Africa, provided more than 183 days are spent outside SA in any 12-month period and, during the 183-day period, 60 days are continuously spent outside SA. 

This means that any foreign service income above the first R1 million will be taxed in South Africa at the relevant tax resident’s marginal tax rate. 

To prove to SARS that you comply with the section 10(1)(o)(ii) exemption, you need to keep record of your employment contracts and proof of payment of taxes abroad.  

When considering your approach to tax planning you should appoint a Tax Practitioner to ensure that you don’t step onto any landmines.   

In order to ensure that the tax system promotes the principles of fairness, it was legislated that foreign employment income earned by a resident should no longer be fully exempt. 

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)

Valuation of trading stock for tax purposes

On 27 September 2019, just over a year since delivering judgement in another matter with very similar facts, the Supreme Court of Appeal in CSARS v Atlas Copco South Africa (Pty) Ltd (834/2018) [2019] ZASCA 124 gave a judgement on the valuation of trading stock for income tax purposes.  

The general (and oversimplified) principle is that taxpayers are allowed, as a deduction, the value of opening trading stock during a year of assessment, while the value of the closing trading stock is required to be included in taxable income. From a tax perspective, the higher the value attributed to closing stock at the end of a tax year, the lower the cost of sales for that year will be and the greater the taxable income of the taxpayer. Conversely, the lower the value attributed to closing stock, the higher the cost of sales and the lower the taxable income for that year. The value of the trading stock is generally the cost thereof, less an amount which SARS may think is just and reasonable as representing a diminishing in that value due to damage, deterioration, change of fashion, decrease in the market value or for any other reason. 

Taxpayers often use accounting (or IFRS) values for the determination of stock values. These valuation methods usually involve a time-based approach. I.e. a write-down of stock if it has not been sold for several months. The more the number of months since the stock was last sold, the higher the write down. This approach is often based on internal policies. The court notes (in the previous judgement) that: 

If taxpayers had a free hand in determining the value of trading stock at yearend it would open the way for them to obtain a timing advantage in regard to the payment of tax, by adjusting the value of closing stock downwards. They could by adjusting these values manipulate their overall liability for tax in the light of their anticipations in regard to future rates of tax, future trading results, the need to incur significant expenses in the future and the like. 

The Court finds that IFRS values, based on net realisable value are explicitly forwardlooking and that using this value for tax purposeshas the effect that expenses incurred in a future tax year in the production of income accruing to or received by the taxpayer in that future tax year, become deductible in a prior yearWhether IFRS values was a sensible and business-like manner of valuing trading stock from an accounting perspective was neither here nor there for tax purposes. The concern was whether it accurately reflected the diminution in value of trading stockFor income tax purposes, the exercise is thus one of looking back at what happened during the tax year in question. 

SARS may only grant a just and reasonable allowance in respect of a diminution in value of trading stock in two circumstances. The first is where some event has occurred in the tax year in question causing the value of the trading stock to diminish. The second is where it is known with reasonable certainty that an event will occur in the following tax year that will cause the value of the trading stock to diminish. 

It may, therefore, be necessary that taxpayers keep to sets of trading stock valuations: one for accounting purposes and one for tax purposes.  

Although often only a timing issue between opening stock (for which a deduction is allowed) and closing stock (which is taxable)it could happen that the assessment in respect of the year during which the deduction applies, may have prescribed by the time the dispute relating to the closing stock matter has been finalised. In such an instance, any difference becomes permanent, and not merely a timing difference. It is therefore advisable that any disputes relating to trading stock be dealt with by taxpayers as a matter of urgency.

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 season 2019: What can you expect?

SARS recently released two media statements, in which it notes several improvements made to eFiling for the 2019 tax season, including the issue of customised notices indicating specific documents required in the event of an audit or verification and a simulated outcome issued before a taxpayer has filed.

What is the tax season?

Tax season is the period in which individual taxpayers file their income tax returns to ensure that their affairs are in order. Although the majority of taxpayers who earn a salary have already paid tax through monthly pay-as-you-earn tax (PAYE), which was deducted from their salary by their employer and paid over to SARS, employees may still have an obligation to file a tax return if they earn above the filing threshold (see in more detail below). Once SARS reconciles what was paid over by the employer with what a taxpayer declares on their tax return, an assessment is issued which may result in the taxpayer needing to pay an additional tax to SARS, or is due a refund, or neither.

Taxpayers who are natural persons and meet all of the following criteria need not submit a tax return for the 2019 filing season:

  • Your total employment income for the year before tax is not more than R500 000;
  • Your remuneration is paid from one employer or one source (if you changed jobs during the tax year, or have more than one employer or income source, you must file);
  • You have no car or travel allowance, a company car fringe benefit, which is considered as additional income;
  • You do not have any other form of income such as interest, rental income or extra money from a side business; and
  • Employees tax (i.e. PAYE) has been deducted or withheld

Although you are not required to submit a tax return if you meet the above criteria, it is always good practice to ensure that you have a complete filing history with SARS. If your tax records do ever become important in future (such as in the case of remission of penalties, tax clearance certificates, etc.), you do not want to be in a position to have to prove that you were not liable to file a return in a particular year. The administrative burden in the current year certainly outweighs the potential issues down the line.

Important filing dates

  • eFiling opens on 1 July 2019 and closes on 4 December 2019.
  • Manual filing at branches opens on 1 August 2019 and closes 31 October 2019.
  • Provisional taxpayers have until 31 January 2020 to file via eFiling.

There is already a steady increase in the number of taxpayers in queues at SARS branches – it is therefore advised that you engage with your tax practitioner as soon as possible, to plan for tax season 2019.

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

Value-Added remarks on Value-Added Tax (VAT)

VAT is an integral part of our economic society and is something that influences everyone, especially businesses in South Africa.  In this article, we will discuss a few do’s and don’ts regarding VAT.

  1. Valid tax invoices

In South Africa’s current tax system, vendors that are registered for VAT are allowed a deduction for the tax they pay on eligible goods or services (input tax) from the tax you collect on the sales made (output tax). Tax invoices are therefore very important to vendors as failure to provide valid documentation during VAT audits will cause the vendor to lose all the input tax being claimed on the invoice. The following requirements will overcome the challenges that may be encountered because of SARS scrutinising the validity of VAT invoices.

When the tax invoices exceed R5 000, a full tax invoice needs to be provided. For invoices of R5 000 or below they may issue an abridged tax invoice. There will be no tax invoice needed if the consideration is R50 or less. However, documents such as a sales docket or till slip will be necessary to verify the input tax deducted.

As from 8 January 2016, the following information must be reflected on a tax invoice for it to be considered valid:

  1. Contains the words “Tax Invoice”, “VAT Invoice” or “Invoice”
  2. Name, address and VAT registration number of the supplier
  3. Serial number and date of issue of invoice
  4. Accurate description of goods and/or services (indicating where applicable that the goods are second-hand goods)
  5. Value of the supply, the amount of tax charged and the consideration of the supply
  6. Name, address and where the recipient is a vendor, the recipient’s VAT registration number
  7. Quantity or volume of goods or services supplied

Note that an abridged tax invoice will only need to meet criteria 1 to 5, whereas the full tax invoice (tax invoices exceeding R5 000) must meet all criteria.

  1. When to declare output VAT/claim input VAT

The date on which VAT becomes due on a transaction is the earliest of either the payment date or the invoice date. For example, if a payment is received in advance of the invoice issued for the supply, the VAT will be due on the date of receipt of payment. It is important to note that output VAT should be declared in the period in which the invoice has been issued or the payment has been received. With regards to input VAT, here the 5-year rule applies.

This rule provides that any amount of input tax which was deductible and has not yet been deducted can be claimed in a following period but is limited to a tax period 5 years after which the tax invoice should have been issued.

  1. Overpayments by the customer

When a vendor receives an overpayment from a customer, that vendor will not declare VAT on the overpayment. If a vendor fails to refund the overpayment within 4 months of the date of the invoice, the excess amount is deemed to be a consideration and therefore output VAT should be declared on the last day of the VAT period during which the 4-month period ends at a tax fraction of 15/115.

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)

Sale of shares: Income vs revenue – Back to first principles

The distinction between amounts of a capital nature as opposed to a revenue (or income) nature is essential, and over the years, few other topics have enjoyed so much attention in our tax courts. Although most taxpayers appreciate this distinction, it is essential to revisit the core principles from time to time, to ensure that taxpayers are not caught off-guard when accounting for the tax on the sale of shares.

Non-capital amounts are subject to tax at a higher effective rate compared to capital profits. The difference arises from the annual exclusion that applies to capital gains for natural persons, and the inclusion rate applied to it. In the case of natural persons, the maximum effective rate for capital gains is 18% (compared to 45% on revenue gains); companies are taxed at 22.4% (compared to 28%) and trusts at 36% (compared to 45%).

The departure point for the analysis is how long a person has held the shares. In terms of 9C of the Income Tax Act, 58 of 1962 (the Act), where shares have been held for a period of at least three years, the amount received in respect of the share sale will automatically be deemed to be of a capital nature. Consequently, any gain would constitute a capital gain. Section 9C does not require an election, and its application is automatic and compulsory. Importantly, profits on the disposal of shares held for less than three years is not automatically of a revenue nature. The nature of such profits must be determined using the general capital versus revenue principles. Apart from the three-year holding rule in section 9C, the Act does not provide objective factors to distinguish between capital and revenue gains on share disposals. General principles for making this distinction have been formulated in courts over many years.

A person’s intention (both at the stage of purchase and disposal) is the essential factor in determining the nature of profits. If shares were acquired with mixed intentions (bought partly to sell at a profit and partly to hold as an investment), the person’s intention would be determined by the dominant or main purpose. South African courts have held that a taxpayer’s evidence as to intention must be tested against the surrounding circumstances of the case, which include, amongst other things, the frequency of transactions, method of funding and reasons for selling.

Where shares have been purchased and sold as part of a profit-making scheme, gains will be regarded as revenue in nature. In this regard, although not conclusive, the frequency and scale of share transactions is an important consideration. Where shares are bought regularly for the main purpose of resale at a profit, it will be regarded as trading stock and profits will be revenue in nature. An occasional sale of shares yielding a profit suggests that a person is not a share trader engaged in a scheme of profit-making. Where profits have been made through the mere realisation of investment, there is no scheme of profit-making. Although it is possible that a once-off venture involving the acquisition of shares can comprise a venture resulting in the shares becoming trading stock, the “slightest contemplation of a profitable resale” is not necessarily determinative for a gain to be revenue in nature.

Profits on the disposal of shares acquired for long-term capital growth and dividend income will more likely be capital in nature. Shares sold for a profit very soon after the acquisition is, in most cases, an indication of the potential revenue nature of those profits. However, that measure loses a great deal of its importance when there has been some intervening act, for example, a forced sale of shares.

Taxpayers are encouraged to take careful note of the distinction between income and capital gains since a different interpretation by SARS could result in a lengthy (and costly) dispute.

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)

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