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Tax Technical FAQs: March 2013

30 March 2013   (0 Comments)
Posted by: Author: SAIT technical
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Source: SAIT Technical

VAT: Zero-rating of tour packages

Q: Company A is a South African company and trades as a tour organizer. Company A obtains tour packages to Israel from a tour operator/travel agent outside South Africa. The package includes all flights and airport taxes to and from Israel, hotel accommodation, sight-seeing, bus transport, breakfast and dinners. Company A then adds its "commission/fee/profit" to the price and makes the tour package available to South Africans as an all-inclusive tour to Israel. The South African tourist will pay Company A the full tour price where after Company A will settle the tour cost with the foreign tour operator/travel agent before departure and retain his portion of the package offered as his "administration fee/commission/profit". My question now is: Should Vat be levied at 14% on the full tour price as offered to South Africans, should Vat only be levied on the "administration fee/commission", or should vat be levied at 0% as the service is rendered as an export service and because the final consumption of the service is outside the Republic? 

A: The South African VAT system is a destination based tax that imposes tax on goods or services consumed in the Republic, regardless of where the goods are produced or services are supplied. Exports which are not consumed in the country are therefore free of tax, and imports which are consumed in the country are taxed when imported. Accordingly, supplies of goods or services consumed in the Republic, regardless of to whom the goods or services are supplied, are taxable at the standard rate for VAT purposes. Where consumption of the goods or services supplied will occur outside the Republic, provision is made for such supplies to be zero-rated.

 • Zero-rated - the fees/commission charged by the local entrepreneur for the service of arranging the tour package will be zero-rated according to section 11(2)(ℓ) of the VAT Act if the foreign entrepreneur and the foreign tourist, i.e. the recipients, are outside the Republic at the time the service of arranging the tour package is rendered.

 • Standard–rated - the fees/commission charged by the local entrepreneur for the service of arranging the tour package will be standard-rated according to section 7(1)(a) of the VAT Act if the foreign entrepreneur or foreign tourist, i.e. the recipient, is in the Republic at the time the service of arranging the tour package is rendered.

VAT: R 1million threshold section 23

Q: If a vendor invoices over the R1m mark and did not expect to do so it would be expected that VAT would be paid over the R1m mark and onwards? Is this the case?

A: Your client has to be registered as a VAT vendor within 21 days from the day (date of liability in the application form) the R 1m mark had been exceeded, or when he becomes liable to register as a VAT vendor – s 23 of the VAT Act. This does not mean that your client will have to account for output VAT on invoices issued from this date as your client may off course not charge VAT without a VAT number being issued.

CGT: Refinancing of a commercial property that was purchased cash

Q: A company wants to purchase a commercial property to use for its own office needs. It will purchase the property cash and then refinance the property for the same amount. I expect there would be no capital gains tax? Can it be presumed that when the property is sold it is free from the standard exclusion from CGT? 

A: No there will be no Capital Gains Tax as there is no disposal event of an asset; it is merely a refinance transaction. Because it is a commercial property, the exclusion will not apply to it. It is only applicable to a "residential property” as defined.

CGT: Base cost of a post valuation date asset

Q: A property was purchased at the end of January 2004, would the base cost be the purchase price plus costs plus subsequent costs of improvements? I am assuming this as the property was purchased after 1 October 2001.

A: That is correct; the costs incurred during the sale of the property are also part of the base cost.

CGT, Donations tax and Securities Transfer Tax: Transfer of shares from one shareholder to another

Q: I have a private company that wants to transfer shares from one shareholder to another - what tax implications are there? I presume CGT and transfer tax. The shares are transferred at no cost - do I have to value the shares? Does the transfer of the shares have to be registered or noted anywhere besides the company's share register?

A: The transaction may potentially be subject to CGT/Donations Tax/Securities Transfer Tax;

Where a disposal or donation is made which is not at an arm’s-length, then the provisions of par 38 of the Eighth Schedule may apply. The disposal will be treated as a disposal at the market value of the asset.

The transaction may well fall within the definition of a "donation”, "any gratuitous disposal of property, including any gratuitous waiver or renunciation of a right” – section 55(1) of the Income Tax Act.

The tax rate of 0,25 per cent will be charged on the market value of the security regardless whether no consideration is paid for the securities.

Income tax exemption: Section 10(1)(o)(ii) - employment outside South Africa

Q: My problem is with Section 10 (1)(o)(ii) of the Income Tax Act. My client worked for an Angolan company for a period stretching over three years. She was paid from the SA holding company. Code on IRP5 3651. Payment was made from SA company purely because the subsidiary in Angola was not set up yet. The task of my client was to set up an entity in Angola. When she was in SA she was not required to work for the SA company at all. All the services were rendered outside SA.

My client met the 183 days and 60 continuous days as set in paragraph (aa) and (bb). The period chosen as per paragraph (aa) was May to Apr the following year (any 12 month period). SARS now wants to tax the months March and April preceding the start of the 12 month period. They contend that the last line of paragraph (bb) starting with "and those services were rendered during that period or periods” enables them to tax my client proportionally.

It is my opinion that as long as my client has met the requirements of paragraph (aa) and (bb) the full income for the year is exempt. No services were rendered in SA. My client was in and out of SA during the 2 months in question. The client was not required to work in SA at all. The client was back in SA for periods of time to renew her visa and was on leave during that period. The client’s contract was with the Angolan company.

A: It is my understanding that there will be exempt from normal tax, any remuneration earned from services rendered while outside of the Republic in the event that the requirements of s 10(1)(o)(ii) have been met. This would mean that services rendered while in the Republic during the 12 month period would not be exempt.

In my mind pars’ (aa) and (bb) rather stipulates the requirements of the exemption and par (ii) stipulates as to what exactly would be exempt from normal tax.

"any remuneration as defined in paragraph 1 of the Fourth Schedule
(i) …
(ii)        Received by or accrued to any person during any year of assessment in respect of services rendered outside the Republic by that person for or on behalf of any employer, if that person was outside the Republic-
(aa)      for a period or periods exceeding 183 full days in aggregate during any 12 months period commencing or ending during that year of assessment; and
(bb)      for a continuous period exceeding 60 full days during that period of 12 months, and those services were rendered during that period or periods:

Where a person who has already complied with the exemption requirements of section 10(1)(o)(ii) in a year of assessment, spends vacation leave or sick leave in South Africa during the same year of assessment, the remuneration received by the person during the period of leave will continue to be exempt from tax in terms of section 10(1)(o)(ii) to the extent that the remuneration is attributable to the number of vacation or sick leave days credited to the employee in respect of and during the period of service outside South Africa under a vacation or sick leave scheme operated by the employer that is similar to vacation or sick leave schemes that generally prevails in the South Africanbusiness community for persons employed in South Africa.

It is my understanding that your client’s "remuneration” will only be exempt in the event that the leave taken by her while in the Republic accrued to her during the period/periods while she rendered services outside the Republic.

Income tax: Expatriates

Q: 1)    If the foreigner works in SA for a year the company will obviously deduct tax from him and he will have to register either via Eazyfile or per It77. The tax liability would be the same as any other taxpayer as the services were rendered here, is that correct?

2)    Should he only be on contract here for a short period, for instance 6 months and then return to his country of origin not to return again? Do we apply for a tax number, do a tax return, get a tax clearance and ask for deregistration once this is finalised?

3)   Is there a special unit that deals with these returns or are they submitted via e-filing?

A: 1)   I trust that the source of the income would be from "remuneration” (employment). Yes, Employees tax would have to be deducted, and the taxpayer would have to submit a return. The service is rendered here, and the source of the income would be here and tax will be charged at the normal statutory rates. Please however note that one has to consider the provisions of any Double Tax Agreement.

2)   Yes, as the person will not be required to submit a return in the future, one should apply for de-registration.

3)   Yes, an expatriates unit has been formed late last year.

Income tax: section 12P

Q: In terms of the new section 12P, "Exemption of amounts received or accrued in respect of government Grants”, we were wondering what is the difference between a taxable and a non–taxable government grant ? We are battling to understand the concept of an exempt grant.  I would take this to mean that the money received should not form part of my taxable income, however the Act then goes on to state "any amount allowed to be deducted from that person’s income in terms of section 11 for that year of assessment must be reduced to the extent of the amount of that government grant” surely this is then not really an exempt grant?

A: A comprehensive legislative list of exempt grants will be published and updated annually. The purpose of this Ministerial authority is to provide exemption for certain grants devised between the annual budget periods. The list as published can be found in the 11th Schedule and will apply to grants received or accrued on or after 1 January 2013.

In the case of exempt grants, a comprehensive set of anti-double-dipping rules will apply. Stated differently, the use of exempt grant funding should not be allowed as a means of achieving a further net tax reduction that can be used against non-grant earnings. Application of the anti-double-dipping rules will vary depending upon the allocation of the grant funding received. More specifically, these rules will apply as follows:

a. If an exempt grant is awarded to the taxpayer and the grant is used to fund the acquisition, creation or improvement of trading stock or to reimburse expenses so incurred, the cost price of the trading stock must be reduced by the amount of the grant. If an exempt grant exceeds the cost price of the trading stock, the excess will reduce the taxpayer’s allowable deductions (to the extent these deductions are otherwise available).

b. If an exempt grant is awarded to the taxpayer and the grant is used to fund the acquisition, creation or improvement of an allowance asset or to reimburse the cost so incurred, the base cost of the allowance asset must be reduced by the amount of the grant. If the grant exceeds the base cost and the asset is an allowance (i.e. depreciable) asset, the base cost of that asset will be deemed to be zero and the excess grant funding will reduce the taxpayer’s allowable deductions (to the extent these are otherwise available) (see d. below).

c. If an exempt grant is awarded to the taxpayer and the grant is used to fund the acquisition, creation or improvement of a capital asset or to reimburse expenses so incurred, the base cost of the capital asset must be reduced by the amount of the grant. If the grant exceeds the base cost and the asset is a capital asset, the base cost of that asset will be deemed to be zero.

d. If an exempt grant is awarded to the taxpayer and the grant is "not” used to fund the acquisition of an asset that is trading stock; an allowance asset or a capital asset, the taxpayer must reduce the section 11 deductions otherwise allowed. In addition, if the grant exceeds the total amount of otherwise allowable deductions, the excess will be carried over into the next year (so as to potentially reduce the following year’s deductions). The "double dipping” provisions will not apply where the grant was taxable.

Income tax: Small Business Corporations section 12E

Q: My understanding was that you may only be the director of one company to qualify for small business tax rate. The Income Tax Act only refers to shareholders. Does this mean you can be a director of more than one company (and all other criteria is met) and qualify for the small business tax rate? Is it only the shareholders that need to not hold shares in any other companies?

A: In terms of s 12E (4)(a)(ii) the shareholders or members  of the company may not hold shares or any interest in the equity of any other company. This does not refer to a directorship in a company as a director of a company may not necessarily hold equity in a company.

VAT: Insurance excess

Q: Can you maybe refer me to the relevant section of the VAT Act that deals with insurance excess?

One of our clients received an invoice for the excess portion that they had to pay on an insurance claim. This invoice showed no VAT. The panel beaters advised us that this is due to the fact that the VAT Act specifically states no VAT on insurance excess. I can’t find anything pertaining to this in the VAT Act and was wondering if you could maybe provide some guidance?

A: It is my understanding that current general practise is that where the sum insured is stated in the policy as VAT-inclusive, and the excess is calculated as a percentage of the value of the claim, the excess payment would be deemed to include vat. Please have a look at the VAT 421 Draft Guide for Short Term Insurance. Please refer to page 39 thereof.

Tax Administration Act: Registration as a tax practitioner section 240

Q: We are a small accounting practice registered for e-filing. If the practitioner does not qualify to register on your board of tax practitioners, what will the consequences be? 

A: No registration is required if that person is under the direct supervision of a person who is registered as a tax practitioner – s 240(2)(d)(ii).

Tax Administration Act: Statement of account section 28

Q: Please can you give me some guidance?  We have a client that we did audited financials for, and filed his tax return as such.

He made enquiries with SARS and they said he does not need an audit, he can merely bring his Trial Balance in and they will fill in his tax return.

Do all Pty's have to have a review or audit, or can the tax return be done on basic financials?Can the client really just take his cashbook/ TB to SARS and file his company tax return?

A: Section 28 of the TAA makes provision for the Commissioner to call for, and if he may so require, a certificate or statement from the taxpayer setting out the details of the extent of the persons (preparer of the financial statements/accounts) examination of the books of accounts and related documentation and whether this discloses the true nature of the transactions, receipts, accruals, payments or debits in so far as it may be ascertained by the examinations. This is not a request for audited AFS, but rather a method for SARS to evaluate the degree of reliance that may be placed on the financial statements to consider further verification or audit by SARS.

It is my understanding that SARS may well accept a trial balance as a source for purposes of completing a tax return however, the Commissioner may request a certificate or statement to test the reliance of the source and may call for further verification or audit. 


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