FAQ - May 2013

Source: Dieter van der Walt

1. Medical deduction – s 18(1)(d)

Q: A single (divorced) mother has a 21-year-old daughter with a disability (diagnosed with cerebral palsy at the age of two years). Her medical practitioner rates her functional limitations to perform activities of daily living as moderate to severe – "has great difficulty walking, reduced mental capacity and requires assistance with most activities of daily living”. 

The question is whether the mother (who is in full time employment at a hospital) can deduct the monthly salary of R3000 that she pays to a caretaker for income tax purposes. The caretaker (who lives in the house and shares the daughter’s bedroom) is not a registered nurse or a nursing assistant, only looks after the daughter, and does not perform the house cleaning duties of a domestic worker.

If she is allowed to deduct this salary, under which section of the Act would that be? 

A: The expenses is deductible in terms of s 18(1)(d) of the Income Tax Act due to it being expenditure prescribed by the Commissioner in paragraph 3.2.1 of the South African Revenue Service's List of Qualifying Physical Impairment or Disability Expenditure. Please refer to section 18(2)(b) to calculate your section 18 deduction.

2. Donations made by natural persons

Q: Please advise if donations tax will be applicable when an individual received a donation in excess of R300 000. Who has to pay the donations tax (the donor or receiver) and by when and at what rate?

A: A natural person may donate an amount of R 100 000 annually without incurring a liability for donations tax. The donor is liable to pay the donations tax, but in the event that the donor fails to pay the donations tax, the donee will be held responsible. Donations tax is payable at a flat rate of 20%.

3. VAT implications: Property developers

Q: I am a bit confused with the VAT issues concerning a Property Developer. Here is a few scenarios: 

• Example one: The property developer is busy with the development of a residential townhouse complex. Input VAT is claimed on all expenses that carry VAT. When the property is sold, output VAT will be payable on the selling price. Please advise if the VAT treatment of the above is correct?  
• Example two: A townhouse complex was completed and some of the units sold. Input VAT was claimed as per example one. Some units are rented out with no zero rate output VAT as it is residential property. No input VAT was written back since the client intended to sell it within the grace period of 36 months that is provided in section 18B. 

Questions:

• Initially the grace period was until 2014 – am I correct to say that this changed as long as it is not rented out for longer than 36 months? 
• While it is being rented out, can all the input VAT related to this property that is rented out, be claimed, for example: electricity costs, agency fees and maintenance? 

• Example three: The developer decided to keep one of the units and rents it out. Input VAT was paid back to SARS according to the prescribed rules. 

Questions:

• Since this is residential property, no VAT is charged. Is this then subject to zero rate and must it be included on the VAT return under zero rated supplies?
• What input VAT related to this property may be claimed, in other words:
• May VAT be claimed on agency fees – provided that they charged VAT?
• May VAT be claimed on Body Corporate levies if it carries VAT?
• May VAT be claimed on the maintenance cost of the flat? 

A: Example 1 and 2 

• Your understanding is correct. The relief will not apply in respect of residential properties temporarily let before 10 January 2012, or if the developer did not submit the required declaration to SARS within the prescribed 30-day period. Property developers should therefore ensure they are compliant in terms of the declarations, to receive the expected relief.
• The supply of residential accommodation is exempt from VAT and not zero rated (section 12 of the Value Added Tax Act). This means that the expense was not incurred in making a taxable supply, therefore input VAT will be denied.

Example 3 

• Same as above, residential accommodation is exempt from VAT.

4. VAT implications: Property developers – s 18B 

Q: "The relief will not apply in respect of residential properties temporarily let before 10 January 2012, or if the developer did not submit the required declaration to SARS within the prescribed 30-day period. Property developers should therefore ensure they are compliant in terms of the declarations, to receive the expected relief.”

• If the developer completed the unit after 10 January 2012 and then rents it out – must SARS be informed and if so, how?
• If the property was completed before 10 January 2012 and it is rented out at this stage (while it is in the market) - what should have been done according to SARS, as we did not do anything?

A: Below please find s 18B of the Value Added Tax Act which is relevant to your query. It is my understanding that the relief in terms of s 18B will only apply to property if the rental agreement was concluded on or after 10 January 2012 and SARS was furnished with a declaration in such a form or manner as prescribed. 

18B. Temporary letting of residential fixed property.—(1) For the purposes of this section "developer” means a vendor who continuously or regularly constructs, extends or substantially improves fixed property consisting of any dwelling or continuously or regularly constructs, extends or substantially improves parts of that fixed property for the purpose of disposing of that fixed property after the construction, extension or improvement. (2) Notwithstanding the provisions of section 18 (1), where goods being fixed property consisting of any dwelling— (a) is developed by a vendor who is a developer wholly for the purpose of making taxable supplies or is held or applied for that purpose; and (b) is subsequently temporarily applied by that vendor for supplying accommodation in a dwelling under an agreement for the letting and hiring thereof, the supply of such fixed property shall, subject to subsection (3), be deemed not to be a taxable supply in the course or furtherance of that vendor’s enterprise. (3) The fixed property contemplated in subsection (2) shall be deemed to have been supplied by that vendor by way of a taxable supply for a consideration as contemplated in section 10 (7) in the course or furtherance of that vendor’s enterprise at the earlier of— (a) a period of 36 months after the conclusion of the agreement contemplated in subsection (2) (b); or (b) the date that the vendor applies that fixed property permanently for a purpose other than that of making taxable supplies. (4) Where a vendor makes a supply of fixed property as contemplated in subsection (2) the vendor shall within 30 days of making that supply furnish the Commissioner with a declaration (in such form or manner as the Commissioner may prescribe) containing such information as may be required.

5. VAT & reverse charge mechanism 

Q: A foreign company supplies services to a local company that is a registered VAT vendor. The foreign company is not registered for VAT purposes in South Africa. Is this a problem? This process is called "reverse charge” in the European Union. 

To my understanding, the local registered company wants to include the service charge in its output VAT and then claim the input VAT. Does this apply in South Africa?

A: Most African countries make use of the "reverse charge” mechanism however; South Africa is not one of them. In the event that the person who receives the supply is not a VAT vendor, or the supply is not received for the making of further taxable supplies, the person receiving the supply have to account for VAT. Below please see an excerpt from the VAT 404 Guide for Vendors.

VAT at the standard rate is levied on the supply of imported services. The recipient of the imported services is responsible for the declaration and payment of the VAT.  

What is an imported service?An imported service is – a supply of services; made by a supplier who is not a resident of the RSA, or who carries on a business outside the RSA; to a recipient who is a resident of the RSA; to the extent that such services are not used in the course of making taxable supplies. 

Examples of when a resident recipient has to account for VAT on imported services are where the recipient – is not a registered vendor; is a vendor, but the services are wholly or partly for making exempt supplies; and is a vendor, but the services are applied for private purposes. 

6. Tax implications arising from permanent relationships

Q: Please advise how and when common law marriages are to be taxed. As I understand in terms of section 1, partners are considered spouses for income tax purposes if they are in a relationship that is deemed to be permanent. How do we interpret this? What guidelines are there to determine when the relationship is permanent (is it living together for 12 months or more)? Once it has been determined that the couple are spouses for tax purposes, are they then taxed under community of property rules or as out of community of property?

A: In the absence of proof to the contrary (recognised by a court of law), live-together unions of a permanent nature are deemed to be out of community of property.