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FAQ - June 2013

12 June 2013   (0 Comments)
Posted by: Author: Dieter van der Walt
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Author: Dieter van der Walt 

1. Late submission of returns due to negligence by a tax practitioner

Q: The client had not been submitting and paying VAT, EMP and IT returns since end of 2010 calendar year. The client had a person, acting as her advisor/accountant, who was asking her to deposit money into his bank accounts and was telling her that he'll be paying it to SARS and doing the relevant returns. I have acquired her e-filing profile today and I established that no returns and payments had been going through since Dec 2010 (VAT) and Feb 2011 (EMP) and last return for IT is for 2009, although she has AFS for 2010. My client will probably institute legal action against this person, but this is another topic altogether. He even advised my client to open a new company and start all over again. She has a lucrative established business of 10+ years in the restaurant industry and is an owner of one of the restaurants of a well-known Thai food franchise. My question is: What would be your recommendation to do in terms of all these outstanding returns and payments to SARS? Would it be better to apply for a VDP with SARS and negotiate lower penalties and interest, instead of submitting all the returns on e-filing, which would automatically attract the admin penalties? 

A: Section 229(c) of the Tax Administration Act, grant 100 per cent relief in respect of an administrative non-compliance penalty that was or may be imposed under Chapter 15 or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter or in terms of a tax Act for the late submission of a return or a late payment of tax.

If the taxpayer's affairs are not yet being audited or investigated, or she is not yet aware of a pending audit or investigation, she may apply for VDP. (If this is not the case, section 226(2) of the Tax Administration Act provides an exception for you to consider). In order to make a valid voluntary disclosure, the requirements of section 227 must be met. This includes that there must be default and must involve the potential imposition of an understatement penalty as a result of the default. The non-submission of returns and non-payment of tax would constitute a default as defined in section 225. The prejudice to SARS as a result of the default in rendering the returns constitutes an understatement as defined in section 221 and therefore involve a potential understatement penalty (see below). Based on the information provided, it appears as if she should qualify for the VDP if the disclosure meets the other requirements of section 227.

It is debatable under which behaviour in section 223 the non-submission and non-payment of tax by the previous accountant will fall. It is submitted that it is unlikely to constitute intentional tax evasion on the side of your client, but it could arguably fall into any of the behaviours listed in section 223(i) - (iv) (in terms of section 222(2), the highest rate possible must be used by SARS to determine the understatement penalty). This would result in a penalty of between 25% and 100% of the tax if she did not act obstructively or is not a repeat case. If however she voluntarily discloses the non-submission of the returns before notification of any audit, these penalty rates will be reduced to 0% in the case of the first three behaviours in section 223(1) and 5% in the case of gross negligence. From this it appears as it is should be worthwhile to voluntarily disclose the non-submission as far as the understatement penalties that she may face are concerned.

In terms of s 229(c) of the Tax Administration Act, SARS must grant 100 per cent relief in respect of an administrative non-compliance penalty that was or may be imposed under Chapter 15 or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter or in terms of a tax Act for the late submission of a return or a late payment of tax, if a valid voluntary disclosure had been made.

Your client may request that any potential percentage based penalties (for example, penalties that will be imposed in respect of VAT and PAYE)  charged in terms of s 213 of the Tax Administration Act be remitted in terms of s 215 of that Act. This is however a limited remittance (see s 217). Any decision made by  in this regard is subject to objection and appeal – s 220 of the Act. This request for remittance is not part of the VPD application.

Lastly, it should be noted that non-submission of returns by an accountant is unlikely to be grounds for a remittance of interest in terms of section 187(7) of the Tax Administration Act.

2. VAT on exported services

Q: I have a foreign client that is a registered VAT vendor in South Africa. The company has no branches or employees in SA but renders importation services in SA. We have recently been appointed as their Customs agents in South Africa and will complete their bi-monthly VAT returns. Our services are therefore rendered in SA to a non-resident with operations in SA. Do we invoice the client for our services at the standard rate or zero rate for VAT purposes?

A: In terms of s 11(2)(l) of the Value Added Tax Act, where services are supplied (in the Republic) to a non-resident, the supply will be zero-rated provided that the non-resident or the other person is not in the Republic at the time when those services are requirements of section 11(2)(l) are met.

Based on the information in the query, the following two aspects may be problematic in applying section 11(2)(l):

  1. The fact that the foreign company is registered as a VAT vendor in SA suggests that their activities in South Africa consist of more than just importing goods as a person carries on an enterprise as defined if it has "any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person..." (own emphasis added in bold) as opposed to an import as considered in section 13 of the VAT Act. A resident of the Republic is defined in section 1 of the VAT Act as "a resident as defined in section 1 of the Income Tax Act: Provided that any other person or any other company shall be deemed to be a resident of the Republic to the extent that such person or company carries on in the Republic any enterprise or other activity and has a fixed or permanent place in the Republic relating to such enterprise or other activity". The fact that the foreign company is registered in SA as a VAT vendor might indicate that the foreign company may meet the definition of a 'resident of the Republic' based on the extent of its activities (possibly through agents or contractors) in South Africa. If this is the case, VAT must be levied at 14% as your services are not rendered to a person who is not a resident as required by section 11(2)(l).
  2. (2) The services of the customs agent may also be rendered in connection with "movable property (excluding debt securities, equity securities or participatory securities) situated inside the Republic at the time the services are rendered, except movable property which—

... (bb) forms part of a supply by the said person to a registered vendor and such services are supplied to the said person for purposes of such supply to the registered vendor" (own emphasis added in bold) (see section 11(2)(l)(ii)).It could become a very technical argument as to whether the goods are being cleared through customs before or after entry into the Republic. The Republic is defined in section 1 as "in the geographical sense, means the territory of the Republic of South Africa and includes the territorial waters, the contiguous zone and the continental shelf referred to respectively in sections 4, 5 and 8 of the Maritime Zones Act, 1994 (Act No. 15 of 1994)". In my view, one would be threading a very fine line to argue that the goods are not in the Republic at the time when the clearance services are rendered. It is recommended that further legal advice must be obtained as to when the goods enter the territory of the Republic if you wish to rely on the argument that the goods are not in South Africa at the time of the service. It is further questionable whether the service can be said to form part of the supply, as opposed to a consequence of the fact that the supply is made, by the foreign company to South African VAT vendors. If the goods are in South Africa at the time when the services are rendered, section 11(2)(l) will not apply and the supply will be subject to VAT at 14%.

It is suggested that you consider the application of the above two matters based on the specific facts and circumstances of the goods imported and the reason for the foreign company being registered as a VAT vendor to determine whether the supply of your services can be zero-rated. It must be borne in mind that section 11(3) states that: "Where a rate or zero per cent has been applied by any vendor under the provisions of this section, the vendor shall obtain and retain such documentary proof substantiating the vendor's entitlement to apply the said rate under those provisions as is acceptable to the Commissioner". You can refer to Interpretation Note 31 for a detailed discussion of documentary proof required to apply the zero rate in section 11(2)(l) (Table B, Item M). 


3. Apportionment of expenses – Section 11(a)

Q: If a company earns mainly interest income and receives one dividend per year why does SARS apportion all the expenses that the company incurred as a write back? The expense incurred in capturing a receipt for one dividend would hardly be substantial.

A: An apportionment of expenditure (general deduction formula) is required where a taxpayer derives exempt income as well as income of a revenue nature. The problem with this is that there are no hard and fast rules in as far as to how the apportionment should be calculated. 

The courts have however set out certain formulae which it considers fair:

  • Ratio that "income” bears to total receipts and accruals, CIR v Rand Selections Corporation Ltd, 1956 (20 SATC 390) and CIR v Nemojim 1983 (45 SATC 241).
  • Ratio of capital invested in the operations earning the non-taxable profits bears to the total capital invested, (ITC 832 1956 (21 SATC 320) supra and ITC 1017 1963 (25 SATC 337).
  • Applying the above formulae may in certain instances not be fair and possible and an alternative method which is fair has to be found, Tuck v CIR 1987 (49 SATC 28).

The more recent case of Mobile Telephone Network Holdings (Pty) Ltd v C:SARS (2010) dealt with the situation where the taxpayer derived approximately 6% of its income in the form of interest and approximately 94% from of exempt dividend income. SARS was of the view that audit fees had to be apportioned in the ratio of the interest to the total amounts received (if at all deductible). The taxpayer contended that the audit fees had to be apportioned based on the audit activities (time spent on audit activities) carried out. In this regard the judge held: "[15] Upon a proper application of the law pertaining to the apportionment of expenses, the facts are clear. Only 6% of time was spent on the dividend section of the audit. [16] I am of the view that the appellant's evidence cannot be rejected. The facts as proven i.e. the  amount of work done must remain the yardstick or benchmark and not the value of the dividend payments. The testimony of Messrs Steyn and Van Doorene on behalf of the appellant was clear. Only 5% or 6% of  the auditor's time was spent on the dividends, the rest was in relation to the interest which was its income-producing  activity.  ...[19] The only fair basis would be on the evidence as established and that is 94% in favour of the appellant. ... [26] The grounds relied upon by the respondent for income apportionment method  is factually and legally incorrect. Similarly the finding of the 50% apportionment by the court a quo must  fail since it is unchallenged that the audit functions and its concomitant cost related to the interest-producing operations and not the dividend-producing operations."(own emphasis added in bold) 

Conclusion

Based on the judgment in the Mobile Telephone Network Holdings (Pty) Ltd case there may be grounds to argue that expenditure should be apportioned based on the linkage between the activity that drives the expenditure and the related amounts received (income or exempt amounts). It is suggested that you consider the nature of the expenditure incurred and whether/to what extent it can be apportioned to activities relating to specific amounts received by your client.

4. Taxable benefit of right of use of motor vehicle

Q: I have a query regarding taxing a fringe benefit "Use of company vehicle". A staff member is using a car purchased in 2005. The depreciated value is NIL. SARS recommends taking the cost less 15% for each year as depreciation and using this reduced book value to calculate the fringe benefit. How do I calculate the taxable fringe benefit, when this value is Rnil?

A: For purposes of calculating the fringe benefit, to be placed on the private use of an employer provided vehicle, one firstly have to determine the ‘determined value’ of the vehicle in terms of par 7(1) of the Seventh Schedule to the Income Tax Act.

The ‘determined value’ of the motor vehicle is one of the following:

  • Original cost to the employer (excl. finance charges and interest) provided that the vehicle was acquired by him under a bona fide agreement of sale or exchange (par 7(1)(a)), or
  • Its retail market value when the employer first obtained right of use, if held by the employer under a lease or was acquired on termination of a lease. The ‘determined value’ for a lease contemplated in par (b) of the definition of ‘instalment credit agreement’ in s 1 of the VAT act is its cash value as defined in s 1 of that Act (par 7(1)(b)), or
  • If none of the above applies, the market value when the employer first obtained the vehicle, or right of use thereof (par 7(1)(c)).

The ‘determined value’ may be reduced by 15% for each completed period of 12 months on the reducing balance method if the employee was granted the use of the vehicle not less than 12 months from the date on which the employer first obtained the vehicle or right of use thereof (provisio (a) to par 7(1)).

Conclusion

Determine which of the 3 provisions will best apply to determine the ‘determined value’, and apply the 15% depreciation rate per completed 12 month periods to reduce this value where applicable. 

 


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