Frequently asked questions - June
21 June 2013
Posted by: Author: Dieter van der Walt
Author: Dieter van der Walt (SAIT technical)
1. VAT and Income Tax Implications pertaining to Property
Our client entered into an agreement to sell
their property. The original conditions relating to the sale was for example as
follows: Sales price – R1 500 000 Deposit – R100 000 (Non-refundable) Balance =
R1 400 000 (Bank guarantee to be delivered within 60 days). The purchaser did
not deliver the balance within 60 days although the parties agreed to an
amendment to the contract where the purchaser continued to pay R100 000 per
month up to year end. The balance was still not delivered via a guarantee, and
the amendments to the contract resulted at year end which reads as follows:
Deposit – R500 000 (Paid to date – Non-refundable) Balance – R1000 000 (Bank
guarantee to be delivered within 60 days) Please advise whether the total of
the non-refundable deposits received to date of R500k would be considered
taxable in the hands of the seller? Assuming the purchase price of the property
was R1 000 000 would there be any provision similar to Section 24C (income
received in advance) one could provide for until the purchaser delivered the
guarantee after year end? Or will the full amount of the non-refundable deposit
be taxable at year end? Please advise.
For an amount to form part of "gross income” as defined in s 1 of the
Income Tax Act, it had to be "received by or accrued to or in favour of any
resident” hence, there has to be an unconditional entitlement to the amount.
In Geldenhuys v CIR 1974 (3) SA 256 (C); 14 SATC 419 it was held that
the words ‘received by…the taxpayer’ in the definition of gross income means
‘received by the taxpayer on his own behalf for his own benefit’.
Your client will only have to account for the money as "gross income”
if, and contractually, the purchaser has forfeited the deposit together with
the proceeds paid thus far on the sale of the property, and your client may use
the money for his own behalf or for his own benefit.
VALUE ADDED TAX
In the event that the purchaser forfeits the amounts already paid, will
your client have to consider possible Value Added Tax implications?
Value added tax ("VAT”) is not a tax that is levied on revenue or
receipts. For VAT to be levied, there must be a supply of goods or services by
a vendor (section 7(1)(a) of the Value Added Tax Act, No 89 of 1991 ("the
VAT Act”) refers). If there is such a supply, then the VAT is payable on the
consideration received by the vendor for the supply made. The definition of
"consideration” in section 1 of the VAT Act further excludes a deposit,
unless the supplier applies the deposit as consideration for the supply, or
if the deposit is forfeited.
Case Law -
Commissioner of Taxation v Reliance Carpet Co (Pty) Ltd.
In this case the taxpayer, Reliance Carpet, entered into a contract for
the sale of a commercial property which required a deposit of 10% to be
payable. The purchaser paid the deposit but failed to pay the balance of the
purchase price by the settlement date. The purchaser failed to remedy its
default and the deposit was forfeited as a result. Reliance Carpet was assessed
for VAT on the forfeited deposit.
The High Court considered the sale agreement in detail and found that
there was a supply because the vendor entered into various obligations when the
contract was concluded, such as the obligation to maintain the property in its
present condition, to pay all rates, taxes, assessments, fire insurance
premiums and other outgoings in respect of the land and to hold the existing
policy of fire insurance for itself and in trust for the purchaser to the
extent of their respective interests. The vendor also granted rights to the
purchaser in relation to the land, and the High Court held that the carrying
out of the obligations and the granting of rights in terms of the agreement
comprised a taxable supply for which the forfeited deposit was received as
2. Permanent residence in South Africa
I have a client who is permanently resident in South Africa but only
earns income in Dubai so he will be taxed on his Dubai income in RSA. He
contributes to a medical aid in the UK. Can he claim the medical aid
contributions (convert the contributions from Pound to Rand at the average
exchange rate) as a deduction in his tax return? I cannot find any publications
or sections of the Income tax act that allows or disallows foreign medical aid
contributions. Please can you advise if my client can claim the medical
contributions in his 2013 tax return?
18(1)(a)(ii) of the Income Tax Act allows as a deduction contributions to any
fund which is registered under any similar provisions as the Medical Schemes
Act, 1998 Act No. 131 of 1998).
S 18(1)(c) of the Income Tax Act allows as a deduction any medicines
supplied or services rendered outside the Republic which are similar to the
expenditure in respect of which a deduction may be made in terms of paragraph
(b) of s 18(1).
The expenditure may be included in your client’s tax return provided
that they have met the requirements of the Act. The expenses are subject to the
limitation of expenses formulas as can be found in the Act (same as South