FAQ - June 2013
27 June 2013
Posted by: Author: Dieter van der Walt
Author: Dieter van der Walt
Q: I refer to `n situation of one of our new
clients who joined our company at the beginning of the month.
The client (an individual)
earns income from donations as well as a bookstore. The former accountant took
the bank statements and declared all income under the "business-income or
income from a sole proprietor-category” on the client’s ITR12. The client contacted me on the 6th
of June after SARS enquired about outstanding debts that include penalties and
interest. After I gathered all information relating to the case, I found out
that SARS required documentation concerning the amounts declared on the ITR12,
which the former accountant neglected to provide. Thereafter SARS has written
back all expenses and issued a revised assessment on the 4th of
April 2013. The assessment indicates the following: "1st due date 01
May 2013, 2nd due date 31 May 2013”. The former accountant did not
inform the client of the revised return and therefore the client was astonished
when SARS enquired about the payment of the outstanding debts since the initial
assessment had a NIL-effect.
The legal aspect as to whether, or not, the
income constitutes donations has already been clarified with SARS and there is
no doubt that these amounts constitute donations. I submitted an objection at the SARS office
in Paarl on 13th of June 2013 since the client’s profile on e-filing
was not transferred to our profile on e-filing. The objection was disallowed by
SARS since the client failed to comply with the 30 day-cycle required in terms
of the Tax Administration Act (TAA).
- What should I do now since SARS is adamant
that the objection will not be allowed since it was not made within the 30
day-cycle (due to the administrative recklessness of the former accountant)?
The submission and assessment of the ITR12 is completely and absolutely
- Is there any provision in the
TAA that protects the taxpayer in a situation where SARS insists on an
assessment that is legally incorrect?
- Does the 30 day-cycle refer
to calendar days or weekdays and from which date must it be calculated
(assessment date or "2nd due date”)?
- SARS requires a reason for the delayed
submission and I will indicate that we were appointed by the client to handle
this case afterwards because of the negligence of the former accountant.
A: Section 102(1)(b) states that the taxpayer bears
the burden of proving that an amount or item is deductible. If after having
been request to provide such proof, the taxpayer does not do so (which appears
to have been the case here), SARS would be entitled to disallow the deduction.
objection must be lodged ‘in the manner, under the terms, and within the period
prescribed in the ‘rules’ ” in terms of s 104(3) of the Tax Administration Act Rule
4(e) provides that an objection must be lodged:
- 30 days
after the date of the assessment (not 1st or 2nd
- 30 days after the date that a response is
received from SARS to a request for the reason for an assessment under Rule 3.
For purposes of the Rules, 'day' is defined in
Rule 1 as "a day contemplated in section 83(23) of the Act"
(reference to the Income Tax Act). Before its repeal, this section defined a
day to be any day excluding a Saturday, Sunday or public holiday. It therefore
referred to business days.
reference in the Rules has not been updated. A ‘day’ is not defined in the Tax
Administration Act, but a ‘business day’ is, meaning:
a day which is not a Saturday, Sunday or public holiday, and forpurposes
of determining the days or a period allowed for complying with the provisionsof
Chapter 9, excludes the days between 16 December of each year and 15 January of
year, both days inclusive;The
reference to days in Rule 4 is therefore to business days.
of assessment’ is defined in s 1 of the Tax Administration Act as meaning:
of assessment” means—
in the case of an assessment by SARS, the date of the issue of the notice of
in the case of self-assessment by the taxpayer—
From the information provided, it appears as if
this date would be 4 April 2013. The client therefore had 30 business days from
4 April 2013 to object to the revised assessment. The period prescribed within
the rules as to when an objection must be lodged appears to have lapsed.
However, you may request that the late objection be condoned in terms of s
104(4) of the Tax Administration Act in the event that reasonable grounds exist
as to why the objection is submitted late. That period may not be extended if
any of the provisions of subsection 5 applies.
if a return is required, the date that the return is submitted; or
if no return is required, the date of the last payment of the tax for the tax
period or, if no payment was made in respect of the tax for the tax period, the
A senior SARS official may extend the period prescribed in the ‘rules’ withinwhich
objections must be made if satisfied that reasonable grounds exist for the
The period for objection must not be so extended—
for a period exceeding 21 business days, unless a senior SARS
official is satisfiedthat
exceptional circumstances exist which gave rise to the delay in lodging
if more than three years have lapsed from the date of assessment or the
if the grounds for objection are based wholly or mainly on a change in a
prevailing which applied on the date of assessment or the ‘decision’."
Any request for extension of the objection
period and for the senior SARS official to consider the objection must be
worded to justify why you are of the view that reasonable grounds exist for the
late submission and if the period in section 104(5) has been exceeded (which
may be the case), why exceptional circumstances existed. The following guidance
from the Short Guide the Tax Administration Act issued by SARS may be useful in
Firstly, SARS is of the view that the term
'reasonable' in reasonable grounds means: " "having sound judgement;
moderate; ready to listen to reason; not absurd; within the limits of reason;
not greatly less or more than might be expected; tolerable; fair”. Essentially,
for a decision to be reasonable the Commissioner is required to consider all
relevant matters. The Constitutional Court has held that there is no absolute
standard of reasonableness – what is "reasonable” would depend on the
particular circumstances of each case."
SARS' view on the concept of exceptional
circumstances is: "it contemplates something out of the ordinary and of an
It should however be noted that the discretion
to allow an extended period for objection nevertheless remains with the senior
2. Can a wig qualify as qualifying physical impairment or disability
Q: I have a tax client who
has recently underwent chemo therapy as a result she lost all her hair and
purchased a wig, may I claim the cost under medical deductions on her income
A: The list of qualifying physical impairment or
disability expenditure lists a wig as a prosthetic, provided that the person
claiming the expense has suffered abnormal hair loss due to disease, accident,
or medical treatment for purposes of s 18(1)(d) of the Income tax Act.
Tax Guide on the Deduction of Medical, Physical impairment and Disability
Expenses (Issue 3) however states a prescribed expense does not automatically
qualify as a deduction by mere reason of its listing; the other requirements of
section 18(1)(d) must also be met to qualify for a deduction.The term "physical impairment” is not defined in the
Act but in the context of s 18(1)(d) it has been interpreted as a disability
that is less restraining than a "disability” as defined. In order for a person
to be disabled, as defined in section 18(3), the person's ability to function
or perform daily activities must have been impaired moderately to severely by
the physical, sensory, communication, intellectual or mental impairment. For a
person to be viewed as disabled for tax purposes, a prognosis by a medical
practitioner is required (ITR-DD form). An impairment would therefore exist
where a person’s ability to perform daily activities suffers a restriction
which is less than "moderate or severe”.
In order to qualify for the deduction
in section 18(1)(d), the expenditure must further be necessarily incurred in
consequence of this impairment that affects the person’s ability to function.
Your client may claim the cost of acquiring the wig
as a medical expense for purposes of s 18(1)(d) if you are of the view that the
client's hair loss affects her ability to function or perform daily activities
and she therefore had to necessarily incur the cost to acquire the wig in
consequence of this impairment. The expense will however be subject to the
limitation of deduction provision in terms of s 18(2)(c) of the Act. If however
you are of the view that her hair loss does not affect her ability to function
and perform daily activities, the expenditure to acquire the wig will not be
necessarily incurred in consequence of an impairment and will not be deductible
expenditure as contemplated in section 18(1)(d).
It is submitted that, based on
the specific circumstances of the taxpayer, you would have to determine whether the hair
loss constitutes a physical impairment as discussed above.Please
note that although no specific form or prognosis from a medical practitioner is
required in order to deduct expenses incurred in consequence of physical
impairment in section 18(1)(d), the taxpayer would be required to prove that
the condition affects her ability to function and therefore constitutes a physical
impairment as contemplated in section 18(1)(d) to be entitled to a deduction
(refer section 102 of the Tax Administration Act).
3. VAT implications: expense incurred relates to
more than one company in the same group
Q: We have two legal entities in our group. If company
A is invoiced for an expense, but actually the costs are for BOTH company A
& B equally:
- Should company A invoice 50% of the cost out
to company B (excluding VAT)? What happens if the expense had no VAT? Do you
still charge VAT to company B?)? Is company B allowed to claim the input VAT?
the expense is in the name of Company B but company A pays it:
- Should it go directly to the loan account in
company A’s books and Company B raise the invoice and claim the Input? If not
what is the correct treatment for VAT purposes?
A: In terms of the definition of input tax (and
section 17(1) of the VAT Act), input tax can be deducted "where the goods
or services concerned are acquired by the vendor wholly for the purpose of
consumption, use or supply in the course of making taxable supplies or, where
the goods or services are acquired by the vendor partly for such purpose, to
the extent (as determined in accordance with the provisions of section 17) that the goods
or services concerned are acquired by the vendor for such purpose. In addition,
section 16(2) states that "No deduction of input tax in respect of a
supply of goods or services, the importation of any goods into the Republic or
any other deduction shall be made in terms of this Act, unless—(a) a tax
invoice or debit note or credit note in relation to that supply has been
provided in accordance with section 20 or 21 and is held by
the vendor making that deduction at the time that any return in respect of that
supply is furnished". Section 20 amongst other require that the tax
invoice must contain the name and VAT number of the recipient in order for that
person to be able to deduct input tax.
a company therefore acquires services from a third party for purposes of the
business (taxable supplies) of another person (even if it is a connected
person), that company would not be able to deduct input tax on this supply of services
to the extent that the services are acquired for purposes other than the
acquiring company's taxable supplies. In other words, the company acquiring the
services would only be able to deduct input tax on the portion of the services
acquired for the purposes of making its own taxable supplies.
could be a number of ways around this problem; the specific argument followed
would depend on the circumstances of the expenditure and group in question and
it is recommended that you obtain tax advice based on these circumstances. The
following guidance may however be useful to consider:
the first company acquired all the services for making taxable supplies it
would be entitled to deduct input tax. This company would render a service if
it makes the benefit of the services acquired available to the other group
companies. If this service is rendered in exchange for consideration, this
would be a taxable supply. The consideration could be in the form of a
management or administration fee. If this argument is followed, the first
company (Company A) would acquire the services for purposes of (1) making its
own taxable supplies to customers and (2) providing the
management/administration service for which it earns the management or admin
fee (which, as a taxable supply, would also be subject to VAT). Company A would
invoice Company B for this service. This supply, as a management/administration
fee, would be subject to VAT irrespective of whether the initial supply was
subject to VAT. Company B, which acquires the management/administration service
from Company A, would then be entitled to deduct input tax on the management or
admin fee if this management/administration service is acquired for purposes of
Company B's taxable supplies. This would overcome the problem that the invoice
was issued to Company A even though Companies A and B benefit from the service.
The group of companies would in total be able to deduct the input tax, in the
hands of the correct company benefitting from the service, while the fee to
pass the costs on would be neutral from a VAT perspective.
54(2) of the VAT Act states "For the purposes of this Act, where any
vendor makes a taxable supply of goods or services to an agent who is acting on
behalf of another person who is the principal for the purposes of that supply,
that supply shall be deemed to be made to that principal and not to such agent:
Provided that such agent may nevertheless request that he be provided with a
tax invoice and the vendor may issue a tax invoice or a credit note or debit
note as if the supply were made to such agent." Depending on the
relationship (agent/principal relationship) between the group companies, it can
be argued that the single invoice issued to Company A was partly in respect of
services acquired by Company A on behalf of Company B, as an agent of Company
B. If this argument is followed, Company A can claim input tax to the extent
that the services was acquired for purposes of its own taxable supplies and
Company B, to the extent that Company A acquired it for purposes of Company B's
business. This would however depend on the relationship within the group as
well as whether the requirements of section 54 have been met.
4. Deductibility of medical expenses incurred in
Q: 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 SA. 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?
A: S 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).
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).
expenditure may be included in your client’s tax return if 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 African expenditure).