FAQ - August 2013
12 August 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. VAT on the
use of company owned vehicles
Q: My query
relates to the VAT payable by an employer on the private use of company owned
vehicles. I have the unlimited use of a company owned vehicle and I own the Closed
Corporation (CC) in which the vehicle is registered. Am I correct in my
interpretation that the VAT on this benefit is payable by the CC? If I am
correct, where is it to be shown on the VAT201 form?
A: Section 18(3) of
the VAT Act provides that where an employer has granted a fringe benefit to an
employee (per the Seventh Schedule to the Income Tax Act), VAT is payable on
the value (i.e. cash equivalent) of that fringe benefit. This will only be the
case however if the use of the vehicle is given to you by virtue of employment,
rather than by virtue of shareholding (then it will be a dividend, in which
case the use of the vehicle may have changed to be for purposes other than
making taxable supplies if input tax could have been claimed). The deemed
output = fringe benefit value X 14/114. The right of use of an asset (e.g.
company car) will therefore be subject to deemed VAT output. The fringe benefit
is calculated in terms of the Seventh Schedule and excludes VAT (where the
employer is a VAT vendor) - the only exception where VAT in fringe benefits is
calculated on a different value is the right to use a vehicle. The VAT on
fringe benefits is calculated monthly where employees’ tax is accounted for on
a monthly basis. Otherwise, the time of supply is at the end of February each
year. Special rates are provided for the use of ‘company cars’.
Section 10(13) set out how to value the fringe benefits for VAT
purposes. Where the fringe benefit or advantage consists of the right to use a
motor vehicle as contemplated in paragraph 2(b) of the Seventh Schedule to the
Income Tax Act, the consideration in money for the supply is deemed to be the
amount determined in the manner prescribed by the Minister in the Gazette for
the category of motor vehicle used.
The value of the consideration is deemed to be:
- ‘Motor car’ (i.e. no VAT input can be claimed):
0.3% per month of the determined value.
- Other vehicles (i.e. where a VAT input can be
claimed): 0.6% per month of the determined value.
- Where the employee has the obligation to maintain
the vehicle, the consideration for the deemed supply is reduced by the lessor
of R85 per month, or the deemed consideration.
For fringe benefit purposes, the determined value of the vehicle will
include VAT as of 1 March 2011. However, the determined value for VAT purposes
still excludes VAT.
The 0.3% and 0.6% are monthly rates and should be multiplied by the
number of months that the employee was entitled to the use of the
Where the employer’s business involves the making of both taxable and
exempt supplies, the value of the fringe benefit which is subject to VAT must
only be based on the value of taxable supplies to total supplies.
As per the VAT201 SARS guide, Field 1 - Standard rate (excluding capital
goods and/or services and accommodation), includes deemed supplies, and this
field should therefore be used.
of management fees charged by a financial advisor
have a client who went on early retirement. He took his lump sum from
retirement and went to a financial advisor who invested the money in a capital
and income account (at a South African banking institution) as well as the
acquisition of shares. The client derived interest and dividends from this
portfolio and was charged management fees by the advisor. These fees were claimed
as a deduction (apportioned between dividends and interest) and the net income
was reflected on the tax return. SARS did an audit and advised that the
management fees are not deductible unless the client is a share dealer. It can
be claimed against capital gains when shares are sold. Can you please confirm
whether this is correct?
A: In order to be able to deduct the
management fee expenditure, the requirements of section 11(a) must be
met - this includes that the expenditure must be incurred in the
production of income and in the course of carrying on a trade.
production of income requirement
order to claim expenses relating to the management fees of a share portfolio
one has to determine
whether the amounts received constitute income.
the intention is to dispose of the shares, it must be determined whether the
gain or loss is of a capital or revenue nature. Apart from the three-year
holding rule in section 9C, the Act does not provide objective rules to
distinguish between amounts of a capital and revenue nature. This task has been
left to the South African courts, which over many years have laid down
guidelines for making this distinction. The more important of these are listed
in the SARS Guide for Share owners.
principles as per the guide:
Scheme of profit-making
Any profit or loss on disposal of your shares will be of a revenue
nature if you purchased them for resale as part of a scheme of profit-making, (Californian
Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes)17)
Shares acquired for dividend income
Shares bought for the dominant, main and overriding purpose of securing
the highest dividend income possible will be of a capital nature when the
profit motive is incidental (CIR v Middelman21).
frequency of transactions
The scale and frequency of your share transactions is of major
importance, although not conclusive (CIR v Nussbaum22).
A person who carries on a business of share-dealing will typically claim
general expenses as a deduction against income under section 11(a) of the
Income Tax Act. Such expenses may include bank charges, interest on money
borrowed to buy shares, technical analysis software and telephone charges. Once
these shares have been held for three years it will no longer be possible to
claim such expenses in relation to them under section 11 because their ultimate
disposal can no longer produce gross income.
If the shares are
held for share-dealing purposes, the taxpayer will also be carrying on a trade.
Intention to earn
Investments made in dividend and interest bearing stock falls outside
the scope of the definition of "trade” as defined in section 1 of the Income
Tax Act (refer ITC 1275) and expenses relating thereto will not qualify as a
deduction in terms of section 11(a) of the Income Tax Act. ("trade” includes
every profession, trade, business, employment, calling, occupation or venture,
including the letting of any property and the use of or the grant of permission
to use any patent as defined in the Patents Act, 1978 (Act No. 57 of 1978), or
any design as defined in the Designs Act, 1993 (Act No. 195 of 1993), or any
trade mark as defined in the Trade Marks Act, 1993 (Act No. 194 of 1993), or
any copyright as defined in the Copyright Act, 1978 (Act No. 98 of 1978), or
any other property which is of a similar nature).
In terms of the above-mentioned SARS guide on page 25, fees paid to a
portfolio manager to manage your share portfolio do not qualify as part of the
base cost of a share as it does not fall within the scope of the base cost of
an asset unless the shares are listed shares (refer par.20(1)(g) and par 20(2)
of the Eighth Schedule to the Income Tax Act).
Based on the information you have provided, it appears as if the shares
are held for investment purposes (rather than speculation) - the trading and
income requirements of section 11(a) of the Income Tax Act are likely not to be
requirements to claim input VAT on commercial property
Q: Can you please
advise what documentation we need to keep as support for VAT claimed on the
purchase of commercial property? The property was purchased from a VAT
vendor. It is commercial property situated in an office complex.
We received the final account from the attorneys which stated the purchase
along with their fees and what we paid (this is called a Tax Invoice by them,
but it is more like a reconciliation of what came in and what went out).
We also have the signed copy of the sale agreement, where the purchase
price is stated and it specifically mention the purchase price is VAT
inclusive. Would this be sufficient or would we require any other documentation
in order to claim the input VAT?
A: Please see SARS Interpretation Note 49
– Documentary proof required in terms of section 16(2) to substantiate a
vendor’s entitlement to "input tax” or a deduction as contemplated in section
16(3) for your reference.
In terms of the table for vendors registered on the invoice basis, and
item E on page 4 for fixed property acquired under a taxable supply, the
following is required:
a) Tax invoice OR a deed of sale containing the information as required in
terms of section 20(4) of the VAT Act,
b) Proof of payment.
The following information is required in terms of section 20(4) of the
4) Except as the Commissioner may otherwise allow, and subject to this
section, a tax invoice (full tax invoice) shall be in the currency of the
Republic and shall contain the following particulars:
a) The words
"tax invoice" in a prominent place;
b) the name,
address and VAT registration number of the
c) the name,
address and where the recipient is a registered vendor, the VAT registration
number of the recipient;
individual serialized number and the date upon which the tax invoice is issued;
e) full and
proper description of the goods (indicating, where applicable, that the goods
are second-hand goods) or services supplied;
quantity or volume of the goods or services supplied;
i) the value of the
supply, the amount of tax charged
and the consideration for the supply; or
ii)where the amount
of tax charged is calculated by applying the tax fraction to the
consideration, the consideration for the supply and either the amount of the
tax charged, or a statement that it includes a charge in respect of the tax and
the rate at which the tax was charged,
Provided that the
requirement that the consideration or the value of the supply, as the case may
be, shall be in the currency of the Republic shall not apply to a supply that
is charged with tax under section 11.
For purposes of fixed property acquired under a taxable supply, as
referred to above, the term "tax invoice” includes a document issued by the
supplier in compliance with section 20(7) of the VAT Act. Section 20(7) of the VAT Act states:
Where the Commissioner is satisfied that there are or will be sufficient
records available to establish the particulars of any supply or category of
supplies, and that it would be impractical to require that a full tax invoice
be issued in terms of this section, the Commissioner may, subject to such
conditions as the Commissioner may consider necessary, direct-
a) that any
one or more of the particulars specified in subsection (4) or (5) shall not be
contained in a tax invoice; or
b) that a tax
invoice is not required to be issued, or
c) that the
particulars specified in subsection (4) or (5) be furnished in any other
to a trust and CGT
Q: I have a
client whose beneficiaries have loan accounts in a trust. These were as a
result of a capital gain distributed by the trust to the beneficiaries on the
sale of a property held in the trust. The beneficiaries would like to
each donate a R100 000 personally to the trust. The beneficiaries
would physically pay the money into the bank account of the trust. There
are two beneficiaries both wanting to do this, both in their personal
capacity. Would these transactions attract capital gains tax and is the
trust allowed to receive donations to the value of R200 000 in one tax
A: It is our understanding that the loans in question are owing by
the trust to the beneficiaries (i.e. an obligation for the trust). The proposal
is that the beneficiary would donate R100 0000 to the trust, which the trust
will in turn use to repay the loan owing to the beneficiary. This transaction
effectively has the same outcome as the beneficiary writing off the loan owing
to it by the trust. If this understanding is not correct, the response below
may not be correct.
structured as a donation by beneficiary and repayment
The exemption from donations tax can
be found in s 56(2)(b) of the Income Tax Act. A natural person may donate
property with a total value of R 100,000 during any year of assessment. The
transaction in this instance should not attract CGT as money physically changed
hands (the donation was not affected by a mere accounting entry) and the loan
was settled by the trust (as opposed to being reduced for no consideration).
liability to pay donations tax is with the donor (in this case the
beneficiary). If the donor does not pay the donations tax (if any), the donee
(trust) may become liable. Section 55 of the Act stipulates that any trustee
who became liable for donations tax may recover that tax from the assets of the
trust. If the donation is however only R100 000 per natural person, there
should be no liability for donations tax.
may however be a risk that SARS could view this transaction as a simulated
transaction or avoidance arrangement if a tax benefit is obtained from
structuring it in the proposed manner. If the transaction is treated as a write
off of a loan, the beneficiary would be waiving his/her right to a loan of R100
000 - this should still qualify for the exemption from donations tax. In
addition, the beneficiary would be realising a capital loss on the disposal of
the loan for no consideration (this loss would however be ring-fenced and may
be disregarded in terms of par 56 of the Eighth Schedule, as the beneficiary
and trust are connected persons in relation to each other). From the donor's
side it does not appear as if there is any tax benefit in structuring the
transaction as proposed.
the donee (trust) perspective, the loan would be reduced without the trust
paying consideration. In broad terms, if the trust used the loan amount to fund
deductible expenditure there could be a recoupment in terms of section 19 (for
years of assessment commencing on or after 1 January 2013). If the trust used
the loan to fund the acquisition of an asset, there could be a base cost
adjustment in terms of par 12A of the Eighth Schedule (for years of assessment
commencing on or after 1 January 2013). Unlike paragraph 12(5) of the Eighth
Schedule (which applied to years of assessment that started before 1 January
2013), the new debt reduction regime will not necessarily result in a loan
write-off being taxed in the hands of the borrower. Depending on the facts of
the case, there may be no tax benefit in structuring the transaction as
proposed. If there is no benefit, it is unlikely that the proposal will have a
risk of being viewed as a simulated transaction or avoidance arrangement. If
however a recoupment or base cost reduction is avoided in this way, the risk of
a simulated transaction or avoidance arrangement should be considered.
the case of C:SARS v NWK Limited Lewis JA stated that "In my view the test
to determine simulation cannot simply be whether there is an intention to
give effect to a contract in accordance with its terms. Invariably where
parties structure a transaction to achieve an objective other than the
one ostensibly achieved they will intend
to give effect to the transaction on the
terms agreed. The test should thus go further, and require an examination of the
commercial sense of the transaction: of its real substance and purpose. If the purpose
of the transaction is only to achieve an object that allows the evasion of
tax, or of a peremptory law, then it will be regarded as
simulated. And the mere fact that parties do perform in terms
of the contract does not show that it
is not simulated: the charade of performance
is generally meant to give credence to their simulation." (emphasis added)
judgement would suggest that the exchanging of cash may not be sufficient for
the transaction not to be viewed as a sham if there is a tax benefit. It may be
difficult to give a rationale for a donation to the trust if the trust merely
uses the money to repay the loan to the beneficiary. Should the transaction
have a tax benefit (on the borrower's side when a loan is reduced), there may
be a risk of it being viewed as a simulated transaction in which case the
substance will be considered for tax.
a rationale or purpose other than obtaining the tax benefit exists for the
beneficiary donating money to the trust to be used to settle the loan (which
could be viewed as a circular financing transaction), the transaction may also
be a risk of being adjusted by SARS in terms of sections 80A-80K as
an impermissible avoidance arrangement if the write-off would have
had tax implications for the borrower (trust).