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FAQ - August 2013

12 August 2013   (3 Comments)
Posted by: Author: SAIT Technical
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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 vehicle. 

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. 

2. Deductibility of management fees charged by a financial advisor

Q: I 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. 

In the production of income requirement 

In order to claim expenses relating to the management fees of a share portfolio one has to determine whether the amounts received constitute income. 

If 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.

Some general 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).

Scale and 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 dividend income

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 met.

3. Documentary 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 VAT Act:

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 supplier;
c) the name, address and where the recipient is a registered vendor, the VAT registration number of the recipient;
d) an 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;

f)the quantity or volume of the goods or services supplied;
g) either-

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 manner.

4. Donations 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 year? 

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.

If 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).

The 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.

There 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.

From 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.

Simulated transaction

In 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)

This 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.

Avoidance arrangement

Unless 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).


Michael G. White says...
Posted 19 August 2013
Management fees continued: It should also be noted that section 23(f) of the Act prohibits the deduction of expenses incurred in respect of amounts that do not constitute income i.e. exempt income. Hence expenses incurred for purposes of deriving dividend income may not be allowed as a deduction because such income is exempt income- section 10(1)(k) of the Act. I would therefore agree with final sentence of SAIT's conclusion.
Michael G. White says...
Posted 19 August 2013
Management fees: The preamble to Section 11(a) of the Income Tax Act (the Act)aka the general deduction formula reads as follows:” For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived”. An important point to note is that only expenses relating to the carrying on of a trade(my underlining) are deductible for tax purposes. Income such as dividends and interest do not fall within the ambit of “trade income” – refer ITC 1275 as provided by the SAIT Technical to FAQ’s. Also see paragraph 7.2 of Silke on South African Income Tax- Electronic version. Hence management expenses incurred by the taxpayer will not be deductible under section (11) (a) or any other section for that matter.
Wayne L. Buys says...
Posted 14 August 2013
I don't really understand the answer given for question 2 above. The question was quite clear: the client invested funds into both shares and a banking account, and dividends and interest were earned. The management fee was deducted from the dividends and interest earned. Its quite clear that the question wasn't referring to capital gains. Clearly interest and dividends are income. Expenditure incurred in the production of income is allowed as a deduction. Why therefore over complicate the answer by referring to gains of capital nature when that wasn't the question?


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