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FAQ - September 03

03 September 2013   (4 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Question 1 : Tax fraction of Betting Taxes

A client, who is a registered bookmaker, claims the tax fraction of betting taxes paid on sports bets to the Provincial Revenue Fund (Gauteng Gambling Board)in terms of Section 16(3)(e) of the Vat Act.  The bookmaker pays the provincial taxes as the principal. 

The taxes paid on the horse racing bets are different, as the amount is  paid on behalf of the punter. 

According to Interpretation Note No 41 (Issue 2), "The deduction under section 16(3)(e) of the VAT act is not a deduction made in terms of the definition of "input vat"As contained in section 1, but rather, is a specific deduction which compensates for the effect of "tax on tax' in relation to the deemed supplies envisaged in section 8(13)Of the VAT Act and the manner in which gambling tax is calculated and levied."

This client has recently had a vat audit and the SARS auditor disputed the claims made on the taxes paid to the province.

The provincial taxes in question are the taxes paid on the sports betting.  The tax is not borne by the punter, but by the bookmaker.  The provincial taxes paid on winning bets on horse racingare different, in that the tax is deducted from the winnings and paid over to the Gauteng Gambling Board on behalf of the punter.

The two types of bets are treated differently. I have attached the following extracts governing the payment of provincial taxes:

National Gambling Act No 7,2004. 

Refer to S61(2), which states that "The holder of the licence shall pay ...” i.e. the bookmakerRefer S61(4) "Every person who has placed a bet with a bookmaker shall pay the prescribed tax...” i.e. the punter. 

Gauteng Gambling Regulations

Refer No 270 (1) – refers to tax on horseracingRefer No 270 (4)(A)(1) – refers to tax on "events or contingencies other than horseracing”

Please clarify the whether the bookmaker is correct in deducting the tax fraction on the taxes.

Answer:

Section 16(3) of the Value-Added Tax Act provides that a "notional" input tax deduction may be claimed as follows:

16(3)

d) an amount equal to the tax fraction of any amount paid during the tax period by the supplier of the services contemplated in section 8(13) as a prize or winnings to the recipient of such services Provided that where the prize or winnings awarded constitutes either goods or services, the deduction must be limited to the input tax on the initial cost of acquiring those goods or services;

e) an amount equal to the tax fraction of any amount of tax on totalizator transactions or tax on betting levied and paid for the benefit of any Provincial Revenue Fund by the supplier of the services contemplated in section 8(13);

8(13)

For the purposes of this Act, where any person bets an amount on the outcome of a race or on any other event or occurrence, the person with whom the bet is placed shall be deemed to supply a service to such first-mentioned person.

Interpretation Note No.41 (Issue 2) in 4.1.7, indicates that in respect of the payment of betting taxes by bookmakers that the bookmaker is liable to deduct a provincial tax (i.e. 6%) on a winning bet which is then paid to the Provincial Revenue Fund ("PRF"). This payment is made by the bookmaker for and on behalf of the punter. The tax fraction applied to the payment of the betting tax by the bookmaker to the PRF is not deductible as input tax in the hands of the bookmaker, as the betting tax is borne by the punter and not the bookmaker. The bookmaker therefore,will have a deduction of input tax on the gross amount of the prize or winnings to the recipient of such services in terms of section 16(3)(d). 

Prior to 1 April 2008, a deduction of input tax was allowed in terms of section 16(3)(d), where bookmakers treat the payment of betting taxes to the PRF as if it is made by the bookmaker in its capacity as principal andthe bookmakers claimed input tax on the portion relating to the payment to the PRF in terms of section 16(3)(e) and the other portion in terms of section 16(3)(d). Prior to the said date, SARSdid not disallow the incorrect deduction of input tax claimed in terms of section 16(3)(e) of the VAT Act and it was made in terms of 72 of the VAT Act and constituted a binding general ruling issued at that stage in accordance with section 76P of the Income Tax Act and was made applicable to VAT by section 41A of the VAT Act at that stage.

Conclusion:

Therefore, based on the fact that betting tax is borne by the punter and not the bookmaker, as also indicated by Interpretation Note No. 41, the bookmaker will not be able to obtain a notional input tax deduction in terms of section 16(3)(e), but on the gross amount of the prize or winnings paid to the recipient in terms of section 16(3)(d). 

It is my understanding that s 16(3)(e) allows the person that renders the service in terms of s 18(13) will be allowed a deduction of 14/114 of the betting taxes paid to PRF (an amount equal to the tax fraction of any amount of tax on totalizator transactions or tax on betting levied and paid for the benefit of any Provincial Revenue Fund by the supplier of the services contemplated in section 8 (13)). 

If the bookmaker then pays the provincial taxes, then he should be able to claim a deduction, but this depends on the relevant betting tax legislation.  

Section 16(3)(e) of the VAT Act refers to "an amount equal to the tax fraction of any amount of tax on totalizator transactions or tax on betting levied and paid for the benefit of any Provincial Revenue Fund by the supplier of the services contemplated in section 8(13)"

Section 61(2) amounts

Section 61(2) of the Gauteng Gambling Act (No 4 of 1995) states the following: 

" The holder of a licence shall pay in the prescribed manner for the benefit of—

(a) The Provincial Revenue Fund

(i) the prescribed tax on the amounts as prescribed; 
(ii) the prescribed penalty on the late payment of any such tax, which penalty shall not exceed twice the amount of the tax in respect of which the penalty is payable.
(b) the board..."

The way I interpret Regulation 270(4)(A1), it refers to this type of tax (5% of gross betting income?) in the context of betting other than horse-racing.

Only the tax amount (i.e. in terms of section 61(2)(a)(i)) should qualify for the s 16(3)(e) deduction. It would however not include the amounts in s 61(2)(a)(ii) and s 61(2)(b).

Section 61(4)

Section 61(4) of the Gauteng Gambling Act states that "Every person who has placed a bet with a bookmaker shall pay the prescribed tax and levies on the prescribed amounts in the prescribed manner". The way I interpret Regulation 270(1), (2) and (3), it refers to this type of tax and levy. The person who has placed a bet, will be the punter and will not qualify for the deduction in section 16(3)(e).

Section 61(3)

And lastly, section 61(3) of the Gauteng Gambling Act states "Every holder of a totalisator licence, bookmaker’s licence or race-meeting licence shall pay in the prescribed manner for the benefit of prescribed beneficiaries—

(a) the levies as prescribed on the betting amounts as prescribed; and
(b) the prescribed penalty on late payment of any such levy, which penalty shall not exceed twice the amount of the levy in respect of which the penalty is payable."

As these amount are not taxes (but rather levies and penalties), it would not qualify for deduction under section 16(3)(e).

Question 2 - Transfer of property to trust

My client wishes to transfer a property into his inter vivos trust and create a loan account in the trust for the value of the property. He intends to use his annual Donation exemption of R100 000 to reduce the loan account. I am trying to calculate the tax implications of this donation. Previously it would be triggering CGT for him each year, as well as the interest which he would have earned (this would be an interest free loan) also being seen as a donation. The new legislation infers that the CGT aspect of the donation would fall away. am I reading it correctly?

Answer

Paragraph 12A of the Eighth Schedule to the Income Tax Act deals with the reduction or cancellation of debt. Par.12A applies for all years of assessment commencing on or after 1 January 2013. Para 12A(6) sets out the exclusions. It states that if a debt is reduced or written off as a result of a donation (or a section 58 deemed donation), par.12A does not apply. In terms of the previous para 12(5) or para 20(3) of the Eighth Schedule, applicable for years of assessment commencing before 1 January 2013, the waiver of a debt would have result in capital gains tax or a reduction in the base cost of the asset.. 

Therefore, if an individual donates R100,000 to a trust on 1 March 2013, no capital gains tax will be applicable.From a donations tax point of view, you have to however be aware of the risk of the transaction being viewed as a simulated transaction. In brief, a transaction can be viewed by the courts as simulated if the agreement (sale and loan) does not reflect the intention of the parties. The advance of a loan with the intention to write it off without any repayment may expose your client to SARS/Courts viewing this as a donation from the date that the loan was advanced. (refer to CIR v Erf 3183/1 Ladysmith (Pty) Ltd and Another 58 SATC 229 and more recently C: SARS v NWK Ltd 73 SATC 55 [2011] 2 All SA 347 (SCA)). If effect is given to the real intention of the parties, this would result in the seller being subject to donations tax. In addition, the client's understatement penalty exposure in terms of section 223 of the Tax Administration Act may be greater as the behaviour could constitute behaviour with the intention to deceive by purporting to enter into a sale/loan in order not to pay tax. 

Question 3 - Transfer of property out of liquidated company

We refer to the above matter and wish to confirm that we have received instruction to transfer a property which was registered in the name of a Company which has been liquidated. The VAT number and SARS number  is not active anymore since the liquidation of the Company. There is currently is dispute between our offices and the potential buyer about the VAT.  We are of the opinion that VAT is still payable, although the Company has been liquidated and the VAT number deactivated. It would be highly appreciated if you could give us a written confirmation  that VAT is still payable on the transactions after registration of the transfer.

Answer:

The timing of the sale and deregistration of the company as a VAT vendor would be of importance. We refer you to section 24 of the VAT Act to determine when the company ceased to be a VAT vendor.

Consequences of deregistration as VAT vendor and sale after this deregistration

Section 26 of the VAT Act states that if a person ceases to be a vendor he is still liable for the VAT Act obligations which arose while he was a vendor. Where a person ceases to be a vendor (s 8(2)), any goods (other than those on which an input deduction was denied under s17(2)) which forms part of his enterprise, are deemed to be supplies made immediately prior to him ceasing to be a vendor. This means that when a person ceases to be a vendor he will have to pay an output tax on all assets which forms part of his enterprise (i.e. assets used to make taxable supplies). The output tax is paid at the rate of 14/114 on the lessor of the cost of the goods (including VAT) or their market value (when he ceases to be a vendor) (s10(5)). The vendor must account for output VAT immediately before he ceases to be a vendor. It is submitted that this will include the building used for business purposes, which at that time had not yet been disposed of.

8(2) For the purposes of this Act, where a person ceases to be a vendor, any goods (other than any goods in respect of the acquisition of which by the vendor a deduction of input tax under section 16(3) was denied in terms ofsection 17(2) or would have been denied if those sections had been applicable prior to the commencement date) or right capable of assignment, cession or surrender which in either case then forms part of the assets of his enterprise, shall be deemed to be supplied by him in the course of his enterprise immediately before he ceased to be a vendor, unless the enterprise is carried on by another person who in terms of section 53 is deemed to be a vendor: Provided that-

i)where such right is so deemed to be supplied that supply shall be deemed to be a supply of a service; 
ii)this subsection shall not apply to any such goods or right to the extent that a deduction in terms of section 16(3) has not been allowed or will not be allowed, in respect of the acquisition or use by such vendor, where such vendor on or before 30 June 2000-

aa)ceases to be a vendor for the sole reason that the total value of taxable supplies made by that vendor in the preceding period of 12 months has not exceeded R20 000; orbb)ceases to be a vendor in respect of a commercial rental establishment or a residential rental establishment for the sole reason that the total receipts and accruals derived from that commercial rental establishment or residential rental establishment in the preceding period of 12 months have not exceeded R48 000;

iii)this subsection shall not apply to fixed property to the extent that a deduction in terms of section 16(3) has not been allowed or will not be allowed in respect of that fixed property or any improvements thereto, where such vendor, on or before 30 June 2000, requests the Commissioner in writing, in the circumstances contemplated in section 24(2), to cancel his registration.

iv)this subsection shall not apply to a vendor that is a constitutional institution listed in Schedule 1 to the Public Finance Management Act, 1999 (Act No. 1 of 1999) or a public authority, respectively, where that vendor (other than a vendor who applied and was registered as a vendor during the period 22 December 2003 to 31 March 2005) ceases to be a vendor as a result of—

a)the substitution of the definition of ‘public authority’ in the Revenue Laws Amendment Act, 2004 or the insertion of paragraph (viii) to the proviso to the definition of ‘enterprise’ in the Revenue Laws Amendment Act, (Act No. 45 of 2003); orb)the re-classification of that vendor or part of that vendor’s activities within the Schedules to the Public Finance Management Act, 1999 (Act No. 1 of 1999) subsequent to the introduction of the Revenue Laws Amendment Act, 2004;

v) this subsection shall not apply to any such goods or right to the extent that output tax has been paid in terms of section 16(4) read with section 22(3) in respect of such goods or right (unpaid debts); andvi)this proviso shall not apply to the extent that input tax in respect of such goods or right has been deducted in terms of section 16(3) read with section 22(4) (unpaid debts subsequently paid).

From the above, there appears to be no VAT concession in terms of section 8(2) with regards to the deregistration of a company as a result of liquidation. The company that has been iquidated/deregistered is therefore liable for the VAT on the deemed supply in terms of section 8(2).It is submitted that at the time when the property is then supplied to the buyer, the company is no longer a VAT vendor if this takes place after deregistration as a VAT vendor. In this case, no VAT will be charged to the buyer on the supply. This could however mean that the transaction now becomes subject to transfer duty.

Sale prior to deregistration as VAT vendor

In this case, the disposal of the property will still be a supply of goods in the course of carrying on or the furtherance of the entity's enterprise. The supply would have to be subject to VAT. In this case, the VAT will be charged to the buyer.

Question 4

My client retired during the 2013 tax year. I have received a letter from Metropolitan to confirm that except R315 000, the balance was transferred to an approved pension fund. It also states that "Total of members own contribution without interest not previously allowed as a deduction from taxable income if the transferring fund is an approved pension fund: R170 152.20. Can I add this amount on his IT12 under Arrear Pension Fund? Is it tax deductible from his income (Glacier Annuity) for 2013? 

Answer:

At retirement or withdrawal from a retirement fund, the lumpsum benefit will be taxed, except amongst other (a) to the extent that it is transferred to a qualifying fund (which appears to be the case for your client) or (b) to the extent that contributions could not previously be deducted exist (refer para 6(1)(b)(i) of the Second Schedule). The amount to be taxed in the current year should therefore be determined as the lumpsum received less the portion transferred to a qualifying fund less the amount of contributions that were not previously deducted. This amount will be taxed in terms of the retirement lumpsum tax rate scales.

The lumpsum transferred to the qualifying fund does not constitute a contribution (which could have been deductible under section 11(k) or 11(n)). It is therefore not deductible. 

Comments...

Dineshwar Bhoobun says...
Posted 06 September 2013
With regards to question 2 above - please refer to the following linkhttp://uctscholar.uct.ac.za/R/?func=dbin-jump-full&object_id=76918&local_base=GEN01
David Kop says...
Posted 06 September 2013
Section 10C of the Income Tax act would be applicable in this case. It seems that the R 170 152.2 was contributions that did not qualify for deduction under Sec 11(k). I can only assume that this is due to the fact that it was in excess of the 7.5% limit. if this is the case then yes under Section 10C the annuity payment that relates to the unused docntributions would be exempt (not a deduction)
Jacobus P. van den Bergh says...
Posted 06 September 2013
More chaos unfortunately. Not sure how it is to the benefit of the tax system in general if decisions are made without proper consultation and without proper consideration of the practical implications. Practitioners can rightly ask whether they are considered a role player in setting a world class tax system in place or whether they are considered mere filing agents. To date the answer is clear and this is sad as it can only lead to a poor system, poor relationships and low tax morale.
Barend Klopper says...
Posted 05 September 2013
Regarding your answer to Question 4, the lump sum benefits are taxed as follows: (1) At Retirement, the taxable portion of a lump sum received from a pension, provident, or retirement annuity fund is the lump sum LESS any contributions that have not previously been allowed as a tax deduction, PLUS the taxable portion of all lump sums previously received. This taxable portion of the lump sum is subject to tax at a sliding scale as follows: the first R315 000 is tax free; from R315 001 to R630 000 taxed at 18% of the amount over R315 000; from R630 001 to R945 000 taxed at R56 700 plus 27% of the amount over R630 000; and over R945 001 taxed at R141 750 plus 36% of the amount over R945 000. (2) The scenario is different in the case of withdrawal (resignation) from a pension or provident fund. Here the taxable portion of a lump sum before retirement is the amount withdrawn, LESS any transfer to a new fund, PLUS all withdrawal lump sums previously received. Only R22 500 tax free.

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