FAQ - September 18
18 September 2013
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Diesel rebate
Can you please confirm whether a farmer who is registered for the diesel rebate can claim for the fuel he uses in his vehicles that do the deliveries of his produce. We are of the opinion that it is not claimable but a client reports that other farmers have told him they do claim the rebate on the fuel used for deliveries and that SARS has not reversed that when doing an audit.
For purposes of Part 3 to Schedule 6 to the Customs and Excise Tariff Table; Paragraph (h) of Note 6 the said part to Schedule 6 determines that in order to qualify as "eligible purchases", the distillate fuel must be purchased by the user and used as fuel for "own primary production activities" in farming as determined in paragraphs h(ii)(cc), h(iii) and (h)(iv).
Paragraph (h)(iv)(cc) specifically indicates that eligible use in farming includes the transportation by the user (as defined in Note 6) by means of own vehicles of "farming products" (which is defined as products in their natural state produced during any farming activity contemplated in par (h)(ii)(cc)(B), including animals, fish and reptiles and their products, plants, fruit and vegetables, eggs, milk, meat, honey, flowers, nursery products, wool and hides, whether or not packed for marketing), to any place.
No refund, however, applies in respect of distillate fuel used by a purchaser of farming products in vehicles which carry those products from the farming property to the place of business of the purchaser. Refer to par (h)(iv)(aa) in respect of when a user will be able to claim a refund where farming products are transported by a contractor of the user.
2. Failure to distribute IRP 5's
We have a case where a company (not our client) is 6 years in arrears with its income tax returns, has failed during those six year to prepare and distribute IRP5’s. As a result our client is also 6 years in arrears with his personal tax returns as he cannot lodge without his IRP5 and has received no payslips. Obviously there are lots of legal issues with the companies act, the income tax and TAA act.
We advised our client to appoint an attorney which he does not wish to do. He has asked us to write to the managing director who is also the major shareholder indicating to him the risks that he is running. I would like comment specifically on whether my reading of S222 is correct in these circumstances.
· S 222 (1) states that an understatement penalty MUST be levied.
· Understatement is defined in S221 (d) to be: "means any prejudice to SARS or the fiscus in respect of a tax period as a result of – (a) a default in rendering a return….etc”. "default” is not defined.
· S221 defines a substantial understatement as " means a case where the prejudice to SARS or the fiscus exceeds the greater of five percent of the amount of "tax” properly chargeable or refundable under a tax act for the relevant period, or R1,000,000.”
1. Although not very clear as to how it would be applied, it appears that the understatement penalties in Chapter 16 are intended to also be applied also to cases where the taxpayer has failed to submit a return. Surely failure to submit is a default.
2. However the definition of "substantial understatement” sets the kick-in level at R1.0mil taxation, meaning that the Chapter 16 Understatement Penalties cannot apply to small companies such as the one we are dealing with.
S 221 of the Tax Administration Act;
‘understatement’ means any prejudice to SARS or the fiscus in respect of a tax periodas a result of—
(a) a default in rendering a return;
(b) an omission from a return;
(c) an incorrect statement in a return; or
(d) if no return is required, the failure to pay the correct amount of ‘tax’.
I agree that the failure to submit a return may result in a an ‘understatement’.Regarding the imposition of the penalty, the 'substantial understatement' category of behaviour is the last and least severe behaviour that a taxpayer can be penalised for. Section 222 however states that the understatement penalty will be based on the highest possible rate from the table in section 223(1). This table includes penalties for intentional tax evasion, gross negligence, taking tax position without reasonable grounds and not taking reasonable care when completing a return. Knowingly not submitting tax returns and as a result not paying taxes would arguably constitute tax evasion, in which case the most severe penalty could be imposed in terms of the table, irrespective of whether is constitutes 'substantial understatement'. Section 223 can therefore apply to any size entity or person as these persons can be guilty of the behaviours in section 223(1)(a)(ii) - (v). The least severe behaviour is however likely to only impose a penalty in the case of larger entities where the tax shortfall exceeds at least R1 million.
Your client may consider applying Voluntary Disclosure and in the event that the application is successful, will your client enjoy the following relief in terms of s 229 of the TAA.
229. Voluntary disclosure relief.—
Despite the provisions of a tax Act, SARS must, pursuant to the making of a valid voluntary disclosure by the applicant and the conclusions of the voluntary disclosure agreement under section 230—
(a) not pursue criminal prosecution for a statutory offence under a tax Act arising from the ‘default’ or a related common law offence;
(b) grant the relief in respect of any understatement penalty to the extent referred to in column 5 or 6 of the understatement penalty percentage table in section 223; and
(c) grant 100 per cent relief in respect of an administrative non-compliance penalty that was or may be imposed under Chapter 15 or a penalty imposed under a tax Act, excluding a penalty imposed under that Chapter or in terms of a tax Act for the late submission of a return or a late payment of tax.
It is however important to note that VDP does not extinguish the tax liability nor the interest that have accrued on the unpaid tax. This may have significant cash flow implications for your client.
3. Claim flight costs of daughter as business expenditure
A client is required to travel out of town, but within SA, on business. She has to take her 3yr old daughter on the flight with her as there is no one to look after her. Can she claim the flight costs for her daughter as part of business expenses as well?
In order for expenditure to be deductible, section 11(a), read with section 23(g), requires amongst other that expenditure must be incurred for purposes of the taxpayer's trade as well as in the production of income. In the case of PE Electric Tramway Co Ltd v CIR is was held: "Such expenses are deductible expenses, provided they are so closely linked to such acts as to be regarded as part of the cost of performing them. A little reflection will show that two questions arise (a) whether the act, to which the expenditure is attached, is performed in the production of income, and (b) whether the expenditure is linked to it closely enough."
The expense will not be allowed as a deduction terms of s 11(a) read with s 23(g) of the Income Tax Act. It is submitted that it will be difficult to argue that the cost of the child's flight ticket is closely enough linked or attached the business that produces the income.
Section 23(a) also specifically prohibits the deduction of "the cost incurred in the maintenance of any taxpayer, his family or establishment". The cost of taking care of the child would arguably fall into this prohibition, as the reason for incurring the expense was motivated by the well-being of the child rather than the business.
4. Trust year-end
I know that trusts can only have a february tax year end, but i can't find that in the Income tax Act. could you please assist me in that? is there any cases where a trust can have a different year and than Feb?
The definition of a 'person' in section 1(1) of the Income Tax Act specifically includes a trust (refer para (c)).
S 1 of the Income Tax Act:
"year of assessment” means any year or other period in respect of which any tax or duty leviable under this Act is chargeable, and any reference in this Act to any year of assessment ending on the last or the twenty-eighth or the twenty-ninth day of February shall, unless the context otherwise indicates, in the case of a company or a portfolio of a collective investment scheme in securities, be construed as a reference to any financial year of that company or portfolio ending during the calendar year in question.
A trust, as a person, would therefore not fall into the exclusion available for companies and collective investment schemes and will have a February year of assessment.
5. Commission and fees related to interest
Supporting schedules attached to interest certificates from various banks are indicating 'commision' and 'fees' related to the interest.
Are these expenses within the definition of claimable 'in the production of interest'?
Is they are, should they be claimed as a line item of deductions or netted off the interest declared?
One of the requirements for a deduction to be claimed in terms of s 11 of the Income Tax Act is that taxpayer should carry on a trade. The term "trade” is widely defined in s 1. of the Act and one may consider whether the earning of interest may well fall within this definition.The uncertainty in regard to this was clarified in the matter ITC 1275 (1978). The court held that the mere passive accumulation of capital in interest-bearing securities or shares does not constitute a trade for purposes of s 11(a). SARS issued Practice Note 31/1994 which states that even though "it is evident that a person (not being a moneylender) earning interest on capital or surplus funds invested does not carry on a trade and that any expenditure incurred in the production of such interest cannot be allowed as a deduction, it is nevertheless the practice of Inland Revenue to allow expenditure incurred in the production of the interest to the extent that it does not exceed such income".
The fees that you mention should therefore be deductible despite not carrying on a trade, but limited to the interest income.As the interest income and fees are separate transactions (one is income, the other expenditure), these cannot be netted off and the gross amounts should be included relevant line items.
6. Disability status of taxpayer
I have a question regarding a tax payer’s disability status – she was declared blind (permanently) in 2011 by an ophthalmologist…we need to submit supporting docs for her 2013 return – can I re-use the letter (ITR-DD) from 2011 or does she have to get it re-done?The condition is permanent and the ITR-DD says as much – if she has to redo it then she has to pay to see a specialist again and also pay a taxi to take her to the appointment – surely this is an unnecessary expense?
A ‘Confirmation of disability' form ("ITR-DD”) must be completed by a registered medical practitioner every five years, or if the disability is temporary and expected to last less than five years, the ITR-DD must be completed every year.
The from must be submitted every 5 years.
7.Distribution of funds from trust
The Debtors are R500,000 and is beneficiaries of trust.If the pay the loans back the trust will have R500,000 in CashThe retained income and trust capital is also R500,000 credit
How do the trust distribute the cash to the beneficiaries?As a Capital distribution ?So this will be taxable in the hands of the beneficiaries.Under CGT.
Provided that the trust deed provides for such a distribution can I not see any problem with the transaction from a CGT perspective. The money will enter the trust as capital (repayment of a loan) provided that no interest was charged on the respective loans therefore not creating any tax liability in the trust. Par 12A of the Eighth Schedule to the Income Tax Act (Reduction or cancellation of debt) should not apply as the debt was physically repaid to the trust. This in turn will be included in the trust's capital account until time of distribution from where it will flow out of the trust as capital (conduit principle). Capital gains tax is only payable in respect of the disposal of assets. The term 'asset' is defined to exclude currency. The distribution of cash by the trust does therefore not constitute a disposal of an asset.
8. Outstanding VAT
SARS have suddently demanded payment from a client for outstanding VAT for 5 periods ranging from 1995 to 2005. This is the first communication that he has received from SARS. Don't these debts prescribe after 3 years?
Most of the debts arise from late payment or assessments raised by SARS. I only commenced writing up this clients books from 2008 and was not aware of any outstanding VAT debts - neither was my client.
If SARS has not contacted him in regard to these outstanding amounts, don't they prescribe?
In my opinion he owes the money to SARS as there were late payments, but can they come after 18 years and demand payment? His records do not even go back that far. He only has records from 1997.
Prescription period (s 171 of Tax Administration Act)
171. Period of limitation on collection of tax.—Proceedings for recovery of a tax debt may not be initiated after the expiration of 15 years from the date the assessment of tax, or a decision referred to in section 104 (2) giving rise to a tax liability, becomes final. If SARS did not initiate any collections process during a 15 year period, then the collection period has prescribed 15 years from the date of assessment. It is important to note that if SARS raised an assessment in a year subsequent to the year in which the VAT should have been paid, the prescription period only starts when the assessment was raised.
Limit on period during which SARS can raise assessments
Section 99(1) of the Tax Administration Act states that SARS may generally not make assessments for VAT within 5 years from the original assessment. Section 99(2) however states that this 5 year rule does not apply where the full amount of tax was not charged due to fraud, intentional or negligent misrepresentation, intentional or negligent non-disclosure of material facts or the failure to submit a return or, if no return is required, the failure to make the required payment of tax. Depending on the reasons for the assessments raised at this stage by SARS, there may be no limit on when SARS can raise an assessment.
9. Eligible for small business tax rates
Another query is regarding an entity being eligible for Small Business Corporation tax rates. They are a service company and have always qualified as they employed 3 non connected people, however at the end of April 2013 one of the staff left and has not as yet being replaced, would they still qualify for the SBC tax rates for the full 2014 tax year or not?
S 12E(d) of the Income Tax Act, definition "personal service” uses the wording "…throughout the year of assessment…”. The ordinary meaning of the word "throughout” suggests that it is something that is uninterrupted or from start to end. Therefore it is my understanding that your client will unfortunately not qualify as a SBC if the services are rendered by persons having an interest in the company.
10. Validity of invoice
According to SARS, one of the requirements for an invoice to be valid is to have the companies’ address on the face of the invoice.Are there any specific requirements or stipulations regarding physical address and postal address?Do you need to display both or can you have only one of the two?
I agree that s 20(4) of the Value Added Tax Act is not clear in this regard. It merely requires in para (b) "the name, address and VAT registration number of the supplier" and in para (c) "the name, address and, where the recipient is a registered vendor, the VAT registration number of the recipient". Examples of a valid "tax invoice” as per the VAT 404 Guide for Vendors makes use of a physical address – it would seem.As the Act does not expressly state the address should be the physical or postal address, is it my understanding that it may be any of the 2 (postal/physical)