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FAQ - November 6

06 November 2013   (3 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Charging VAT on taxable supplies to non-residents

Question

I'm having an on-going discussion with a client of mine with regards to VAT. The client is in the safari business and the discussion revolves around VAT being charged on their international clients. They are under the impression that because the client comes from across our borders they do not have to charge VAT but are still able to claim the input VAT. I feel this is wrong. The service is performed by a VAT registered South African company and the services are rendered in this country, thus the company should charge VAT regardless where their client comes from. Should the client want to claim the VAT back then they should do so at the border control.

Answer

Section 7(1)(a) of the VAT Act provides that VAT shall be levied and paid at 14% for the benefit of the National Revenue fund on: The value of a supply of goods or services in the Republic of SA by a vendor in the course of furtherance of an enterprise.

To fall within the scope of the VAT Act, a payment (consideration) must be received by a vendor in respect of a taxable "supply” made by that person. 

 Section 11(2) of the VAT Act allows for the zero-rating of certain export related services. Services physically rendered outside the Republic are zero-rated in terms of section 11(2)(k). Services supplied to a person who is not a resident in the Republic are zero-rated provided that certain conditions are met; section 11(2)(l). This provision has created problems for the tourism industry. This is dealt with in VAT IN Note. 42, kindly see attached. For example, if a tour operator arranges a tour for a non-resident, while that non-resident is outside South Africa, then the charge for arranging the tour can be zero-rated. This is the charge for the work done in making enquiries, planning the itinerary, booking the hotels, arranging the transport, etc. It does not include the actual cost of the services supplied by the hotels etc. If the tour operator books and pays for the hotels, game drives etc. and then on-charges these costs to the non-resident tourist (even before the tourist arrives in SA) the charge must be standard rated, because these services will be rendered to the tourist when he or she is inside SA. In comparison, the arranging of the tour was a service supplied and rendered while the tourist was outside SA.

2. Tax implications of the provision for bonuses and the implications of section 7B 

Question

Can I adjust the 2012 provision for bonuses with the actual bonuses paid in April 2013 on the 2012 tax return? Section 7B will not allow the deduction that is added back in 2012 when submitting the 2013 tax return. If not what will happen in the 2013 tax computation?Section 7B will apply from 1 March 2013. This section effectively applies a cash basis of taxation to variable remuneration paid to an employee from the perspective of both the employer and employee. Variable remuneration is essential overtime pay, bonuses, commission, travel allowances and leave pay. If I have made a provision for bonuses in the 2012 tax computation, I will deduct 2011 provisions for bonuses and add back the 2012 provision. The company pays bonuses in April every year. 

Answer

Effective from 1 March 2013, employers will only be able to claim a corporate tax deduction, to the extent that the payment of the variable remuneration had been made.Section 7B will have a major impact for corporate taxpayers who historically claimed a deduction of their bonus provisions. That is, taxpayers will not be able to deduct inter alia their bonus expense on the "accrual basis” from 1 March 2013 as they will not have paid the relevant bonuses. They will only be entitled to a deduction when payment is made, which in all likelihood will be after the end of their tax year.

From a business income tax compliance perspective, any provisional tax calculation should take into account the new legislation by treating any forms of variable remuneration not yet paid as provisions instead of accruals in their tax computations. This may have significant cash tax consequences for companies that applied the accrual principle to variable payments in the past.A deferred tax implication may also arise due to a timing difference between the accounting treatment and the tax treatment of the expense.

3. Deemed disposal on shares in at date of death in community of estate.

Question

I have a client who was married in community of property. The wife has died. The estate is accruing to a testamentary trust of which the husband is the sole beneficiary. The question now arises on the CGT implications of the shares. Does the CGT on the deemed disposal at date of death get declared on either spouse or only on the spouse who died or on neither? The shares sold before death will be accounted for on both but we are unsure regarding paragraph 40 of the Eighth Schedule. 

Answer

In terms of par 3(5)(d) of the Estate Duty Act the following:

d) the expression "property of which the deceased was immediately prior to his death competent to dispose" shall not include the share of a spouse of a deceased in any property held in community of property between the deceased and such spouse immediately prior to his death.Therefore, where spouses are married in community of property the estate must first be divided in half before the rules are applied.

4. CGT implications on the disposal of a block of flats

Question

I have a client who purchased a block of flats (17 units) in a close corporation in 2002 and now wants to sell it at a profit of approximately R4 million. The question regarding CGT is whether it is better for him to sell the units straight from the CC and how CGT will be calculated thereon. The other option is to sell the whole block to himself as the member and then sell the units one by one from his personal name. How will the CGT work on that? The question is thus which will be the most cost effective way to do the transaction.

Answer

The purpose of this platform is not to provide opinion but merely advice and guide relating to technical tax issues.

The following guidance may be useful:

In the event that the CC sells the property out of the CC, then 66.6% (inclusion rate) of the net profit will be included in the taxable income of the entity. Further to this the member (as beneficial owner) of the CC may be subject to a 15% Dividends Tax if this profit is distributed out of the CC. 

On the other hand if the member sells his members interest in the CC, then 33.3% (inclusion rate) of the net profit will be included in his/her taxable income but the transfer of the members interest may be subject to Security Transfer Tax at a rate of 0.25%. In addition, he also qualifies for an annual exclusion from CGT. In this regard it would be important to compare the base cost of the shares (member's interest) in the CC in the hands of the member to the base cost of the underlying building in the company. If this is materially lower, it could impact on the calculation of the capital gain.Lastly, also bear in mind that selling the shares or the property itself may have different transfer duty and/or VAT implications for the purchaser, which may in turn impact on the selling price that the person agrees to.

It is recommended that you obtain specialist tax advice based on the actual facts and circumstances of the particular transaction.

Comments...

Susanna J. Frank says...
Posted 28 February 2016
Regarding question 3 and the deemed disposal on death when the parties are married in community of property. I do not understand the reference to the Estate Duty Act when we are dealing with capital gains tax. Where in the Income Tax Act is it stated that the allocation of half of the estate to a surviving spouse in terms of the matrimonial property regime, is not a disposal at the death of the other spouse? The roll-over relief between spouses only provides for assets which the surviving spouse inherits. How should we treat that part of the assets allocated to the surviving spouse in terms of the marriage in community of property for capital gains tax purposes. I should think it is not a disposal but cannot find authority for this in the Income Tax Act. S Frank
Sanjay Harrilall says...
Posted 14 November 2013
Regarding the first query, SARS Interpretation Note No. 42 is of more direct relevance
Michael G. White says...
Posted 08 November 2013
Question 1 Charging Vat on taxable supplies to non residents : As your client is in the safari business ,you should familiarize yourself with Vat Practice Note 13 which deals with Professional Hunters and taxidermists (refer SARS web site for details).

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