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FAQ - 30 January 2014

29 January 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical 

1. VAT - Zero rating ito section 11(2)(l)

Q: A local subsidiary provides marketing services in SA on behalf of the holding company in France. Is the invoice which is issued to France zero rated in terms of section 11(2)(l) or is there VAT at 14% because of section 11(2)(l)(iii) which states that the service must not be consumed by "any other person" and can it be argued that the "other person" is the SA public who consume the service?

A:  Section 11(2)(l) of the VAT Act provides the following zero-rating:

"the services are supplied to a person who is not a resident of the Republic, not being services which are supplied directly-

(i)  in connection with land or any improvement thereto situated inside the Republic; or

(ii)  in connection with movable property (excluding debt securities, equity securities or participatory securities) situated inside the Republic at the time the services are rendered, except movable property which

(aa)  is exported to the said person subsequent to the supply of such services; or

(bb)  Forms part of a supply by the said person to a registered vendor and such services are supplied to the said person for purposes of such supply to the registered vendor; or

(iii) to the said person or any other person, other than in circumstances contemplated in subparagraph (ii) (bb), if the said person or such other person is in the Republic at the time the services are rendered, 

and not being services which are the acceptance by any person of an obligation to refrain from carrying on any enterprise, to the extent that the carrying on of that enterprise would have occurred within the Republic” 

The definition of service includes "anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage”. It is therefore submitted that the making available of advertising space constitutes a service for VAT purposes as you have indicated.

Assuming that the client is not a resident of South Africa for income tax purposes and does not carry on any activity through a fixed place in South Africa, the service will be rendered to a non-resident and may qualify for section 11(2)(l) zero-rating. (refer to the definition of resident in the VAT Act for the detailed requirements, this definition is narrower than the definition for income tax purposes).

The critical question in this case is whether the advertising services are directly supplied in connection with movable or immovable property in South Africa. Secondly, it should be established whether the service can be said to be rendered to any person in South Africa (in this case the clients).

Unfortunately no case law exists in South Africa regarding the interpretation of the phrase "directly in connection with”. The New Zealand case of Wilson & Horton Limited v CIR (1994) 16 NZTC 11,221 dealt with a similar question regarding advertising space in a newspaper. The New Zealand tax authorities issued as ruling following this case. In the ruling it is stated that: ""The High Court had accepted that the supply of advertising space in a newspaper was not "directly in connection with” the subject matter of the advertising.  During the Court of Appeal hearing, the potential argument that the services are supplied directly in connection with the newspapers themselves was also raised”. The ruling further states that: ""Similarly, when advertising space is supplied in a publication, the services are not supplied directly in connection with the publication in which the advertisements are published. 

The High Court judgment in Wilson & Horton concluded that the provision of advertising space was supplied directly in connection with (if anything) the advertising itself.  The advertised goods were considered to be at least one step removed from the services.  The Commissioner considers the same logic applies in respect of a newspaper or other publication.  The service of communicating an advertising message is directly connected with that message and not the publication.  The publication is at least one step removed from the service and is merely the medium in which the advertising message is publicised.  Accordingly, the service is not supplied directly in connection with the publication produced by the publishers."

It is therefore submitted that, if a similar view was followed in South Africa, advertisements on South African television are not services supplied directly in connection with the goods advertised or the medium (television channel). As such, section 11(2)(l)(i) and (ii) should not prevent the zero-rating. Similar views were held in VAT Ruling nr 161 (which has since been withdrawn) in the context of advertising boards next to a sportsfield.

Regarding the fact that persons in SA (consumers) benefit from the television advertisement, the question arises whether it can be said that the advertising services were supplied directly to such other persons (consumers). In the context of the New Zealand GST legislation, which contains a provision that is similar in many respect, even though not all, to the South African legislation the following views from the Wilson & Horton case are contained in the ruling issued by the New Zealand tax authorities: "The Court of Appeal rejected the High Court’s interpretation of "for” in section 11(2)(e), as meaning "beneficially for”.  The Court of Appeal questioned whether this "benefit” test was workable. The Court noted that many parties may potentially benefit from an advertisement placed by a non-resident, and that it was unlikely that the legislature would have intended a wide group of possible beneficiaries of a service to determine the GST treatment of the service.” If this same line of argument is followed in the South African context, is can be submitted that the direct supply of the service relates to the making available of advertising space and the benefit to the consumer is a secondary implication of the service. As such, the service is not necessarily directly supplied to a person in South Africa at the time that the service is supplied.

Based on the above views, a strong argument would exist for the view that the services qualify for the zero-rating in s 11(2)(l). It must however be borne in mind that the views of SARS may differ from those of the New Zealand tax authorities.


2. Loan or no interest loan

Q: I have a query relating to a low or now interest loan being made to a member of a close corporation. As at 28 February 2013, there is an outstanding loan account of R243 977 made by the close corporation to one of its members. Can you please inform me whether my tax calculation and/or interpretation of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as the ‘Income Tax Act’) is correct?

Tax and accounting implications for the close corporation 

  • The interest rate @ 6% times the loan (0.06 x 243 977) equals R14 638.62, which will constitute the deemed dividend paid by the close corporation. 
  • The dividend would therefore equal (14 638.62 x 15%) R2 195.79. Must this amount be declared as a dividend and the resulting dividends tax paid over to SARS?
  • Accumulated reserves must be debited, while the loan account must be credited.

 Tax implications for the member 

  • The member will be taxed on the deemed dividend and will then receive the section 10(1)(i) exemption. 

Provided that the close corporation is required to pay over the dividends tax, is it correct to only now calculate and pay the dividends tax to SARS? 

A: The amount of the deemed dividend is calculated as the difference between the market–related interest on the loan and the amount of interest payable in respect of the loan (if any).

Where a market related interest on the loan is equal to or exceeds the actual interest payable on the loan, the value of the deemed dividend is nil (s 64E(4)(b)). A market-related interest in respect of the loan is specifically defined as the interest that would have been payable had interest been provided for for the period of the loan that falls in the year of assessment at the official rate of interest as defined in par 1 of the 7th Schedule (at 28 Feb 2013 this rate was equal to 6% (repo rate of 5% plus 100 basis points)).

From the information you provided, it does not appear as if any interest was charged on the loan. In that case, the deemed dividend that arises is only a tax concept and need not be processed against the company's reserves. If no interest was charged, the deemed dividend will be based on the outstanding loan amount during the year (not only at year-end). This deemed dividend is deemed to be a dividend in specie - this results in the tax liability resting with the CC/company. The CC would have to account for this as a tax expense.

As this is only a deemed dividend for dividends tax purposes, the member need not indicate this benefit as dividends received/accrued on his tax return. 

Where a company is deemed to have paid a dividend as a result of such an amount being owed to the company, the dividend is deemed to be paid on the last day of that company’s year of assessment (s 64E(4)(c)). The dividends tax in respect of the deemed dividend therefore had to be paid by the end of the month following 28 Feb 2013 - i.e. end of March 2013. Any payment after this date will attract interest on the late payment.


3. Retirement payouts 

Q: I have a client who is a short-term insurance broker. He is contracted to a Financial Group, and in turn this group holds contracts with all the short-term insurance companies. His income is received from one source, being the financial group. My question relates to the fact that he is now considering retirement and would like to know the tax implications of the following:

1. The financial group and himself have a contract and on retirement the group will pay him out an amount, say R1 million for what they term his "book of clients". What is the tax implication to him of this payout? More directly, is it income in nature, thus attracting income tax, or of a capital nature, thus attracting CGT. Opinion varies in that some in my office think it could be in the ambit of CGT, whilst others think it could be income in nature due to the fact that the financial group is in effect buying his future earnings? Please could you give an opinion on this if possible.  

A: One would firstly have to consider the facts – the agreement. 

The Income Tax Act does not define the words ‘of a capital nature’. The line between income and capital has often been blurred and the source of much litigation between taxpayers and the fiscus over many decades. In deciding these disputes South African courts have over the years developed a number of tests or guidelines for distinguishing between the two concepts. However, there is ‘no single infallible test of invariable application’. 

Many of these principles find their origins in decisions of the courts of the United Kingdom and other commonwealth countries such as Australia and New Zealand. 

The onus of proving that an amount is of a capital or income nature rests on the taxpayer under s 82 of the Income Tax Act. In CIR v Middelmanthe court stated that in order to discharge the onus a taxpayer must  ‘establish his case on a balance or a preponderance of probabilities’. 

In capital v revenue disputes the legal principles are well established, and the vast majority of cases are won or lost on the facts. The importance of establishing the true facts by gathering sufficient evidence cannot be over-emphasised. This is particularly important in presenting a case before the tax court, for once that court has made a finding of fact it cannot, except on certain limited grounds, be overturned on appeal. As was pointed out by Innes CJ in CIR v George Forest Timber Co Ltd, it is dangerous in income tax cases to depart from the actual facts; the true course is to take the facts as they stand and apply the provisions of the statute’.

In CIR v Visser Maritz J stated the following: 

‘If we take the economic meaning of "capital” and "income” the one excludes the other. "Income” is what "capital” produces, or is something in the nature of interest or fruit as opposed to principal or tree.’

Vos J stated in Bloch v SIR that:

‘capital is that which is held with an element of permanency and with the object that it should produce an economic utility for the holder’.

One has to consider whether the company is buying capital or income from the broker and for this purpose I suggest that you carefully peruse the agreement between the parties to establish the true nature of the transaction. Consider for example whether there is any mention of a restraint of trade clause in the contract which may be an indication that your client is walking away from his income producing asset, the "book”, for which he is remunerated etc. 

As capital is not defined in the Income Tax Act, apply case law to the facts it might well be the case that your client is selling the "tree” rather than the "fruit”. 


4. Franchise fees in education.

Q: I have a client, who is a master franchisor in SA, for extra mural mathematics for kids.  She charges franchise fees to the franchisees. 

The turnover for this is now approaching the limit where we have to register for VAT.  I want to know – is this a supply subject to VAT, or is it exempt in terms of "educational services provided by an approved education institution” 

A: Firstly one would have to consider whether the supply constitutes the supply of educational services as defined in s 12 of the Value Added Tax Act.

The supply of educational services by the following entities is exempt from VAT: 

All State schools or schools registered under the South African Schools Act, 1996 or a further education and training institution registered under the Further Education and Training Act, 1998

Universities, universities of technologies (previously known as technikons), colleges and other institutions providing higher education which are registered under the Higher Education Act, 1997

  • adult basic education and training (ABET); 
  • education and training of religious or social workers ; 
  • educating and training of persons with permanent physical or mental impairment; or
  • bridging courses to indigent persons to enable them to enter a higher education institution.

Kindly advise whether the franchisor is registered with any of the above mentioned registered bodies. Furthermore, does the franchisor only act as a franchisor or does it provide educational services?

Based of the facts provided above, the franchisor is not making a supply of educational services but I will however need more information in this regard.





Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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