FAQ - 20 February 2014
18 February 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Section 10(1)(0)(ii) exemption
Q: How do I treat a claim on behalf of a client who has worked out of the country for a South African company (for example) the last 100 days of tax year 1 and the first 90 days of tax year 2? We accept that there has been an unbroken period of 60 days during this time.Under normal circumstances SARS would reject a claim for tax year 1 and also for tax year 2 but given SARS' own ruling a claim should be allowed for one of these two years.
A: When preparing the first tax return when the period started, you should be in a position to prove to SARS that s 10(1)(o)(ii) applies to a part of that tax year and that period in that first tax year should be exempt from tax. Say for example, a 12 month period started in February of a specific tax year, and ended in January of the next tax year and you have already submitted the return for the first tax year, then you would have to object to the first tax year. Even though the period during which you may submit an objection has prescribed, the late objection should be condoned as exception circumstances resulted in the objection being filed late (not in a position to consider if s 10(1)(o) may apply at that stage).
2. Transfer pricing & double tax agreement
Q: A foreign individual has registered a local Close Corporation (CC) and is its sole member. The individual also has a registered UK Company. Main business activities entails management or organising of conferences in various countries. The conferences held in South Africa are conducted through the South African CC; however invoices are issued from the UK Company. Some clients transfer funds into the South African bank account. All local suppliers are paid from the South African bank account.
Although invoices are issued by the uk co; business is conducted through South African CC in respect conferences held in South Africa; therefore is the income subject to income tax? If so, will the double tax agreement apply? Can the CC be classified as an agent? If so, what is the tax consequences?
A: Persons, other than natural person will be "resident” in the Republic by virtue of being incorporated, established or formed in the Republic or by having its place of effective management in the Republic – s 1 of the Income tax Act, definition "resident”. A close corporation is unique to South African law and will therefore most certainly have its place of incorporation in the Republic.
One would then have to consider whether the "source” of the income is from within the Republic. Under source jurisdiction, a country’s right to tax depends on whether the activities that generated the income took place within its borders.
There is more to consider;
- From where is the CC effectively managed?
- You state that the business is conducted through the CC, does it have offices, staff etc. in the Republic.
- What was the purpose for founding the CC in the Republic?
3. Eligibility to claim input VAT
Q: A client of mine operates through a company registered and operated in the UAE. This company sells goods and services to a company in Italy. The problem lies in that these goods are manufactured in South Africa, essentially by the UAE company for the Italian company. There is no separate company in South Africa.
From my understanding, these goods remain the property of the UAE company and although they are manufactured here in South Africa, they essentially never change ownership. The problem the owner of this operation is having, is that the companies he is making use of here in South Africa, are charging him VAT – which I think is incorrect since these goods and services are all imported and exported and essentially belong to a foreign company anyway – he would however like to know if he is entitled to claim this VAT back from SARS somehow? Would he be able to claim back the input VAT as the registered UAE company? Should he register a local company as an intermediary and claim the input VAT back that way?
A: In terms of s 13(3) of the Value Added Tax Act certain goods, as listed in Schedule 1 will be exempt from VAT.
Goods temporarily admitted for processing, repair, cleaning, reconditioning or for the manufacture of goods exclusively for export are exempt from VAT in terms of Schedule 1, item 470.00 of the Value Added Tax Act. For the imported goods to be exempt from VAT, certain requirements must be met, please see item 470 below.
GOODS TEMPORARILY ADMITTED FOR PROCESSING. REPAIR, CLEANING, RECONDITIONING OR FOR THE MANUFACTURE OF GOODS EXCLUSIVELY FOR EXPORT:NOTES:
1.The Commissioner may require the importer to register a rate of yield of the processed or manufactured goods that will be obtained per unit of the imported goods.
2.a)The exemption in terms of items 470.01 or 470.03 is allowed only for goods to be used for the processing or manufacture of goods for export and the processed or manufactured goods must be exported-
i) for the purposes of items 470.01 and 470.03 (01.00 and 02.00) within 12 months from the date of entry thereof; and
ii) for the purposes of item 470.03 (03.00) within three (3) years from the date of entry thereof.
b) The exemption in terms of item no. 470.02 is allowed only for parts to be used and the goods submitted for repair. cleaning or reconditioning must be exported within 6 months from the date of importation thereof:
i) the Commissioner may. in exceptional circumstances. extend the period specified in each case for a further period as deemed reasonable: and
ii) the application for such extension is made prior to the expiry of the period of 1 2 months or 6 months. as the case may be.
3. This exemption is allowed only if the Controller ensures that the tax is secured, in part or in full. by the lodging of a provisional payment or bond except where the Commissioner, in exceptional circumstances. otherwise directs. or in the circumstances contemplated in rule 120A.01(c) of Chapter XIIA of the Rules under the Customs and Excise Act.
4. If proof is not furnished to the Commissioner that the goods imported have been repaired, cleaned, reconditioned, processed or used in repairing. cleaning, reconditioning or processing and have been duly exported within the time period prescribed in note number 2, this exemption shall he withdrawn and tax, penalty and interest must be paid.
5. For the purposes of Item No. 470.03/00.00/02.00:
a) Where the importer is contractually entitled to keep a portion of the goods manufactured, processed, finished, equipped or packed in lieu of payment for the operations carried out, that importer must—
i) also export those goods within the period of 12 months contemplated in Note 2(a); or
aa) process a bill of entry at the office of the Controller for payment of the value-added tax on the goods retained; and
bb) adjust by voucher of correction the rebate bill of entry in respect of the quantity and value of the goods used to manufacture the goods retained.b)
The importer is required to maintain the records prescribed in terms of section 75 of the Customs and Excise Act.
4. VAT consequences on imports and exports
Q: I have a client that is importing machinery from China to sell on a contract to a company in Swaziland, the shipment will go from Durban directly to Swaziland and opened in Swaziland. Please explain the invoice and VAT consequences if any. This is a a South African Registered Company that is registered and paying VAT.
A: On importation:
Section 13(3) of the VAT Act states: "The importation of the goods set forth in Schedule 1 to this Act is exempt from the tax imposed in terms of section 7 (1) (b)."
Para 8 (item 490.00) of the First Schedule refers to GOODS TEMPORARILY ADMITTED SUBJECT TO EXPORTATION IN THE SAME STATE. The conditions to this exemption include that the goods must be re-exported within 6 months, a payment must be made to secure the tax, the exporter should be able to prove that the goods have been exported (failure to do so would result in him remaining liable for VAT on importation).
The export of the goods would constitute a supply of goods and must be zero-rated if the goods are 'exported' as defined in section 1 of the VAT Act. Please refer to Interpretation Note 30 for the detailed requirements in this regard.
5. Application of Section 6 quat rebate
Q: A client who is a South African resident worked for 2.5 months of the year only at a Namibian Company from which he earned income and paid PAYE. He had, as per usual, medical expenses and his RAF contributions. He received a refund in the past when working for SA companies, but this time he didn't. No IRP5 was uploaded (understandably) from the Namibian company and so I declared the income as Foreign Income (4228) and claimed the PAYE as Other Foreign Tax credits (4111)
Is the client entitled to gain any refund from that PAYE paid (from the Namibian company) as a consequence of the allowable deductions and medical tax credits, etc.
A: In determining the taxable income derived from foreign and South African sources respectively, any deductions sought under the following sections must be apportioned on a pro rata basis between taxable income derived from local and foreign sources before taking into account the relevant deductions:
- 11(n) (retirement annuity fund contributions),
- 18 (medical and dental expenses), and
- 18A (donations to certain organisations)
(Paragraph (i) of the proviso to section 6quat(1B)(a)).The following sequence must be followed in order to calculate the correct amounts in respect of the deductions under sections 11(n), 18 and 18A respectively:
Gross income as defined in section 1 from all sources XXX
Less: Exempt income under section 10 (XXX)
Income as defined in section 1 XXX
Taxable capital gain from all sources XXX
Less: Retirement annuity fund contributions* (section 11(n)) (XXX)
Donations to certain organisations (section 18A) ** (XXX)
Qualifying medical and dental expenses (section 18) ** (XXX)
Taxable income from all sources XXX
The amount of foreign taxes which qualify for the section 6quat rebate is capped at an amount calculated in accordance with the following formula:
Taxable income derived from all foreign sources (A)/Taxable income derived from all sources (B) X Normal tax payable on (B)
Normal tax is the South African tax calculated on taxable income before the deduction of any rebates contemplated in sections 6 and 6quat respectively. Taxable income derived from all foreign sources includes all foreign-sourced amounts included in taxable income regardless of the rate of foreign tax (if any) to which those amounts are subject.
The purpose of the limitation in section 6quat(1B)(a) is to ensure that the rebate granted for foreign taxes paid relates only to the foreign income included in South African taxable income. Hence if there is no foreign taxable income included in taxable income, no foreign tax credit will be available. The purpose of foreign tax credit relief is not to relieve all foreign taxation thereby subsidising the tax base of foreign jurisdictions, but rather to ensure that in providing relief to South African residents from double taxation, South Africa’s tax base is protected.
6. Definition of primary residence
Q: Our client stayed in a rented property during the period that he built his primary residence. In the end he took an offer to sell this property he even moved in.
Will the client qualify for the R2 million exemption on capital gains tax on the sale of this property even though he never stayed property. The client did intend to stay in this property once the building was complete.
A: Definition – ‘primary residence’
‘"Primary residence” means a residence—
(a) in which a natural person or a special trust holds an interest; and
(b) which that person or a beneficiary of that special trust or a spouse of that person or beneficiary—
(i) ordinarily resides or resided in as his or her main residence; and
(ii) uses or used mainly for domestic purposes.’
A requirement is that your client should have ordinarily resided in that residence, and he did not. My understanding therefore is that that property will in any event not qualify as a ‘primary residence’.