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FAQ - 3 April 2014

02 April 2014   (0 Comments)
Posted by: Author: SAIT Technical
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 Author: SAIT Technical

1. VAT - Time of supply for services rendered between connected persons

Q: If you have a management fee or advisory fee invoice dated January 2014 for services to be rendered for the quarter January 2014 - March 2014, when do you declare the output VAT on this invoice? The fee is between connected parties. Are you allowed to spilt the invoice and declare the output VAT separately in the following three months together with the input VAT? Or do you need to declare the whole invoice in the first month? Your advice would be highly appreciated.

A: Sec 9(2)(a) of the Value-Added Tax Act (No. 89 of 1991) (hereinafter referred to as ‘the Act’) determines the time of supply rules between ‘connected persons’ as defined in sec 1 of the VAT Act. Based on the information provided by you, it is assumed that the supplier and the recipient are ‘connected persons’. Sec 9(2)(a) states the following:

‘... A supply of goods or services shall be deemed to take place—

(a) where the supplier and the recipient are connected persons—

(i) in the case of a supply of goods which are to be removed, at the time of the removal; and

(ii) in the case of a supply of goods which are not to be removed, at the time when they are made available to the recipient; and

(iii) in the case of a supply of services, at the time the services are performed:

Provided that this paragraph shall not apply in any case where an invoice is issued in respect of that supply or any payment is made in respect of that supply on or before—

(aa) the day on which the return is furnished for the tax period during which that supply would, but for this proviso, have been made; or (bb) the last day prescribed by this Act for furnishing the return for the tax period during which that supply would, but for this proviso, have been made;


Therefore, from sec 9(2)(a)(iii) the supply is deemed to take place at the time the services are performed. One should remember that the purpose of sec 9(2)(a) is to serve as anti-avoidance measure preventing connected persons from postponing or avoiding the supply taking place by way of, for example, not issuing invoices, or by debiting and crediting loan accounts instead of making payment.

The proviso to sec 9(2)(a) of the VAT Act has the effect that sec 9(2)(a) will not apply if an invoice is issued or payment is made on that supply before the date on which the supply is deemed to take place under sec 9(2)(a). Therefore, should the time of supply in terms of sec 9(1) be earlier than the time of supply in terms of sec 9(2)(a), one would use sec 9(1) to determine the time of supply.

Conclusion

Given the fact that the invoice was already issued in January 2014 when the services began, the time of supply will be determined in accordance with sec 9(1) of the VAT Act as being the date on which the invoice was issued. Output VAT must thus have been levied on the date on which the invoice was issued and must have been paid over to SARS at the end of that tax period.

2. Income Tax (trust) - Setting off a balance of assessed loss against a taxable capital gain arising on the disposal of the only asset used for trade purposes

Q: A trust owns a single property from which it received rental income. The trust was however running at loss for several years. The property was sold at a profit. Can the taxable capital gain resulting from the property be offset against the losses incurred?

 

A: In answering your query, it is assumed that all of the requirements of sec 20 of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) are met and that the letting of the property by the trust constitutes the carrying on of a ‘trade’. To answer your query, one would have to determine if the balance of an assessed loss may be set off against the taxable capital gain and whether the taxable capital gain from the disposal of the property constitutes ‘income derived from carrying on a trade’.

 

1.      Can a balance of an assessed loss be set off against a taxable capital gain?

Sec 20 of the Act provides the following:

‘... For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall, subject to section 20A, be set off against the income so derived by such person—

(a) any balance of assessed loss incurred by the taxpayer in any previous year which has been carried forward from the preceding year of assessment;

(b) any assessed loss incurred by the taxpayer during the same year of assessment in carrying on any other trade either alone or in partnership with others, otherwise than as a member of a company the capital whereof is divided into shares...’

 

Sec 20 therefore requires the balance of an assessed loss to be set off against the ‘income’ derived from carrying on a trade. ‘Income’ is defined in sec 1 of the Act as follows:

 

‘... the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part I of Chapter II...’

 

Therefore from the definition of ‘income’ it would seem as if the balance of the assessed loss may not be off-set against the taxable capital gain, due to the fact that a ‘taxable capital gain’ is not included in gross income – it is included in taxable income in terms of sec 26A of the Act which states the following:

 

‘... There shall be included in the taxable income of a person for a year of assessment the taxable capital gain of that person for that year of assessment, as determined in terms of the Eighth Schedule.’

 

‘Taxable income’ is defined in sec 1 of the Act as follow:

"taxable income” means the aggregate of—

(a) the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income; and

(b) all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;

 

Despite of the fact that the definition of income refers to ‘... the gross income remaining...’, it is evident from the above definition of ‘taxable income’ that the figure (taxable income) may be negative. The deduction of the balance of an assessed loss in terms of sec 20 of the Act is included in Part I of Chapter II (discussed in par (a) of the said definition) and will therefore be taken into account in determining the taxable income in which the taxable capital gain is included (included in terms of par (b) of the said definition by sec 26A of the Act). Therefore a balance of the assessed loss may, in normal circumstances, be set off against a taxable capital gain.

 

2.      Will the taxable capital gain from the property constitute ‘income derived from carrying on a trade’?

 

In order to determine if the disposal of the property will take place in the course of ‘carrying on a trade’, one would have to refer to the definition of ‘trade’.

 

A trade is defined in sec 1 of the Act as follow:

 

‘"trade” includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent as defined in the Patents Act or any design as defined in the Designs Act or any trade mark as defined in the Trade Marks Act or any copyright as defined in the Copyright Act or any other property which is of a similar nature’

 

The definition of ‘trade’ is very widely defined and it does not give any indication as to what constitutes the ‘carrying on of a trade’ (i.e. cessation activities).

 

It should be noted that an important distinction was drawn between ‘trade’ and ‘realisation’ in Robin Consolidated Industries Ltd v CIR [1997] 2 All SA 195 (A), 59 SATC 199. In this case a company in liquidation only derived income from two isolated sales during the 1988 year of assessment against which it sought to set off its balance of assessed loss. The court refused to allow the set-off, drawing a distinction between trade and realisation. It was held that they are normally viewed as different, sometimes even opposed concepts. The principle to be drawn from this case is that isolated sales made by a company in liquidation on terms not normally adopted, and in a manner that eliminates risk, will not constitute income from trade.

 

However, despite the above, sec 20(2A) of the Act provides the following:

 

‘(2A)  In the case of any taxpayer other than a company

(a)   the provisions of subsections (1) and (2) shall mutatis mutandis apply for the purpose of determining the taxable income derived by such taxpayer otherwise than from carrying on any trade, the reference in subsection (1) to "taxable income derived by any person from carrying on any trade” and the reference in that subsection to "the income so derived” being respectively construed as including a reference to taxable income derived by the taxpayer otherwise than from carrying on any trade and a reference to income so derived...’ (own emphasis added).

 

This subsec therefore allows all taxpayers other than companies to off-set their balance of assessed loss against non-trading income. The determination as to whether the income was derived from carrying on a trade will therefore only be relevant in the case of a company and the trust will be allowed to set off the assessed loss.

 

Conclusion

 

In principle, a balance of an assessed loss will be allowed to be set off against a taxable capital gain. The trust will as a result of sec 20(2A) be allowed to set off the balance of assessed loss against the taxable capital gain. This will be the case irrespective of whether a trust only rents out one property or multiple properties.

 

3. Income Tax – Section 13sex allowance for residential units

Q: If a person bought 5 five new properties (flats in a flat block) from a developer at R500 000 per property and all five properties were rented out in the 2014 financial year how can we use section 13 sex of the Income Tax Act in this scenario? Secondly, say the one property have a tenant in one month before the transfer goes through to the new owner can we then still use section 13 sex in this scenario or how will SARS see it?

A: Sec 13sex(1) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) provides an allowance for the following:

‘... Subject to section 36, there must be allowed to be deducted from the income of a taxpayer an allowance equal to five per cent of the cost to the taxpayer of any new and unused residential unit (or of any new and unused improvement to a residential unit) owned by the taxpayer if—

(a) that unit or improvement is used by the taxpayer solely for the purposes of a trade carried on by the taxpayer;

(b) that unit is situated within the Republic; and

(c) the taxpayer owns at least five residential units within the Republic, which are used by the taxpayer for the purposes of a trade carried on by the taxpayer ...’ (own emphasis added).

A ‘residential unit’ is defined in sec 1 of the Act as follow:

‘... means a building or self-contained apartment mainly used for residential accommodation, unless the building or apartment is used by a person in carrying on a trade as an hotel keeper.’

Sec 13sex(3) determines what constitutes the ‘cost’ of a ‘residential unit’. It holds that the cost is deemed to be the lesser of:

‘... the actual cost to the taxpayer or the cost which a person would, if that person had acquired or improved the residential unit under a cash transaction concluded at arm’s length on the date on which the transaction for the acquisition of the new and unused residential unit (or of the new and unused improvement to the residential unit) was in fact concluded, have incurred in respect of the direct cost of the acquisition or erection of the residential unit or improvement.’

Therefore in terms of sec 13sex(3), the ‘cost’ of the unit is deemed to be the lesser of the actual costs incurred or the market value on the date on which the transaction was concluded. However, sec 13sex(8) states the following regarding what the ‘costs’ are for residential units not constructed by the taxpayer:

‘(8)  For the purposes of this section, to the extent that the taxpayer acquires a residential unit (or improvement to a residential unit) representing only a part of a building without erecting or constructing that unit or improvement—

(a) 55 per cent of the acquisition price, in the case of the unit being acquired; and

(b) 30 per cent of the acquisition price, in the case of the improvement being acquired,

is deemed to be the cost incurred by that taxpayer in respect of that unit or improvement, as the case may be.

Therefore the cost of the flats for purposes of sec 13 sex will have to be 55 per cent of the acquisition price. Given the fact the cost per unit is more than R350 000, the apartments won’t qualify as ‘low-cost residential units’ as defined in sec 1 of the Act (in terms of par (a) of the said definition) and would consequently not qualify for the additional five per cent allowance in terms of sec 13sex(2).

The fact that the one unit was occupied before transfer of ownership to the taxpayer

The fact that one of the units was occupied before the taxpayer received ownership thereof will cause the taxpayer not to have five ‘new and unused’ residential units. However, upon proper construction of the words in sec 13sex(1) it would appear that the four units that are in fact new and unused would qualify for the allowance. This is caused by the fact that subsec 1 of sec 13sex refers to a specific residential unit that needs to be ‘new and unused’ whilst par (a) and (b) of the said section refers to the requirements of that specific unit i.e. it must be used solely for trade purposes and must be situated within the Republic. The distinguishing factor comes in at par (c) of sec 13sex(1) which requires that the taxpayer owns at least five residential units within the Republic used for trade purposes. Note that in par(c) no distinction is made between ‘new and unused’ residential units and ‘used’ residential units. It should further be noted that no distinction is made in the definition of ‘residential unit’ in sec 1 of the Act as to whether a ‘residential unit’ should be ‘new and unused’. It is therefore submitted that the requirements of sec 13sex(1) are met and that the four units that are ‘new and unused’ may qualify for the allowance in terms of sec 13sex(1) subject to restrictions and requirements imposed in the rest of sec 13sex.

Conclusion

From the facts provided, it would seem as if the sec 13sex allowance may be granted on the four ‘new and unused’ units. The unit that was occupied before the transfer of ownership thereof to the taxpayer would not qualify as it is not ‘new and unused’. The allowance will be equal to 5 per cent which must be calculated on the ‘cost’ of a residential unit which would be determined in terms of sec 13sex(8) in your particular case (due to apartments being acquired).

 

 


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