FAQ - 20 May 2014
20 May 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. VAT treatment for
non-resident providing commercial accommodation in SA
Q: A UK citizen and resident would like to
purchase a property in Cape Town and rent it out as a holiday home. She would
like to register for VAT. I have contacted SARS to find out if the
representative VAT vendor can be a foreign citizen and the call centre was
unable to assist me. For VAT registration, the representative VAT vendor needs
to be present for the VAT interview at a SARS branch. My client will fly to
South Africa to come with me to SARS. Will SARS accept the UK utility account
as proof of residential address or does she have to be a South African
resident? If SARS accepts the holiday home as commercial rental, can she claim
the VAT on the purchase price of the property (input tax) in the first VAT
return and receive a refund? If she sells the house she will then declare the
VAT on the selling price as output tax and pay SARS? It is very unlikely that
she will sell the house in the foreseeable future.
A: As per our
telephonic conversation, it was held that the non-resident will buy a new
property directly from a developer. It is assumed that the non-resident is not
registered as a vendor. It should however be noted that the non-resident may be
seen as a ‘Resident of the Republic’ as defined in sec 1 of the Value-Added Tax
Act (No. 89 of 1991) (hereinafter referred to as ‘the VAT Act’) due to it
carrying on an enterprise in the Republic and having a fixed place of business
in the Republic relating to such enterprise.
May the non-resident register as a vendor?
In order to become eligible to register as a ‘vendor’ as
defined in sec 1 of the VAT Act, read together with sec 23 of the VAT Act, a
person needs to carry on an ‘enterprise’ as defined in sec 1 of the VAT Act. In
terms of proviso (ix) to the enterprise definition, a person will not be
carrying on an enterprise where he/she supplies commercial accommodation
stipulated in par (a) of the commercial accommodation definition in sec 1 of
the VAT Act (such as holiday accommodation) if the total value of the taxable
supplies for the preceding 12 months did not exceed R60 000 or if it is
not expected that the total value of the taxable supplies will exceed R 60 000
during the in a period of 12 months.
Should the person carry on an enterprise, then he/she may be
eligible to register in terms of sec 23 of the VAT Act. Given the fact that it
is highly unlikely that a single property would have a turnover of over R 1
million during a period of 12 months, the person may register voluntarily in
terms of sec 23(3)(b)(ii) on the payments basis if the value of the taxable
supplies during the following 12 months is likely to exceed R 60 000 given
the fact that the person is supplying commercial accommodation. Please note
that the person will, in terms of sec 15(2B) be required to account for VAT on
the invoice basis from the commencement of the tax period immediately following
the tax period when the total value of the taxable supplies of that enterprise
has exceeded R 50 000, which may lead to an adjustment in terms of sec
15(4),(5) and (7), unless the vendor (in your instance being a natural
person) applies to the Commissioner in writing in terms of sec 15(2)(b) to
remain registered on the payments basis. This will be possible where the total
value of the vendor’s taxable supplies for a period of 12 months, ending on the
last day of any month has not exceeded R 2.5 million or if it is not likely at
the beginning of any month that the vendor’s taxable supplies would exceed R
2.5 million during the following 12 months.
VAT implications on the acquisition and disposal of the
Proviso (i) to the ‘enterprise’ definition in sec 1 of the
VAT Act holds that an enterprise would include ‘anything done in connection
with the commencement or termination of any such enterprise or activity...’.
The client would therefore be able to claim input tax on the acquisition of the
house in terms of par (a)(i) of the ‘input tax’ definition in sec 1, read with
sec 7(1)(a) and calculated in terms of sec 16(3)(b)(i). Sec 16(3)(b)(i) would
entitle the person to claim input tax ‘to the extent that payments of any
consideration which has the effect of reducing or discharging any obligation
... relating to the purchase price...’ for the supply. Please refer to sec
9(3)(d) for the relevant time of supply rules.
The disposal of the property would fall within the ambit of
sec 7(1)(a) of the VAT Act and output tax would consequently have to be levied
thereon calculated in terms of sec 16(4)(b) if the vendor is at that time still
registered on the payments basis or sec 16(4)(a) if the vendor is at that time
registered on the invoice basis.
Can a representative vendor be a foreign citizen?
Sec 46 of the VAT Act holds that a representative vendor
should be any natural person who resides in South Africa. Although the
non-resident may be seen as a ‘resident of the Republic’ as defined in sec 1 of
the VAT Act, she would still be liable to appoint a person residing in the
Republic. Sec 46 does not disqualify a foreign person from acting as
representative vendor, but it requires that the person must ‘reside in the
Registration as a vendor
Please refer to p. 6, 15 and 18 of the SARS Guide for
Completion of VAT Registration Application Forms 2013 for more information
on the registration requirements which can be found at the following link: http://www.sars.gov.za/AllDocs/OpsDocs/Guides/VAT-REG-02-G01%20-%20Guide%20for%20Completion%20of%20VAT%20Applications%20-%20External%20Guide.pdf.
It is however advised that you contact SARS in this regard
to ensure that you conform to their latest registration requirements.
2. UIF on commission
Q: Do commission earners contribute to UIF?
A: Sec 4 of the
Unemployment Insurance Contributions Act (No. 4 of 2002) (hereinafter referred
to as ‘the UIC Act’) requires that the UIC Act applies to all employers and
employees. An ‘employee’ is defined in sec 1 of the UIC Act as ‘any natural
person who receives any remuneration or to whom any remuneration accrues
in respect of services rendered or to be rendered by that person, but excludes
an independent contractor...’ (own emphasis added). ‘Remuneration’ is defined
in sec 1 of the UIC Act as ‘remuneration’ as defined in par 1 of the Fourth
Schedule to the Income Tax Act (No. 58 of 1962) but par (c) of the definition
of remuneration in the UIC Act excludes commission payments.
Given the fact that commission payments are excluded from
the definition of ‘remuneration’ in sec 1 of the UIC Act, they would not fall
within the provisions of sec 4 of the UIC Act and consequently no UIC would
have to be contributed by the employee and employer on such payments. It should
be noted that should an employee earn both a basic salary and commission, then
it is submitted that UIC would only have to be calculated on the basic salary.
3. Possible tax
implications of B-BBEE cash contributions
Q: My client is in the process of doing its B-BBEE
Certificate and will be rated on enterprise development as one of the elements.
It has been informed it needs to make a contribution of R 5 000.00 to a
qualifying enterprise and it has now identified an enterprise with a black
shareholding of 51%.
What would the tax
implications would be for my client and what would they need from the
enterprise to meet SARS’ requirements to claim it as an expense?
A: This guidance is solely based
on ‘cash donations’ as a percentage of turnover made by companies in order to
comply with their BEE requirements and does not in any way extent to share
In order to determine if these ‘BEE payments’ would be
subject to donations tax, one needs to consider the definition of a ‘donation’
in sec 55(1) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as
‘the Act’) which definition reads as follows ‘means any gratuitous disposal of
property including any gratuitous waiver or renunciation of a right’. The word
‘gratuitous’ is not defined in the Income Tax Act and on therefore needs to
consider the word within its ordinary grammatical meaning by making use of a
dictionary. According to the Oxford online dictionary the word means ‘Done
without good reason, uncalled for’. Furthermore, in CSARS v Estate Welch’s 66
SATC 303, the SCA held that a donation would only come into existence if it
were motivated by ‘pure liberality’ (i.e. the quality of giving or
spending freely) or ‘disinterested benevolence’ (kindness). From the above, it
would appear as if the voluntary payments made to other organisations (albeit
PBO’s or otherwise) to score a higher BEE rating, would not be motivated by
pure liberality or disinterested benevolence. It was also not done without good
reason and uncalled for as it is explicitly done in order to obtain a better
BEE rating (ie. to obtain a quad pro quo).
It can therefore be argued that these payments are not ‘donations’ for purposes
of Part V of the Act and that no donations tax liability would subsequently
come into existence on such payments.
For income tax purposes, you would have to consider whether
these payments would be deductible in terms of sec 11(a) of the Act read with
the negative tests contained in sec 23 of the Act. The challenge with sec 11(a)
would come in where you need to prove
that these payments are not of a capital nature in terms of sec 102(1)(b) of the
Tax Administration Act. In New State
Areas Ltd v CIR (1946 AD) it was held that one should establish whether
expenditure forms part of the cost of performing the income-earning operations
(in which case it would be income in nature) or whether the expenditure forms
part of the cost of establishing, improving or adding to the income-earning
structure (in which case the expenditure will be capital in nature). It was
further held in CIR v George Forest
Timber Co Ltd (1924 AD) at 526 that
‘... There is a great
difference between money spent in creating or acquiring a source of
profit, and money spent in working for it. The one is capital expenditure,
the other is not...
The reason is plain; in the
one case it is spent to enable the concern to yield profits in future, in the
other it is spent in working the concern for the present production of profit.’
(own emphasis added)
In your client’s particular instance, making these donations
to obtain a higher BEE rating would enable it to secure tenders/better tenders
in future. SARS may therefore argue that these payments would add to the
company’s ‘income-earning structure’ and that it would create a ‘source of
profit’ to the company and that it consequently classifies as expenditure of a
However, by making use of the principles of Warner
Lambert SA (Pty) Ltd v CSARS  (65 SATC 346), it can be argued that
these expenses are bone fide incurred for the performance of the
taxpayer’s income earning operations as they are akin to insurance
premiums which are incurred to protect the taxpayer’s income earning structure.
In this case it was also held that empowerment costs incurred in terms of the
Sullivan Code (an American code very similar to our empowerment code) were not
of a capital nature as no capital asset was created or improved in the hands of
the taxpayer. Please also refer to Binding Private Ruling 113 where SARS has
held, subject to the application of sec 23H for the prepaid portion of the
expenditure, that a programme where the taxpayer invested 4 per cent of its
annual turnover into selected qualifying small black owned independent vendors
over a period of seven years would qualify for a deduction in terms of sec
11(a) of the Act.
Should the expenditure be seen as income in nature, then it
would qualify for a deduction in terms of sec 11(a) of the Act being
expenditure actually incurred in the production of income, not of a capital
nature. Should it be capital in nature, then no sec 11(a) deduction would be
Sec 18A of the Act would allow a deduction for any ‘bone
fide donation’ made to a qualifying PBO. As stated above, the payments are
made with the intention to receive something in return (i.e. a government
tender as a result of its BEE status) and it would therefore not qualify as a
donation and consequently no deduction in terms of sec 18A would be allowed
even though it is made to a qualifying PBO.