FAQ - 6 November 2014
04 November 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Local VAT vendor constructing in RSA for foreign
company: VAT output and input
Q: My client, a VAT
vendor, is building a specialised structure for a foreign entity with no RSA
presence. Based on the fact that the service will be supplied for building a
fixed structure in South Africa, my client has to charge VAT. The foreign
entity, however, is refusing to pay the VAT because they will not be able to
claim it back as input VAT. Is there any way that the foreign entity can claim
some sort of VAT (maybe customs?) back, thus enabling me to convince them to
pay the VAT-inclusive amount?
Furthermore, the building project will take 18 months. On
what basis, therefore, do I split the output VAT payment? Because if I pay all
the VAT output in one month it will not be relative to the expenditure incurred
therefore I will be receiving huge VAT refunds for the rest of the 18 month
A: Building of the fixed
The only possible instance where the supply can be subject
to the rate of zero per cent is where section 11(2)(l) applies. That subsection requires that the recipient
must be "a person who is not a resident of the Republic” (RSA) as defined in
section 1(1) of the Value-Added Tax Act - this is a defined concept and
basically requires that the non-resident must not carry on in the RSA any
enterprise or other activity and from a fixed or permanent place in the RSA
relating to such enterprise or other activity.
Our guidance assumes that the non-resident is not a resident of and does
not carry on an activity in the RSA. If
this assumption is not correct the guidance may not be appropriate.
The next issue is that the said person (the non-resident) or
any other person must not be in the RSA at the time the services are
rendered. In this instance the
non-resident must NOT be present in the RSA at the time the services are
rendered (section 11(2)(l)(iii)) for the rate of zero per cent to apply. If the non-resident is present in the RSA at
the time, the service will be standard rated (section 7(1)(a)).
The rate of zero per cent (mentioned above) will however not
apply if the services are supplied directly in connection with land or any
improvement thereto situated inside the RSA (section 11(2)(l)(i)). As the
structure will be built in South Africa we agree with you that the rate of zero
per cent does not apply – it is a standard rated supply.
The recipient can only make a deduction of the input tax if
they are registered as a vendor in the RSA. Based on our assumption this is not
the case, but we don’t know who will be using the fixed structure.
The output tax
The Value-Added Tax Act requires (section 16(4)) that output
tax in relation to a supply made by a vendor must be attributable to a tax
period where a supply is made or is deemed to be made by him during that tax
period. The accounting for the output
tax is therefore not influenced by when the input tax is deducted. the period the output tax must be accounted for in the same period.
2. Tax consequence on the disposal of one spouse’s interest in a company to the other spouse
manufacturing company that commenced business in 1998 was formed by a husband
and wife as members. Since it was a start-up business, there was no goodwill.
In 2014 the spouses decided to divorce, resulting in the wife relinquishing her
50% membership to the husband. This 50% equated to R2m where R50 000 per month
is to be paid to the wife until fully settled.
How would she be taxed on this amount? In my opinion she
will be subject to capital gain tax annually on the R50 000 payment.
A: Based on the
facts our guidance assumes that payment of R50 000 per month does not
constitute an annuity. It is therefore
merely a repayment of the debt.
We are not sure why you believe that the capital gain in
this instance is not rolled over in terms of paragraph 67 of the Eighth
Schedule. For the purposes of paragraph
67(1) a person must be treated as having disposed of an asset to his or her
spouse, if that asset is transferred to that spouse in consequence of a divorce
order or, in the case of a union contemplated in paragraph (b) or (c) of the
definition of ‘spouse’ in section 1 of this Act, an agreement of division of
assets which has been made an order of court.
Paragraph 67(3) provides an exception to the rule.
If the capital gain does not roll over we submit that the
full amount accrued on disposal and not when the R50 000 payments are
made. It is therefore ‘taxed in full’ in
the year of disposal.
3. Whether the
valuation by an independent valuator will be accepted by SARS as proof of
Q: My client
initially began operating as a sole trader but subsequently converted to a
close corporation (CC). When the entity was converted into a CC the accountant
did not bring the assets of the individual into the CC. A period of time passed
and a new accountant was appointed. He then discovered that there was a lot of
plant and machinery that was not included in the assets of the CC in the
financial statements. He advised the client to get an independent valuator to
value the assets. The valuation showed that the assets were worth R 3.5
The accountant then used this valuation and brought these
assets into the financial statements for the 2014 financial year. He adjusted
for depreciation accordingly. The depreciation resulted in the CC having a
taxable loss. The accounting rate of depreciation differed from the tax rate of
depreciation. The accountant did not provide for deferred tax. I now have to do
the ITR14 submission. I'm sure this will raise a red flag with SARS as the
client has a big loss. If SARS does an audit will the documentation of the
valuation be sufficient information for them? The client does not have any invoices
relating to the assets as these were purchased more than 10 years ago. So the
only documentation used is the valuation certificate.
A: We can’t
comment on whether or not the ITR14 will be selected for a review or an
audit. In terms of section 102(1)(e) of
the Tax Administration Act a taxpayer bears the burden of proving that a
valuation is correct. We don’t know on
what basis the valuation was prepared, but as the assets were transferred
between connected persons the market value had to be used and at the time of
the transfer. The valuation documents
would certainly have to be presented to SARS and if they dispute the valuation the
matter can go to court.
Our guidance assumes that the special rules (section 42 of
the Income Tax Act) didn’t apply. This
is an important assumption.
Under paragraph (vii) of the proviso to section 11(e), the
acquisition cost of qualifying assets, shall be deemed to be the cost which, in
the opinion of the Commissioner, a person would incur if that person had acquired
that asset under a cash transaction concluded at arm’s length (also known as
the market value) – see binding general ruling 7. The section 11(e) deduction had to be made in
the year that the assets were used.
The owner had to account for the recoupment and resultant
capital gains also in the year of disposal.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.