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FAQ - 2 April 2015

01 April 2015   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. You should have charged 0% VAT, but you charged 14% - how to get it back;

Q: When a company export horses they charge VAT the zero rate. But my client only found out about this recently, and incorrectly charged VAT at 14% on an export to a customer who based overseas. Is there any way possible that this customer can claim the VAT back from SARS? It is a large sum of money. In effect the customers weren’t supposed to pay VAT. If yes, what is the process to follow and what documentation should be filled in, and where do they find this documentation?

A: The rate of zero per cent applies (in terms of section 11(1)(a) and subject to compliance with section 11(3) – documentary proof) to a supply of goods where the supplier has supplied the goods (being movable goods) in terms of a sale or instalment credit agreement and the supplier has supplied the goods (being movable goods) in terms of a sale or installment credit agreement and the supplier has exported the goods in the circumstances contemplated in paragraph (a), (b) or (c) of the definition of "exported” in section 1. 

The concept "movable things” is not defined and therefore takes its common-law meaning, as applied by the courts.  Its meaning is summarized as follows by CG van der Merwe in Joubert (ed) The Law of South Africa vol 27 'Things' para 34:

'A thing is considered to be movable if it can be moved from one place to another without being damaged and without losing its identity. Things that can move on their own, like animals are also considered to be movables. Immovable things, on the other hand, are things which cannot be moved from one place to another without damage or change of form...'

Our guidance assumes that the client will be able to meet the onus of proof that the horses were exported and will be able to submit the required supporting documentation.  In other words it qualified to apply the rate of zero per cent. 

There are two options available to the client.  The first is to use the "request correction” function available and then submit an amended return.  If that is not available the client will have to lodge an objection.  It is settled law that the taxpayer can "rely upon an error that it made in its return”- see the most recent SCA case (GB Mining). 

The objection is made by submitting an ADR1.  The documents required to prove this is listed in Interpretation note 30 (direct export) or Interpretation note 31 (issue 3) in other cases. It is advisable to add this as supporting documents to the ADR1.  The original invoice will also have to be amended. 

2. Should a retrenchment package received while out of RSA be exempt from tax?

Q: I would like to find out how the taxpayer should be taxed on foreign employment income if:

He is a SA resident, he worked for an SA company in Namibia. The SA company has a branch in Namibia so they have sent him to do some project. He last worked in the SA offices in 2011.

For the 2014 year of assessment he worked for this SA company for 60 days, then he was retrenched because he was done with his projects and the SA company did not have any projects available for him to do in Namibia so they gave him his salary and a retrenchment package (a gratuity).

He then found another job in Namibia (from a Namibian company) and worked there for the remaining days in the year of assessment. His salary will be exempt.

The taxpayer can prove that he was outside the SA for more than 183 days and 60 continuous period.

The SA company did not withhold PAYE on the taxpayer’s other income except for the gratuity, but they recorded in the taxpayer’s IRP5 that he received a taxable income, and now the taxpayer has a huge liability.

I have requested the employer to correct the taxpayer’s IRP5 and record his income as ‘foreign income – non-taxable’. And the employer has corrected foreign income as non-taxable but the issue now is that they are refusing to correct gratuities and other allowances to be foreign but non-taxable.

They are saying the gratuity the taxpayer received was a retrenchment package and it should be taxable. And I am asking why they withhold so little tax on that gratuity? And all his income should be exempt, because section 10(1)(0)ii says: "any amount received by or accrued  to any employee during any year of assessment by way  of any salary, leave pay, wage, over time, bonus, gratuity, commission, fee, emolument or allowance, including  any amount referred  to in paragraph (i) of the definition  of gross income in section 1 or any amount  referred to in s8, 8B or 8C in respect of services rendered  outside  the Republic  by that employee  for or on behalf  of any employer, if that employee was outside  the republic-

(a) for a period or periods exceeding 1863 full days in aggregate during  any period  of 12 months

(b) for a continuous period exceeding 60 full days in aggregate  during  any period of 12 months”

And I am saying that if the remuneration can be exempt and taxable so as the gratuities because they fall under the definition of remuneration (Fourth Schedule).

A: In terms of article 15 of the RSA /Namibia treaty, Namibia obtains the right to tax "salaries, wages and other similar remuneration” after an "aggregate 183 days in any twelve-month period commencing or ending in the year of assessment concerned”.  This is so irrespective of whether or not the remuneration is borne by a permanent establishment or a fixed base which the RSA employer has in Namibia. The RSA provides the section 10(1)(o)(ii) exemption to address the double tax that arises if the person is still a resident of the RSA (ordinarily resident). 

The issue is whether or not the ‘gratuity’ qualifies.  Section 10(1)(o)(ii) refers to ‘remuneration’ and not ‘remuneration as defined in paragraph 1 of the Fourth Schedule’ (as does for instance sub-paragraph (i) and (iA)).  The section does, however, include a ‘gratuity’.   

The practice prevailing (see Interpretation note 16) is that "the services that generated the income to be considered for exemption must have been rendered during the 183 day and 60 day periods…”  It is possible that the gratuity is based on services rendered in the RSA and the exemption would only be available to the extent that the gratuity relates to the services rendered outside the RSA.  We don’t know if that applies and the client will have to confirm that from the employer. 

Q2: His IRP5 states that it’s a foreign gratuity, which means that it is a gratuity for the services he rendered outside SA. I have asked the employer and she said:

"The gratuity (retrenchment package) was for compensation for loss of employment upon his return to South Africa.

According to me, and to our Financial Controller, the retrenchment package was paid because the taxpayer would be returning to South Africa, and we didn’t have another project to place him on. As such, the retrenchment package was paid as local income, and not as foreign income. The reason it is marked on the IRP5 as 3951, is because the payroll he was paid out of is flagged as a foreign payroll, and rather than transfer him to a local payroll just to pay his package, we did it from the regular expat payroll. As such, we do not agree that the retrenchment package could/should be classified as exempt foreign income, and this was also why a tax directive was obtained, rather than just paying it out as exempt of tax.”

A2: As we indicated in our previous response the practice prevailing (see Interpretation note 16) is that "the services that generated the income to be considered for exemption must have been rendered during the 183 day and 60 day periods…” The fact that the employer marked the gratuity as foreign is irrelevant.  The determining factor is where the services were rendered that was used to calculate the retrenchment package.  By example, if the person worked for 10 years of which 2 years were outside the RSA and the retrenchment was calculated with reference to the full 10 years the full amount can’t be exempt.  The view of the financial controller seems the correct one. 

As the taxpayer bears the onus of proof in this instance he will have to prove that the retrenchment gratuity was paid in respect of the service rendered in Namibia.  If not the full amount will not qualify the exemption. 

3. Can you claim the living costs at a frail care centre as a medical deduction?

Q: When you go to a frail care centre (when you are to old to look after yourself), can you claim a ‘medical’ deduction on the cost to stay there?

My view is that if SARS allow physically impaired individuals to claim their caring cost, then the same should apply to old people that are looked after and hospices.

A: Sec 18(1)(b) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’), before its deletion, provided a deduction for the following:

‘any amounts (other than amounts recoverable by the taxpayer or his or her spouse) which were paid by the taxpayer during the year of assessment to any duly registered...

(ii) nursing home or hospital or any duly registered or enrolled nurse, midwife or nursing assistant (or to any nursing agency in respect of the services of such a nurse, midwife or nursing assistant) in respect of the illness or confinement of the taxpayer, his or her spouse or his or her children, or any dependant of the taxpayer...’ (own emphasis added).

Therefore, sec 18(1)(b) provides for a deduction, provided that the amounts were paid to a registered nursing home in respect of the ‘illness or confinement’ of the taxpayer, his spouse, children or dependants.

Conclusion

Should the expenses not be paid to a duly registered nursing home for the ‘confinement or illness’ of a taxpayer, his/her spouse, children or dependants, no deduction will be allowed in terms of sec 18(1). Therefore normal frail care costs would not rank as a medical deduction unless it is paid for the confinement or illness in respect of one of the above individuals to a duly registered nursing home.

Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.


Comments...

Daniel P. Foster says...
Posted 02 April 2015
RE: Q2. It is important to note that s 10(1)(o) was amended so that "any form of remuneration as defined in the paragraph 1 of the Fourth Schedule" now applies only to s 10(1)(o)(i) and not to (ii). As you point out, (ii) now has a specific list of potentially exempt remuneration. A gratuity on termination is a specfic type of gratuity (i.e. unlike, say, a bonus) and it is submitted that, if the legislator had intended that it be eligible for exemption, a reference to para. (d) of "gross income" would have been included. This is SARS view also, I understand. Consequently, a termination payment will not be eligible for exemption. Furthermore, there is a view (perhaps held by SARS) that the source of a termination payment is the contract and not the services, so source is not necessarily apportionable. With respect to the DTA treatment, I would refer readers to the recent 2015 update to the OECD MTC Commentary, which deals at length with treaty relief on termination payments.

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