FAQ - 8 July 2015
08 July 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Does a share buyback
reduce ‘contributed tax capital’ or is it deemed to be a dividend?
Q: If a company
buys back its own shares, is that buy-back a reduction of the issued shares
(reduction of "Contributed tax capital”) or does the company now own its own
Or is the share buy-back a "dividend” under the new dividend
rules? I saw mention of this in the ENS article attached.
A shareholder held 20% of the issued shares of a company
that he bought for R 385 000. The company now wants to buy back 15% of the
shareholder’s shares. Does this decrease the total issued shares by 15% or does
the company now own the 15% in its own name?
A: The definition
of a ‘dividend' in section 1(1) includes: "any amount transferred or applied by
a company (that is a resident) for the benefit or on behalf of any person in
respect of any share in that company, whether that amount is transferred or
applied...(b) as consideration for the acquisition of any share in, that
company. It does not include any amount
so transferred or applied to the extent that the amount so transferred or
applied ... (i) results in a reduction of contributed tax capital of the
The amount paid to the shareholder by the company to acquire
the share(s) would therefore constitute a dividend for tax purposes, except to
the extent that the payment results in a reduction of contributed tax
capital. It must be remembered that the
directors of the company or some other person or body of persons with
comparable authority must determine the amount that will reduce the contributed
tax capital. This must be evidenced from
The amount paid by the person for the shares (the R385 000
that you refer to) is not necessarily the contributed tax capital of the
company. It would only be that if the
amount was paid to the company when the shares were originally issued. If the person acquired the shares from another
person for the R385 000 the amount will be the person’s base cost and the
contributed tax capital must be determined from the company – it will normally
be the consideration received by or accrued to that company for the original
issue of shares.
We only dealt with the Income Tax Act consequences – in
other words we accept that the Companies Act provisions will be observed.
2. Are there VAT
issues associated with arranging tours in South Africa for foreign tourists?
Q: My client
arranges tours to South Africa for mostly European tourists. I understand that
as long as their clients are overseas while they make the arrangements, their
fee is zero-rated.
I also understand that the costs of accommodation, game
drives, local air travel, etc. that is on-charged to the non-resident tourist,
is standard rated, because these services will be rendered to the tourist when
they are inside SA. If accommodation or a game drive is booked at an entity
that is not registered for VAT, my client must therefore add 14% to the
accommodation or game drive fee as it is a standard rated supply?
Is it possible for my client to on-charge the accommodation
or game drive fee as charged (inclusive of VAT or non-vendor fee), and just not
claim input on VAT registered suppliers? This makes it more practical to
administer their booking schedules and allow them to work with small and medium
Theoretically, tour operators receive a fee for the service
of arranging a tour package. The on-charge of the cost of a tour package makes
no money for them as it is an in and an out. Is there anything in the VAT Act
that supports this?
A: The current
practice generally prevailing in this regard is set out in Interpretation Note
42 - the supply of goods and/or services by the travel and tourism
With respect to what you refer to as the "on-charge the
accommodation or game drive” fees the treatment, from a Value-Added Tax
perspective, will depend on whether or not your client acts as the agent for
the foreign tourist. Judge Nugent, in
the British Airways plc case, explained it as follows:
"A further tax does not accrue when the vendor of another
service (British Airways) does no more than bring to account and recover the
charge that it was required to pay for the supply of that service by the
company (whether it is supplied to the passengers themselves, or to the airline
for the benefit of its passengers). The
moneys that are recovered by British Airways are not a consideration for the
supply by it of airport services simply because it does not supply them at
If your client is the principal then they would have to
account for output tax, but will be entitled to an input tax deduction.
In the Interpretation note referred to above SARS explains
it as follows:
"In the travel and tourism industry, many of the goods and
services supplied by service providers are made available through local
entrepreneurs. That is, such local entrepreneurs act as agents under common law
in representing principals (i.e. the service providers) that supply the goods
and services. Notwithstanding this, local entrepreneurs may also act as
principals, for example, the purchase and resale of tour packages.
Due to the unique relationship between an agent and the
principal, special provisions have been introduced in the VAT Act, to deal with
the VAT consequences arising from such relationships. In order to correctly
apply the VAT legislation to the concept of agents, it is necessary to identify
and understand the concept of an agent, as treated in common law.
An agency is a contract whereby one person (the agent) is
authorised and usually required by another (the principal) to contract or to
negotiate a contract with a third person, on the latter’s behalf.”