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FAQ - 8 July 2015

08 July 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 issued shares?

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 company...” 

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 minutes. 

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 size businesses.

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 industry. 

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 all.”

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.”


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