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FAQ - 26 August 2015

26 August 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Can a farmer who has not yet made any income be registered for VAT? 

Q: How do I register a start-up farmer for VAT? There is no income as income will only be earned in a few years. Which documents do I need to have the VAT registered as there is a large amount of start-up and establishment costs.

A: Section 23(3)(d) of the VAT Act states:

"Notwithstanding the provisions of subsections (1) and (2), every person who satisfies the Commissioner that, on or after the commencement date—

that person is continuously and regularly carrying on an activity of a nature set out in any regulation made by the Minister in terms of this Act and in consequence of the nature of that activity is likely to make taxable supplies only after a period of time, may apply to the Commissioner for registration.”

The relevant regulation, which I’ve provided below as a link, specifically mentions agricultural and farming activities.

You may therefore register for VAT.

Here is the regulation: http://c.ymcdn.com/sites/sait.site-ym.com/resource/resmgr/2015_SARS_-_May/LAPD-LSec-Reg-2015-10_-_Regu.pdf  

Point number 5.7.1 of the following SARS Guide will show you which documents are needed for the purposes of a VAT registration:

http://www.sars.gov.za/AllDocs/OpsDocs/Guides/VAT-REG-02-G01%20-%20Guide%20for%20Completion%20of%20VAT%20Applications%20-%20External%20Guide.pdf   

In case you didn’t know, if your farming client is already registered for income tax and has an efiling profile, you can register him for VAT on efiling through the RAV01 form. 

You may then still be informed that you must go to a SARS branch for a VAT interview, but you will not have to spend too much time at the branch because you’ve already captured the required information on the SARS system through efiling.

Please read from page 58 onwards of the attached guide for details on how to register for VAT through the RAV01 form on efiling. 

Is the loss of future earnings due to medical negligence taxable?

Q1: Please provide further clarity on whether SARS taxes the award in medical negligence matters for future loss of earnings.

If so, at what rate would they quantify same? At the lump sum payment or would it be calculated at the actuarial determination on yearly spread? 

A1: The taxpayer will bear the onus of proof if the matter is disputed by SARS.  The general principle in this regard has been quoted (with approval) from Silke by Judge Kroon in the Stellenbosch Farmer’s winery case as follows:

"An amount received by way of damages or compensation for the loss, surrender or sterilisation of a fixed capital asset or of a taxpayer’s income-producing machine is a receipt of a capital nature.

. . .

In order for compensation for the cancellation of a trading contract to constitute a sum of a capital nature, it is sufficient if the contract constitutes a substantial part of the business, and the cancellation need not have the effect of destroying or materially crippling the whole of the taxpayer’s income producing structure.”  

The Judge then found that "the taxpayer, which did not carry on the business of the purchase and sale of rights to purchase and sell liquor products, did not embark on a scheme of profit-making, and that it did discharge the onus of establishing that the receipt of R67 million was of a capital nature.” 

Based on the information provided the taxpayer would be able to discharge the onus – due to negligence of a third party and not business related.  The fact that it was based on future earnings is not relevant. 

We don’t have enough information to comment on whether or not the right to the compensation constituted an asset and the possible capital gain consequences.  In terms of paragraph 59 of the Eighth Schedule a natural person must disregard a capital gain or a capital loss determined in respect of a disposal that resulted in that person receiving compensation for personal injury, illness or defamation of that person or a beneficiary of that special trust.  

Q2: We are aware that this is the consequence of the loss or damage to a capital asset. When dealing with the loss of future earnings in the case of an individual, does this have the same consequences? 

A2: Apologies, I didn’t elaborate on my statement: "the fact that it was based on future earnings is not relevant.” I had the comment by Judge Musi in WJ Fourie Beleggings CC v CSARS (the high court decision) in mind.  The Judge (CJ) said:

"If the amount to be paid is computed with reference to future loss of profits the receipt will remain of a capital nature. The method used to compute the sum therefore does not necessarily determine the nature of the sum.”

From the footnote it is clear that this was from ITC 254: 7 SATC 56 p58.

This point wasn’t raised in the Supreme Court, but I submit it is a valid one.  Judge Musi seems to have favoured the approach followed in Burmah Steam Ship Company Ltd v CIR.  The Judge then concluded that "an amount paid by way of damages or compensation takes on the character of the loss in compensation for which it has been paid.”  It was against this context that I felt the fact that that the quantum of the damages is determined with reference to loss of future revenue is not relevant.  It does not, as stated by Judge Musi, determine the nature of the sum. 

The nature of the receipt must be determined according to the principles alluded to in the first response. 

Can a deduction for contributions made to a RA fund be claimed against a taxable capital gain? 

Q: Is the 15% RA deduction allowed on a taxable capital gain and where do I find the relevant clause(s) in the Income Tax Act? My client sold a non-residential property at a profit. A 15% RA contribution is allowed on taxable income. Does it apply to a taxable capital gain as well? 

A: SARS explains it well enough in their CGT guide (paragraph 23.4.3) – we copied that for ease of reference:

"A taxpayer will not be able to claim 15% of a taxable capital gain for the purposes of determining the allowable portion of retirement annuity fund contributions. This treatment follows from the wording of s 11(n)(i)(aa)(A) which provides a deduction in respect of

‘(A) 15 per cent of an amount equal to the amount remaining after deducting from, or setting off against, the income derived by the taxpayer during the year of assessment (excluding income derived from any retirement-funding employment (being the income or part thereof referred to in the definition of "retirement-funding employment” in section 1), and any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit) the deductions or assessed losses admissible against such income under this Act (excluding this paragraph, sections 17A, 18 and 18A and items (c) to (i), inclusive, of paragraph 12(1) of the First Schedule); or’

Since a taxable capital gain is not included in ‘income’ as defined but rather in taxable income, the 15% limitation may not be calculated on a taxable capital gain.” 

We agree with this view.  Section 26A specifically states that a taxable capital gain is included in taxable income.  The definition of taxable income in section 1(1) confirms that it is the amount after deducting from income plus the inclusions. 

The excess contributions will be carried forward.  

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. 


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