FAQ - 29 March 2016
30 March 2016
Posted by: Author: SAIT Technical
Author: SAIT Technical
1. Are legal fees paid on
your behalf a vatable supply?
Q: Our client won a long standing legal battle with a supplier
whereby the Court ordered the supplier to pay our client's legal costs. Our
client incurred legal fees on which VAT was levied and they have claimed the
VAT incurred as an input deduction. Must the cost order include or exclude VAT
and is the cost award taxable?
A: The vendor
of course bears the onus of proof if the view is taken that there was no
According to the definition in section
1(1) of the Value-Added Tax Act, ‘services’ means "anything done or to be done,
including the granting, assignment, cession or surrender of any right or the
making available of any facility or advantage…”
This is a very wide definition
and we don’t have the detail of the compensation receipt in this case to
comment on whether or not a service was supplied. In CSARS v Stellenbosch Farmers’ Winery (504)
Judge Kroon said "that, by agreeing to the early termination of the
distribution right, the taxpayer surrendered the remaining portion of the
right, and that such surrender constituted the supply of services in the course
of an enterprise by the taxpayer to UD. There can be no quarrel with the
correctness of these findings.”
Whether the payment of damages or
out-of-court settlements is a consideration for a supply can be determined only
by establishing whether the payment is made in respect of, in response to, or
for the inducement of a supply of goods or services.
Juta’s, in their electronic services
explains that "damages paid for non-payment of goods or services would … be a
consideration for the underlying supply of goods or services. The VAT consequences would depend on whether
the underlying supply is standard-rated, zero-rated or exempt.”
They confirm that "SARS is of the
view that any compensation received from third parties for losses due to
negligence relates to the surrendering of a right. The compensation is
therefore paid in respect of the supply of a service and is subject to VAT (see
SARS Rulings No 292, 314, 352 and 424).”
Inland Revenue New Zealand has
stated that where compensatory damages are awarded for a loss, the recipient
cannot be said to have supplied anything to the payer in return for the payment
- reciprocity will thus be absent from the transaction. They acknowledge that where a payment is
accepted as 'full and final payment', resulting in the recipient forbearing his
right to sue in future, the forbearance is capable of being a 'supply'. However, they are of the opinion that there
will not, in the majority of cases, be a separate and ascribable value attached
to the forbearance to sue. The payment
will not be linked to the forbearance, but to some other issue such as a loss or
damage (see Tax Information Bulletin Vol 14 No 10).
Fines and penalties levied for
late payment are an additional consideration in respect of, in response to, or
for the inducement of the underlying supply of goods or services. Non-statutory fines or penalties imposed by
clubs, trade unions and other vendors for breach of rules will normally relate
to a supply, namely an action or lack of action and will thus be consideration
for a supply (see SARS Ruling 439).
You may want to consult a
Value-Added Tax specialist or obtain an opinion from SARS in this regard.
2. Does a non-resident importer
need to register a South African company?
I have a potential non-resident client who wishes to import frozen meat
products into South Africa. My query is whether I have to register a South
African company for this purpose?
A: Whether or not the client must use a company is
outside the scope of the technical assistance provided by SAIT. The same applies to the issue of registering
an external company.
The obligation to
register as a vendor doesn’t arise from the fact that the client imports goods
into the RSA. The tax payable on the
importation of goods is levied, except where a specific exemption applies, on
any person (not only a vendor).
For purposes of
being registered as a vendor in the RSA, section 23 of the Value-Added tax Act
doesn’t require the person to be a resident of the RSA. It requires that the person must carry on an
enterprise – we accept that when you say the person "wishes to import Frozen
Meat Products into South Africa” it implies that the person would then supply
the imported goods in the RSA. Section
23(2) requires of a person not resident in the RSA to appoint a representative
vendor (who must be a natural person and reside in South Africa) and to furnish
SARS with the particulars of their representative, and their bank account
details in South Africa.
3. What are the tax
implications of investing in an off-shore pension fund?
Q: My client wishes to invest in an
off-shore pension fund. He wants to withdraw R100,000 before age 55, and then
quarterly after 55. Are the contributions tax deductible? The institute is an
international Pension Fund.
Please see the corrected answer below:
A: The question being asked concerns an unapproved offshore pension plan (e.g. a trust established in Guernsey).
The contributions are definitely not deductible as it is an unapproved scheme. The more important question is whether the contribution is in fact subject to Donations Tax (like any other contribution to an offshore trust). Although the contribution may not be gratuitous (i.e. the contributor may receive a guaranteed pension or lump sum in return) the provisions of section 58(1) must be considered. Is the benefit provided by the offshore pension fund adequate consideration in relation to the contribution? Often, the "benefit" paid by the fund is discretionary or negligible and therefore may not qualify as adequate consideration, meaning the contributions should be subject, at least in part, to Donations Tax.
If the contribution constitutes even partly a donation, then the provisions of section 7 and Part X (8th Sch) apply, meaning some or all of the trust's income and gains should be taxed in the hands of the contributor every year.
Because the 'pension fund' is a non-resident trust (and not an insurance policy, approved scheme or CIS), benefits paid out to residents should also be taxed in terms of the roll up rules (s 25B(2A) and para. 80(3)).
Therefore, the issues raised are extremely complex and controversial and SAIT suggests that you seek professional advice before investing in such funds.
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.