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FAQ - 27 September 2017

27 September 2017   (1 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Does foreign income need to be declared on the South African tax return?

Q: We have a client who is an Australian. His SA employment earnings are taxed - PAYE. He is renting out his property in Australia. His Australian tax consultant is declaring his rental income in his Australian tax return, but she has classified him as non-resident of Australia? Does this mean we must declare his Australian rental income and foreign tax in his SA tax return, even though he will be returning to Australia when his contract comes to an end? Surely he cannot be a non-resident of 2 countries?

A: We also don’t comment on Australian tax laws, but the issue can be resolved by applying Article 4 of the RSA / Australia treaty (the protocol in this instance).  We don’t have enough information to comment on this, but you are correct that he can only be a resident of one country.  Once it is determined where the individual is a resident, it will then apply to both countries.  

We copied Article 4 below:  

“Article 4

Resident

1. For the purposes of this Agreement, the term “resident of a Contracting State” means a person who is a resident of that State for the purposes of its tax. The Government of a Contracting State or a political subdivision or local authority of that State is also a resident of that State for the purposes of the Agreement.

2. A person is not a resident of a Contracting State for the purposes of the Agreement if the person is liable to tax in that State in respect only of income from sources in that State.

3. Where by reason of the preceding provisions of this Article a person, being an individual, is a resident of both Contracting States, then the person’s status shall be determined as follows:

(a) the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual’s personal and economic relations are closer (centre of vital interests);

(b) if the State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national;

(c) if the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.” 

2. Is capital gain applicable to foreign assets of an SA resident?

Q: Where a SA resident previously lived in the UK (UK citizen) and inherited assets from her UK family before she became a SA resident, will those assets that are outside SA be subject to CGT in SA? If yes will double taxation agreement apply with regards to CGT? Do we need to do calculations and submit to SARS? With Estate Duty such assets qualify as a deduction, does the same apply to CGT?

A: We accept that the individual is someone who is deemed to be exclusively a resident of the RSA.  We don’t know what the nature of the assets is.  The fact that they were inherited is irrelevant – see below. 

Article 13(1) of the agreement between the RSA and the UK, deals with this – it reads as follows:

“Capital Gains

1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 of this Convention and situated in the other Contracting State may be taxed in that other State.

2. Gains derived by a resident of a Contracting State from the alienation of:

(a) shares, other than shares quoted on an approved Stock Exchange, deriving their value or the greater part of their value directly or indirectly from immovable property situated in the other Contracting State, or

(b) an interest in a partnership or trust the assets of which consist principally of immovable property situated in the other Contracting State, or of shares referred to in sub-paragraph (a) of this paragraph, may be taxed in that other State.

3. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other State.

4. Gains derived by a resident of a Contracting State from the alienation of ships or aircraft operated in international traffic by an enterprise of that Contracting State or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in that Contracting State.

5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 of this Article shall be taxable only in the Contracting State of which the alienator is a resident.

6. The provisions of paragraph 5 of this Article shall not affect the right of a Contracting State to levy according to its law a tax on capital gains from the alienation of any property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned Contracting State at any time during the six years immediately preceding the alienation of the property if the property was held by that individual, or by the spouse of that individual, before that individual became a resident of that other State.” 

It basically gives a dual taxing right and relief for the foreign taxes paid (in the UK) will then be by way of section 6quat. 

3. Can input tax claims be backdated to date prior to registration?

Q: I have a client that is registered as from 1 March 2017, although he started trading in Aug 2016 already. His accountant delayed the registration. He wants to know how far back he can claim for his VAT input expenses. What is the general rule here?

A: The VAT Act

1. Section 16(3)(a)(i) of the VAT Act allows a vendor to make a deduction of input tax in respect of supplies of goods and services made to the vendor during a tax period.

2.  A “vendor” is defined in section 1(1) of the VAT Act as any person who is or is required to be registered in terms of the VAT Act.

3. Section 18(4)(b)(i) of the VAT Act determines that where VAT-able goods or services have been supplied to a person and the person has not claimed any input tax on the acquisition of such goods or services, the person may claim a deduction if the goods are subsequently used in a taxable activity. The deduction must be computed by applying the following formula:

´ B ´ C ´ D, where

A = the tax fraction

B = the lower of the adjusted cost (the cost on which VAT has been paid) or the open market value of the goods

C = the % taxable use

D = If second-hand goods, the extent to which to purchase price has been paid

Application of the principles

1. From the information supplied it appears that the business was registered as a VAT vendor on a voluntary basis (i.e. the annual value of taxable supplies made by the person did not exceed R1 million).

2. Based on the assumption that the registration was voluntary the person only became a VAT vendor from the date that the Commissioner for SARS actually registered the person as a VAT vendor, i.e. from 1 March 2017. The VAT Act does not make provision for any retrospective deduction of input tax incurred in respect of financial periods prior to registration as a VAT vendor. Section 16(3)(a)(i) requires that goods or services in respect of which a vendor seeks to claim input tax deductions must be made to the vendor during a tax period. Where is person is not registered as a VAT vendor, it will neither be a vendor, nor will it have “tax periods” as envisaged in the VAT Act.

3. Section 18(4)(b) of the VAT Act does however make provision for a retrospective adjustment in respect of goods or services acquired prior to the date of registration as a VAT vendor where such goods or services will be used in the newly registered VAT enterprise, for example capital goods or services, trading stock acquired before registration but sold thereafter, etc. The amount of the deduction must be computed in accordance with the formula contained in section 18(4) of the VAT Act. Essentially it requires that you apply the tax fraction to the lower of the original cost or current market value of such goods or services.

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

Comments...

André Anderson says...
Posted 28 September 2017
Definitely a voluntary payer!!!

 

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