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FAQ - 27 March 2014

Tuesday, 25 March 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical 

1. Maintaining a logbook by a sole proprietor to be entitled to deduct traveling expenses

Q: Where in the tax law does it state that a sole proprietor must keep logbooks for his business vehicles, as SARS keeps on requesting logbooks during audits?

A: A taxpayer running a sole proprietorship does not receive a travel allowance and is therefore not subject to the provisions of sec 8(1) of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’). However, taxpayers running a sole proprietorship who incurs travel expenses or commission earners may want to claim their travel expenses as a deduction in terms of section 11(a) of the Act, provided that the requirements of the said section are met.

Section 11(a) of the Act states the following:

‘11.   General deductions allowed in determination of taxable income.—For the purpose of determining the taxable income derived by any person from carrying on any trade, there shall be allowed as deductions from the income of such person so derived-expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature...’

In order for expenditure to rank as a deduction in terms of sec 11(a) of the Act, it would have to incurred for purposes of carrying on a trade, in the production of income and the expenditure must not be of a capital nature. In order to determine if the travelling was incurred for trade purposes, in the production of income and that the expenditure was actually incurred, an accurate logbook is required. This is due to section 102(1)(b) of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’) which states that a taxpayer bears the burden of proving that an amount is deductible or may be set-off. The onus is therefore on the taxpayer to prove to SARS that the expenditure incurred by it, was in fact incurred for trade purposes.

Various case law, of which Golby v Secretary for Inland Revenue 1969 (2) SA 377 (A) [31 SATC 59] is one case, held that taxpayers are required to prove to what extent they are entitled to deduct certain travelling expenses. The only way in which a taxpayer can prove business kilometres travelled is through a credible logbook which cannot be completed retrospectively.

Section 29 of the TAA would further require that these records be kept for five years from the date of submission of the relevant return/end of the year of assessment. This period of five years may be extended by section 32 of the TAA in the case of an audit or investigation under Chapter 5 of the TAA or if an objection or appeal is made against an assessment or decision, in which case the records (logbook) must be kept until the audit or investigation is concluded or the assessment or decision becomes final (irrespective of the fact that the five years has lapsed).


Therefore, without a credible logbook accurately stating your business travel, you won’t be able to claim the cost of business travel as a deduction. This is due to the fact that the burden of proof will not be discharged that an amount is deductible and to what extent without an accurate logbook.


2. Treatment of medical costs for disabled for the 2014 and 2015 year of assessment

Q: Can persons with a disability still claim 100% of their medical expenses in the 2014 as well as the 2015 financial years?

A: Sec 51(1) of the Taxation Laws Amendment Act (No. 31 of 2013) (hereinafter referred to as ‘the TLAA’) repealed sec 18 of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) effective from 1 March 2014. This has the effect that taxpayers with disabilities are no longer able to deduct all of their qualifying expenses for the 2015 year of assessment. The position for the two years of assessment are therefore as follow:

2015 year of assessment

Taxpayers with disabilities would only be entitled to deduct from their normal tax liabilities the sec 6A medical schemes fee tax credit, together with the new sec 6B additional medical expenses tax credit. 

2014 year of assessment

Taxpayers are entitled to deduct the sec 6A medical scheme fees tax credit from their normal tax liability. They are also entitled to a deduction for their medical scheme contributions paid (as specified in sec 18(1)(a)) to the extent that it exceeds four times the medical tax credit. In addition to this a deduction for all the permitted out-of-pocket and prescribed disability or physical impairment expenses as specified in sec 18(1)(b)-(d).

The deduction for the 2014 year of assessment will therefore be equal to the following:

  • All amounts contemplated in sec 18(1)(b), (c)  and (d); Plus·        
  • Sec 18(1)(a) contributions; Less·        
  • Four times the medical scheme fees tax credit. 

3. VAT on disposal of second-hand machinery acquired from non-vendor by a close corporation prior to registration as a vendor

Q: My client is a close corporation who bought a second-hand machine from a non-vendor who is not a connected person on 1 July 2011. The close corporation was not registered for VAT at the time of acquisition of the machine (it only registered as a vendor on 1 September 2012). The close corporation now wants to sell the machine to a South African resident. Must VAT be levied on the sale of the machine? The machine will be used for purposes of making taxable supplies until the date of its subsequent sale.

A: Par (b) of the definition of ‘input tax’ in sec 1 of the Value-Added Tax Act (No. 89 of 1991) (hereinafter referred to as the ‘VAT Act’) states the following:

‘ amount equal to the tax fraction (being the tax fraction applicable at the time the supply is deemed to have taken place) of the lesser of any consideration in money given by the vendor for or the open market value of the supply (not being a taxable supply) to him by way of a sale on or after the commencement date by a resident of the Republic (other than a person or diplomatic or consular mission of a foreign country established in the Republic that was granted relief, by way of a refund of tax as contemplated in section 68) of any second-hand goods situated in the Republic...’ 

This paragraph therefore allows a vendor to claim an input VAT on the acquisition of second-hand goods from a non-vendor who is a resident of the Republic. Given the fact that the close corporation was not registered as a vendor at the time the machine was acquired, it would not have been entitled to claim an input VAT credit. Section 18(4) of the VAT Act, however, allows for an input VAT adjustment where goods were acquired wholly for the purpose of making non-taxable supplies which are then subsequently used for the purpose of making taxable supplies. 

Sec 18(4)(c) of the VAT Act states the following:

‘...where second-hand goods situated in the Republic have been supplied (otherwise than under a taxable supply) to a person under a sale on or after the commencement date by a resident of the Republic and no deduction has been made in terms of section 16 (3) in respect of such second-hand goods; and

such goods or services are subsequent to the commencement date applied in any tax period by that person ... wholly or partly for consumption, use or supply in the course of making taxable supplies (other than taxable supplies in respect of which, if such goods or services had been acquired at the time of such application, a deduction of input tax would have been denied in terms of section 17 (2)), those goods or services shall be deemed to be supplied in that tax period to that person ... and the Commissioner shall allow that person ... to make a deduction in terms of section 16 (3) of an amount determined in accordance with the formula...’

Sec 16(3)(f) of the VAT Act allows for the following to be deducted as input tax:‘...the amounts calculated in accordance with section 18 (4) or (5) in relation to any goods or services applied during the tax period as contemplated in that section...’

Therefore, from the wording of sec 18(4)(c) and 16(3)(f) of the VAT Act, it would seem as if an input tax credit may have been claimed on the machine during the tax period in which the close corporation registered as a vendor. However, proviso (i)(ee) to sec 16(3) provides the following:

‘... where any vendor is entitled under the preceding provisions of this subsection to deduct any amount in respect of any tax period from the said sum, the vendor may deduct that amount from the amount of output tax attributable to a later tax period which ends no later than five years after the end of the tax period during which—

(ee) in any other case, the vendor for the first time became entitled to such deduction, notwithstanding the documentary proof that the vendor must be in possession of in terms of subsection (2) of this section...’

The proviso therefore states that the input tax may be claimed within five years from the end of the tax period during which the vendor became entitled to the sec 18(4) input tax deduction.

Therefore from the facts given, it would seem as if the close corporation may still be entitled to claim an input tax credit on the machine in terms of sec 18(4)(c) read with sec 16(3)(f), provided that the requirements of sec 16(2)(f) are met. Sec 16(2)(f) states the following:

‘(2)  No deduction of input tax in respect of a supply of goods or services, the importation of any goods into the Republic or any other deduction shall be made in terms of this Act, unless—

(f) the vendor, in any other case, except as provided for in paragraphs (a) to (e) is in possession of documentary proof, as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished...’

In order to determine if output VAT must be levied on the machine, one must refer to sec7(1)(a) of the VAT Act which states the following:

‘7.   Imposition of value-added tax.—(1)  Subject to the exemptions, exceptions, deductions and adjustments provided for in this Act, there shall be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the value-added tax— 

(a)   on the supply by any vendor of goods or services supplied by him on or after the commencement date in the course or furtherance of any enterprise carried on by him...

calculated at the rate of 14 per cent on the value of the supply concerned or the importation, as the case may be.’

Par (a) of the definition of ‘enterprise’ states the following:

‘ the case of any vendor, any enterprise or activity which is carried on continuously or regularly by any person in the Republic or partly in the Republic and in the course or furtherance of which goods or services are supplied to any other person for a consideration, whether or not for profit, including any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing, municipal or professional concern or any other concern of a continuing nature or in the form of an association or club...’

From the facts given, it would appear that the machine forms part of the close corporation’s enterprise. You would therefore have to levy VAT at 14 per cent on the supply of the machine, provided that it is a local sale.

The section that you were looking for are sec 8(14)(a) of the VAT Act which provides the following:

‘... where any goods are supplied by a vendor to a person otherwise than in the circumstances contemplated in paragraph 2 (b) of the Seventh Schedule to the Income Tax Act, and a deduction under section 16 (3) in respect of the acquisition by the vendor of those goods was denied in terms of section 17 (2) or would have been denied if section 7 of this Act had been applicable prior to the commencement date, the vendor shall be deemed to have supplied the goods otherwise than in the course or furtherance of his enterprise...’

Sec 8(14)(a) will not be applicable due to the fact that input tax was not denied on the acquisition of the machine – it was simply not claimed.


The close corporation may be entitled to claim an input tax credit in terms of sec 18(4)(c) read with sec 16(3)(f) on the acquisition of the machine in terms of the formula provided for by sec 18(4). The close corporation will however be required to levy output VAT on the machine in terms of sec 7(1)(a) on the subsequent sale thereof.



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