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FAQ - 13 May 2014

Tuesday, 13 May 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. VAT treatment of the sale of livestock

Q: I have a dairy farmer who is in the process of selling his livestock - must he charge vat on sale of livestock? He is a vat vendor all milk sold is vat exempt so am wondering if the sale of livestock will be subject to VAT?

A: The sale of goods will be subject to VAT at the standard rate if it falls within sec 7(1)(a) of the Value-Added Tax Act (No. 89 of 1991) (hereinafter referred to as the ‘VAT Act’) and no zero-rating or exemption applies. The capital of a person which is used to produce, for example, trading stock will always form part of a person’s ‘enterprise’ even though the person only sells the trading stock. This is because the capital forms part of the enterprise carried on by the person.

In your particular instance the sale of milk would constitute a zero-rated supply in terms of sec 11(1)(j) of the VAT Act which is included in the definition of a ‘taxable supply’ in sec 1 of the VAT Act (the sale of milk is therefore not exempt as indicated in your question). Your farmer would consequently carry on an enterprise and would be subject to levy VAT at the standard rate, unless a zero-rating applies to a particular supply (for example the sale of milk) or if the supply is exempt. To our knowledge the only zero-rating that may apply to the sale of livestock, would be sec 11(1)(a) if the livestock is exported. No exemption would apply to the sale of livestock.

2. Penalties on the late payment of dividends tax

Q: Will penalties and interest be imposed if the dividend withholding tax is paid later than 30 days after payment of a dividend?

A: In terms of sec 64K(6) of the Income Tax Act (No. 58 of 1962), a person would be required to pay interest at the prescribed rate on the balance of the tax outstanding reckoned from the first day of the month following the month during which the dividends tax must have been paid.

Currently there are no percentage-based penalty in sec 213 of the Tax Administration Act (No. 28 of 2011) or late payment penalty in terms of a tax Act applicable to dividends tax.

3. Can the individual companies in a group qualify for the small business corporation tax regime?

Q:  In the light of the criteria for any company to be considered a Small-Medium Enterprise in terms of the Income Tax Act, would a holding company be considered to be a Small-Medium Enterprise if the holding company’s shareholders held only the shares in the holding company and none in any other company? Would the subsidiary be considered to be a Small-Medium Enterprise if the holding company held no other shares than those of the subsidiary?

A: For purposes of this guidance it is assumed that the holding company is a ‘resident’ as defined in sec 1 of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) and that the holding company is a ‘private company’ as defined in sec 1 of the Companies Act (No. 71 of 2008). A ‘small business corporation’ is defined in sec 12E(4)(a) of the Act, which definition may contain stumbling blocks in your specific situation.

1. May the holding company qualify as a ‘small business corporation’

 The definition of a ‘small business corporation’ in sec 12E(4) of the Act requires that the shareholders of the company must at all times during the year of assessment be natural persons. As to your first question, without considering the rest of the criteria of the definition of ‘small business corporation’, should all of the shareholders of the holding company be natural persons, then the holding company may qualify as a small business corporation provided that all other requirements of the said definition are met.

However, despite the above, sec 12E(4)(ii) requires that the shareholders do not hold ‘... any shares or has any interest in the equity of any other company as defined in section 1, other than ...’. This requirement can be interpreted on two ways and the problem comes in when one attempts to determine if this requirement will capture the indirect shareholding that the shareholders hold through the holding company in the subsidiary which may exclude the holding company from qualifying as a small business corporation. 

The first interpretation that one can follow here is that this phrase only refers to direct shareholding as sec 12E(4)(a)(iii) of the Act would exclude the holding company from qualifying as a small business corporation should the dividends it receive exceed 20 per cent of its total receipts and accruals. Further to this argument, throughout the Act, where one needs to take indirect shareholding into account, specific mention is made to ‘directly or indirectly’ (ie the definition of a CFC in sec 9D), which is not present in the above phrase. Following this interpretation, one can attempt to argue that the phrase ‘any interest in the equity of any other company as defined in section 1’ was inserted to ensure that should the shareholders hold interests in any entities other than companies, for example a members interest in a close corporation, that in such an instance the company would also be disqualified from the SBC regime.

The alternative interpretation would be to interpret the phrase to include indirect shareholding and in such a case, the company may be disqualified, should the shareholding in the subsidiary not be permissible in terms of sec 12E(4)(a)(ii)(aa) to (hh).

Should you have chosen the first interpretation, sec 12E(4)(a)(iii) of the Act may still disqualify the holding company which requires that not more than 20 per cent of the total receipts and accruals (excluding receipts and accruals of a capital nature) and capital gains of the company may collectively consist out of ‘investment income’ and income from rendering a ‘personal service’. This subparagraph may therefore disqualify the holding company from qualifying as a small business corporation as ‘investment income’ as defined in sec 12E(4)(c) includes a dividend (of which there may be plenty if the subsidiary’s trading operations did well when compared to the holding company’s operations). You would therefore have to consider whether more than 20 per cent of the holding company’s receipts and accruals would consist out of the above (please refer to the definition of ‘investment income’ in sec 12E(4)(c)  and ‘personal service’ in sec 12E(4)(d) for this determination) – if that is the case, then the holding company will be disqualified from the SBC regime.

2. May the subsidiary qualify as a small business corporation?

The Act does not treat a subsidiary different than any other company in that it is taxed in its own capacity as a separate taxpayer. The determination as to whether the subsidiary would qualify for the SBC regime must therefore be done separately from the holding company. As stated above, sec 12E(4)(a) requires that all of the shareholders of the company must be natural persons. With the subsidiary, the majority or even sole shareholder is not a natural person (it is the holding company).



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