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FAQ - 24 June 2014

Tuesday, 24 June 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Registration as an exporter and exported services for VAT purposes

Q: Recently I obtained a client situated in Northern Ireland. The accounting work is emailed to our offices (in SA), where the work is processed and the financial information (the result) is emailed back to the client. The client wants to pay into a PayPal account (which I have opened).

Do I need to register as an importer? All relevant information I can find deals about goods that is ex- and/or imported, will the service I render be regarded as goods or is it exempt?

What documentation should I retain other than the invoice made out in Pounds and converted to ZAR as per S A Reserve Bank rates?           

Please advise me regarding this matter, as I do not want to contravene any SARS Acts. I am familiar with the SA Reserve Bank regarding the administration of the PayPal account.  

A: The issue is whether it is a service that is being supplied or goods.  In terms of section 1(1) of the Value-added Tax Act ‘goods’ means ‘corporeal movable things… ‘ and we agree that the client is essentially supplying a service.  We submit that you are in fact not exporting goods, but in essence rendering a service to the recipient.  As such you need not be registered as an exporter of record. 

You mention that the services are rendered to a client situated in Northern Ireland, but don’t indicate whether or not this client is a resident of the RSA or carries on an enterprise or other activity from a fixed or permanent place in the RSA.  Services physically rendered in the RSA to a person who is not a resident of the RSA can only be zero-rated if section 11(2)(l) applies and the required documents to prove this was obtained (section 11(3)). 

If we accept that services are not supplied directly in connection with land or any improvement thereto situated inside the RSA, there are two issues which must be considered.

The recipient must be "a person who is not a resident of the Republic” (RSA).  This is a defined concept and basically requires that the company must not carry on in the RSA any enterprise or other activity and from a fixed or permanent place in the RSA relating to such enterprise or other activity.  Our guidance assumes that the client situated in Northern Ireland is not a resident of and does not carry on an activity in the RSA.  If this assumption is not correct the guidance may not be appropriate. 

The second issue then is that the said person (the non-resident) or any other person must not be in the RSA at the time the services are rendered.  In this instance the a client situated in Northern Ireland must NOT be present in the RSA at the time the services are rendered (section 11(2)(l)(iii)) for the rate of zero per cent to apply.  If the non-resident is present in the RSA at the time, the service will be standard rated (section 7(1)(a)). 

Please refer to VAT Interpretation Note 31 (Issue 3) regarding the documents that are required in order to substantiate the entitlement to apply VAT at a zero rate.

2. UIF on incentive bonuses

Q: My client has been retired in October 2012, and received an Incentive Bonus in June 2013. Must UIF be deducted from the incentive bonus?

A: In terms of section 4 the Unemployment Insurance Contributions Act, 2002, the Act applies to all employers and employees.  None of the exclusions in section 4 deals with your example.  Section 5 of the Act, in addition, also refers to every employer and employee – see also section 8.  The Notice issued by the Minister (determination of limit on amount of remuneration for purposes of determination of contribution) also refers to "... an employer to an employee ...”

We submit that the contributions must be made in all instances where there is an employer and an employee.  An employee is a defined term (in the UIF Act) and must be read with remuneration in the Act – see below. 

"employee" means any natural person who receives any remuneration or to whom any remuneration accrues in respect of services rendered or to be rendered by that person, but excludes an independent contractor

"remuneration" means "remuneration" as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, but does not include any amount paid or payable to an employee-

(a) by way of any pension, superannuation allowance or retiring allowance;

(b) which constitutes an amount contemplated in paragraphs (a), (cA), (d), (e) or (eA) of the definition of "gross income" in section 1 of the Income Tax Act; or

(c) by way of commission;

The word "remuneration" as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, includes a bonus. 

From the above we submit that the client will have to deduct the unemployment insurance contributions.  This is not influenced by the fact that it is an incentive bonus. 

3. Apportionment of expenses in a trust

Q: We require some assistance with the tax consequences relating to the taxable income of a discretionary trust. The trust earns local interest, local dividends, foreign dividends and capital profit/gains. The trust incurs costs in the form of accounting fees, administration fees and portfolio management fees. We have prepared a tax calculation, using the conduit principal and allocated certain costs to these income categories based on a pro-rata basis (based on income).

The questions are as follows: 

  1. Is the allocation of expenses incurred on a pro-rata basis, based on percentage of revenue acceptable?
  2. Would the expenses incurred be allowed as a deduction against the revenue?
  3. What effect would the above have on the capital gain that is distributed to the beneficiary? Would the operating expenses be deducted and the beneficiary taxed on the net gain, or is the beneficiary taxed on the gross gain before operating expenses?
  4. Are no expenses deductible from foreign dividends revenue, even though they are incurred?
  5. How does the dividends withholding tax from dividends affect the workings, is the net distributed or does the Trust issue a distribution certificate reflecting the total or gross dividend as well as the dividend withholding tax?

A: Our guidance assumes that the expenses can’t be directly attributed to the income items and hence the need to apportion the expenses.  We also need to comment on the "conduit principle” that you refer to.  We accept that you refer to the principle in section 25B or paragraph 80(2) of the Eighth Schedule.  From the facts it appears that the income

The Income Tax Act does not prescribe how the apportionment must be done.  The issue of the apportionment of expenses was considered recently by the Supreme Court of Appeal – CSARS v Mobile Telephone Networks Holdings (Pty) Ltd.  Judge Ponnan commented as follows:

"Where - as here - expenditure is laid out for a dual or mixed purpose the courts in South Africa and in other countries, have, in principle, approved of an apportionment of such expenditure…”

"Over time, the courts have applied various formulae to achieve a fair apportionment.”

"Apportionment is essentially a question of fact depending upon the particular circumstances of each case (Local Investment Co v Commissioner of Taxes (SR) 22 SATC 4). As Beadle J put it in Local Investment Co (at II):

"It does not seem possible to me to lay down any general rules as to how the apportionment should be made, other than saying that the apportionment must be fair and reasonable, having regard to all the circumstances of the case. For example, in one case an apportionment based on the proportion which the different types of income bear to the total income might be proper, as was done in the Rand Selections Corporation’s case, supra. In another case, however, such an apportionment might be grossly unfair;” 

It seems that SARS favours the apportionment on the basis of gross income – they argued that in the MTN case.  See also Interpretation note 64 where they state (in paragraph 7.2) that "general expenditure must be allocated to the various sources of income on a logical, fair and reasonable basis. For example, depending on the facts it may be acceptable to allocate the general expenses pro rata by applying the ratio that a particular source of receipts and accruals bears to the total receipts and accruals derived by the entity.” 

We will first deal with the issue of whether deductions can be made from the amount of the dividends.  The dividends (you refer to them as "local dividends”) will be exempt from tax and therefore will not be income.  Any expenses directly attributed to the earning of the dividends or apportioned to it can therefore not be deducted – refer to section 23(f) of the Income Tax Act. 

Foreign dividends, if not exempt in terms of section 10B(2), will be partially exempt in terms of section 10B(3).  In must be noted that section 23(q) prohibits the deduction of any expenditure incurred in the production of income in the form of foreign dividends.

The general principal (section 11(a)) is that deductions can only made if a trade is carried on.  It is unlikely that a trade is being carried on if the dividends are derived from a passive investment of funds.  The same principal applies with respect to the interest.  If no trade is being carried on no deduction is then possible – see also section 23(g).  It is therefore possible that none of the "accounting fees, administration fees and portfolio management fees” will qualify to be deducted by the trust. 

The portfolio management fees will also not be added to base cost (for capital gain purposes) – refer to paragraph 20(1)(g) of the Eighth Schedule.  SARS explains it as follows in their CGT guide:

"A monthly management fee paid to a portfolio manager will not qualify under this item, since a listed share or interest in a collective investment scheme cannot be ‘maintained’ or ‘protected’.” 

When the trustees vest the capital gain (in the year of disposal and in an RSA resident beneficiary) the capital gain is taken into account for the purpose of calculating the aggregate capital gain or aggregate capital loss of the beneficiary in whom the gain vests – refer to paragraph 80(2) of the Eighth Schedule.  The beneficiary will not be able to make any deductions against this gain.

The trustees will not be able to distribute more than the net amount of the dividend as they receipt by the trust is the net amount.  The principle though is that the gross amount accrues to the beneficial owner (probably the trust in this case).  The trustees then, when they decide to vest the dividend, will be vesting the gross dividend.  The beneficiary will not have to pay the dividends tax on the basis that the tax has been paid by another person – see section 64K(1) of the Income Tax Act.  We agree that the trust must issue a document indicating this.  



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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