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FAQ - 28 February 2018

Wednesday, 28 February 2018   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. How do I treat input VAT on the purchase of a business vehicle?

Q: The business bought a vehicle on an instalment sale agreement. Company paid a deposit for this vehicle. Output VAT was charged on the instalment sale on the total price of the vehicle. How much input VAT do I claim - on the deposit paid or the full amount?

A: Background

  1. A business bought a vehicle on an instalment sale agreement. The business paid a deposit for this vehicle. Output VAT was charged on the instalment sale on the total price of the vehicle.

Question

  1. How much input VAT may be claim - on the full amount or only on the deposit paid?

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 or services made to the vendor during a tax period.
  2.  Section 16(2)(a) of the VAT Act determines that no deduction of input tax in respect of a supply of goods or services may be made unless a tax invoice in relation to the supply has been provided in accordance with section 20 of the VAT Act, and is held by the vendor making the deduction at the time that the VAT return in respect of that supply is furnished.
  3. Section 9(3)(c) of the VAT Act determines that where goods are supplied under an instalment credit agreement, the supply is deemed to be made at the time that the goods are delivered or the time that any payment of the consideration for the supply is received, whichever event takes place first.
  4. Section 17(2)(c) of the VAT Act denies an input tax deduction in respect of the supply of a motor car to a vendor.
  5. “Motor car” is defined in section 1(1) of the VAT Act as a motor car, station wagon, minibus, double cab light delivery vehicle and any other motor vehicle of a kind normally used on public roads, which has three or more wheels and is constructed or converted wholly or mainly for the carriage of passengers. The definition excludes certain categories of vehicles not relevant for this discussion.

Application of the principles

  1. If the vehicle is a motor car as defined in section 1(1) of the VAT Act no input tax deduction may be claimed.
  2.  If the vehicle is not a motor car as defined in section 1(1) of the VAT Act, a full input tax deduction may be claimed in the tax period that the time of supply occurs (i.e. the earlier of delivery of the goods or the receipt/payment of any part of the consideration for the supply).  To make the claim the company must be in possession of a tax invoice on the date that the VAT return in which the claim is made, is submitted.
  3. The above rules apply irrespective of the basis on which the VAT vendor accounts for output tax (i.e. the invoice or payments basis).

2. Is the cost price of an inherited property taken at value of property when inherited or is it zero as tax?

Q: A client has recently sold a property. This property was inherited by late mother, the property was rented out since owned. I am completing the CGT calculation & client has advised that i would take R300 000 as the value to deduct off profit of R500000. Therefore taxable CGT profit would be R200000. Would this be the correct treatment?

A: We don’t know when, before or after 1 October 2001, the asset was acquired by the late mother.  The principle is that, in terms of paragraph 67 of the Eighth Schedule to the Income Tax Act (read with paragraph 40) if the property was acquired from the first-dying spouse, the surviving spouse must use the base cost of the deceased spouse for the calculation of the gain.  There is no step up of the cost in this instance. 

If the base cost cannot be determined the taxpayer may well have to take it as being nil.  The market value at date of death can only be used if the asset was acquired by inheritance, from someone other than a spouse. 

SARS addresses this issue with respect to assets acquired before 1 October 2001 in paragraph 16.1.2.1 of the CGT guide.  It reads as follows:

“An executor will have to select a valuation method if the deceased held pre-valuation date assets at the date of death. Should the deceased have failed to determine the market value of an asset during the three years ending 30 September 2004, the executor will have to resort to either the time-apportionment method (if a record of pre-valuation date expenditure exists) or the ‘20% of proceeds’ method. Taxpayers should keep records of costs and valuations performed in order to enable their executors to properly determine capital gains and losses. In the case of South African-listed shares, participatory interests in portfolios of collective investment schemes, and gold or platinum coins, the executor will be bound by whatever asset identification method was adopted under para 32 by the deceased (specific identification, FIFO or weighted average).”

And also in 16.1.4

“An heir who acquires an asset from a pre-valuation date estate on or after the valuation date, acquires the asset at the base cost of the estate. As noted earlier, under these circumstances the executor will be regarded as having acquired the assets for an expenditure of nil, and unless that executor determined a market value before 30 September 2004 (for assets whose prices were not published in the Gazette), the heir may be faced with the prospect of taking over a nil base cost or, if the executor has incurred some post-valuation date expenditure, a low base cost from the estate.” 

3. Does one need to charge interest under section 7C on loans to beneficiaries when the money has not been paid out?

Q: Discretionary trust exist and distributes profits to connected beneficiaries. No interest is being charged on loans. No monies have been paid out. All beneficiaries have declared such monies (not yet received) in their tax returns.

A: It is submitted that the trustees can’t unilaterally decide to hold what was vested back - surely there must be some agreement between the trustees and beneficiaries in this regard.  That agreement would determine if it is a loan, advance or credit and would also be critical to determine whether section 7C(5)(b) applies. 

The next consideration, but also relevant to the previous point, is the word ‘provides’ that is used in section 7C – the specific words that are use are that this “section applies in respect of any loan, advance or credit that —

(a) a natural person; or

(b) at the instance of that person, a company in relation to which that person is a connected person in terms of paragraph (d) (iv) of the definition of connected person,

directly or indirectly provides to…” 

The ordinary meaning of the word ‘provide’ in English, and when used as a verb with an object, is to “make available for use; supply” - https://en.oxforddictionaries.com/definition/provide.  That again may require some agreement between the person providing the credit and the trustees of the trust.  But the important part is that it requires that the amount be made available to the trust.  The point then is that, if the amount was (for example) merely credited to an account after vesting, but before year end, and payment to the beneficiary was only made in the next year, it can hardly be said that the beneficiary provided a credit to the trust. 

We submit that the wording in section 7C(5)(b)(iii) is problematic and it is not only the use of the word ‘beneficiaries’ there (and earlier in section 7C) that makes it difficult to interpret this item.  This is specific with reference to “the beneficiaries of that trust hold, in aggregate, a vested interest in all the receipts and accruals and assets of that trust” and “none of the vested interests held by the beneficiaries of that trust is subject to a discretionary power conferred on any person in terms of which that interest can be varied or revoked”. 

The Explanatory Memorandum provides the following explanation:

“Loans by trust beneficiaries to vesting trusts that comply with the requirements listed in subsection (5)(b) will be excluded from the proposed rules. The vested interest of a beneficiary in the assets and receipts or accruals of such a trust will form part of that beneficiary’s estate during his or her life and upon death or when ceasing to be a resident. The interest that remains subject to normal tax as well as estate duty represents, in effect, a fixed stake in the assets disposed of to or acquired by that trust and in the gains made by that trust. An interest-free or a low-interest loan made to that trust by a beneficiary should therefore not result in estate duty avoidance if that beneficiary’s vested stake in the trust assets is proportionate to that beneficiary’s contributions, including that loan, to that trust.”

It also refers to trust assets.  The point is that, for section 7C(5)(b) to apply, it is required that it must relate to “all the receipts and accruals and assets of that trust” – see 7C(5)(b)(i).  Section 7C(5)(b)(iii) then adds that “the vested interest of each beneficiary of that trust is (must be) determined solely with reference and in proportion to the assets, services or funding contributed by that beneficiary to that trust”.  This seems to exclude the argument that the amounts vested, but not paid out, will fall within section 7C(5)(b) if the trust still has other assets or receipts and accruals that are still under the discretion of the trustees.  

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.


 

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