training...–no input vat nor output vat consequences. • remember to look out for the exclusions...

Training

COTE TAX PRACTIONER EXAMS

VAT

• Indirect Tax

Tax periods s27A Taxable supplies ≤ R30 000 000

Farmers > R1 500 000

2 monthly Jan, March, May…

B Taxable supplies ≤ R30 000 000

Farmers > R1 500 000

2 monthly Feb, April, June…

C Taxable supplies > R30 000 000

Or specific application

1 monthly

D Farmers ≤ R1 500 000 or a vendor that is a registered micro

business

Bi-annually February, August

E Annually – last day of YOA

F Taxable supplies ≤ R1 500 000 AND specific application

4 monthly June, October, February – Deleted from 1 July 2015

“Enterprise” s1Any enterprise or activity

carried on continuously or regularly

• Ongoing

• Business owner selling private home?

in South Africa or partly in South Africa

by any person

in the course or furtherance of which

goods or services are supplied for a consideration

whether for profit or not

“Enterprise” s1

Specifically includes:• Anything done in connection with the commencement or

termination of an enterprise• The activities of a welfare organisation and foreign donor funded

project.• The supply of electronic services by a person from a place in an

export country is specifically included in the definition of anenterprise. This specific inclusion applies where at least two of thefollowing circumstances are present, namely – the electronicservices are supplied to a South African resident, or – any paymentfor such services is made from a South African Bank, or – theelectronic services are supplied to a person with a business address,residential address or postal address in South Africa where a taxinvoice will be delivered.

“Enterprise” s1

Specifically excludes:• The supply of services by an employee to his employer

(salaries & wages)• A hobby• An exempt supply• Commercial accommodation not exceeding R60 000 for a

period of 12 months ( from 1 April 2016 – R120 000)• Certain supplies made by branches or main businesses

situated outside South Africa – eg. Foreign Bank in US –head office has a branch in Sandton – branch in Sandton –all supplies of the SA branch will be part of an enterprisehowever, supplies of head office outside SA will beexcluded from the definition of enterprise.

VAT Admin

• Must be submitted and payment made within 25 days after the end of tax period.

• If 25th falls on Saturday or Sunday or public holiday – then last business day before 25th

• If e-filing – submit and make payment on last business day after the end of tax period as opposed to 25th

Timing of a supply s9(1)

General rule :

Earlier of

Invoicing; or

Receipt of payment

Deposit deemed to be consideration (i.e. reduce liability)

OR Deposit that will be forfeited

Value of a supply s10(3)

General rule

• Value of supply = Rand value –excludes VAT

If consideration = money

• Value of supply = Open market value – includes VAT

If consideration ≠ money

SECTION 20

• WHERE THE SUPPLY EXCEEDS R5000, certain information must appear on the tax invoice and must be reflected in South African currency. S20(4). T

• The words ‘tax invoice’ in a prominent place

• The name, address and VAT registration number of the supplier

• The name, address and VAT registration number (if the recipient is a vendor) of the recipient

• an individual serialised number and the date on which the tax invoice is issued

• a full and proper description of the goods or services supplied (including an indication that the goods are second-hand, if that is the case)

• the quantity or volume of the goods or services supplied

• either

• – the value of the supply, the amount of VAT charged and the consideration for the supply, or

– where the amount of VAT charged is calculated by applying the tax fraction to the consideration, the consideration for the supply and either the VAT charged or a statement that it includes a charge for VAT and the rate at which the VAT was charged.

SECTION 20

• WHERE THE SUPPLY DOES NOT EXCEED R5000, an abridged tax invoice may be issued.

• This abridged tax invoice should contain only the following particulars:• the words ‘tax invoice’, ‘VAT invoice’ or invoice in a prominent place• the name, address and VAT registration number of the supplier• an individual serialised number and the date on which the tax invoice is

issued• a description of the goods or services supplied (including an indication

that the goods are second- hand, if that is the case)• either– the value of the supply, the amount of VAT levied and the consideration

paid for the supply, or– where the amount of VAT charged is calculated by applying the tax fraction

to the consideration, the consideration for the supply and the VAT charged or a statement that it includes a charge for VAT and the rate at which the VAT was charged.

– Output VAT is levied, Input VAT is claimed.

– If an item is inclusive of VAT, 14/114 is used to calculate the amount of VAT on that item.

– If an item is exclusive of VAT, 14% is used to calculate the amount of VAT on that item.

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• References:– Section 23 to section 25 of the Act

• Compulsory vs. Voluntary registration• See slides at the end for changes effective from 1 April 2014

– Depends on value (exclusive of VAT) of taxable supplies.

• Separate branches may register as separate VAT vendors if:– Maintain independent accounting records– Separately identified:

• Nature of activities or• Geographic location

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• Taxable Supplies:

– Standard Rated

– Zero Rated

NB Certain deemed supplies

• Exempt Supplies – non taxable supply

• Denied Supplies – input is denied

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• The supply of goods (seed, feed, fertiliser, etc.) and services for use for agricultural or other

farming purposes

• The supply of gold coins, such as Kruger Rands, which are issued by the Reserve Bank

• Certain basic foodstuffs; for example, brown bread, maize meal, samp, mealie rice, rice, pilchards, milk and milk powder, fresh fruit and vegetables (including mealies, but excluding popcorn), vegetable oil (excluding olive oil), eggs and lentils Dehydrated, dried, canned or bottled fruit and nuts would not qualify for the zero-rating.

• The supply of fuel levy goods (for example, petrol and diesel, including biofuels) and certain

crude oil products used in the production of such goods .

• Illuminating kerosene (paraffin) marked as intended for use as fuel for illuminating or heating, and not mixed or blended with another substance

• Certain goods supplied to a customs-controlled area enterprise or Industrial Development Zone operator in a customs-controlled area

• Goods supplied by a vendor to a foreign company,

– but delivered to a registered vendor (the recipient) in South Africa, and

– used by the recipient wholly for the purposes of making taxable supplies

• The supply of controlled animals or things by a vendor to a public authority, whereby the vendor receives compensation in terms of s 19 of the Animal Diseases Act 35 of 1984

• Certain fixed property supplied is zero-rated, if it is supplied to

• – the Cabinet member responsible for land reform or

• – any person to the extent that the consideration is subsidised in terms of the Provision of Land and Assistance Act, 1993 (Act 126 of 1993)

• Services supplied directly in connection with land or any improvements to land or movable goods, where the land or movable goods are situated in an export country

• The charging of municipal rates (property rates and taxes) by a municipality

• The zero-rating of municipal rates is, however, not applicable where such rate is

• – a flat rate charged to the owner of the rateable property for rates and other goods and services (such as supplies of electricity, gas, water, drainage, disposal of sewage and garbage), or

• – a flat rate charged to any person exclusively for the supply of the other goods and services as mentioned above,

• and such flat rate will be taxed at the standard VAT rate of 14%.

• Services relating to intellectual property rights (including patents, designs, trade marks, copyrights,know-how, confidential information, trade secrets or similar rights) and the acceptance of an obligation to refrain from pursuing or exercising any such rights to the extent that the intellectual property rights are for use outside South Africa

• Services comprising vocational training of employees for an employer who is not a resident and a vendor

Sale of a going concern s11(1)(e) and 18A – Zero Rated

Seller = vendor

Purchaser = vendor

Agreement in writing

Enterprise = going concern

Supply of an enterprise

Exports

Goods

Direct:

Documentary evidence to zero rate

Indirect:

Can be zero or standard rated

Services

Performed for non-residentoutside RSA

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Exports

Exported Services - Transportation• The rendering of a transport service to passengers or

goods is zero-rated, according to s 11(2)(a), if transported from

• a place outside South Africa to another place outside South Africa, or

• a place in South Africa to a place in an export country, or

• a place in an export country to a place in South Africa. Any services comprising the insuring or arranging of insurance for any of the above passengers will also be zero-rated (s 11(2)(d)).

Exports

Exported Services – Ancillary services to exported good

• Where goods are exported and additional services are supplied, the additional services, such as the transport and insurance of goods, will also be zero-rated if supplied to a non-resident that is not a vendor (s 11(2)(e)).

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Zero-rated supplies are taxable supplies on which VAT is levied at a rate of 0%.

Certain basic foodstuffs are zero-rated, provided it is not supplied for immediate

consumption (that is, as a meal or refreshment) or added to a standard-rated supply. These include the following:

• brown bread

• dried mealies and mealie rice

• brown bread flour (excluding wheaten bran)

• samp

• hens eggs (that is, not from ostriches, ducks etc.)

• vegetables and fresh fruit

• dried beans

• lentils

• maize meal

• rice

• pilchards in tins or cans

• vegetable cooking oil (excluding olive oil)

• milk, cultured milk, milk powder and dairy powder blend

• edible legumes and pulses of leguminous plants (that is, peas, beans, peanuts etc.)

Webinar:

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The zero rate will not apply where –

Zero-rated foodstuffs are prepared for immediate consumption, for example –

- a glass of milk served in a restaurant;

- a pre-packed salad with salad dressing purchased at a supermarket;

- sandwiches and other take-away foods.

- A standard rated product or ingredient is supplied together with a zero-rated foodstuff,

for example –

- a punnet of vegetables seasoned with herbs and including a stick of butter;

- a pack of rice or beans containing a sachet of flavouring;

- a gift hamper consisting of a basket of fruit with chocolates and nuts;

- peri-peri flavoured cooking oil

Webinar:

• This is a NON TAXABLE supply, therefore:– NO Input VAT nor Output VAT consequences.

• Remember to look out for the exclusions applicable to each exempt supply ie.:– Fee based financial services eg, transfer of shares, loans,

interest, funds – bank charges not exempt, standard rated– Property developers (residential property)

• If a supply is EXCLUDED from being an exempt supply, it becomes a taxable supply.

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• Residential Accommodation

• - The supply of donated goods and services by an association not for gain is exempt. The exemption also applies if the goods being supplied were made or manufactured by the association, provided that at least 80% of the value of the materials used consists of donated goods.

• Other• The letting of leasehold land to the extent that it is used for

accommodation in a dwelling erected or to be erected on that land• The sale or letting of land situated outside South Africa • The supply of services by a• – body corporate• – share block company, or• – housing development scheme• where the costs of supplying such services are met out of the levies

charged by them are also exempt supplies (s 12(f)). As from 1 April 2014 services by home-owners associations could also qualify for this exemption. Although provision is made for these supplies to be exempt, these persons can, however, apply to SARS for the levies to be taxable or partly taxable. This exemption is not applicable to the supply of services in connection with the management of a property timesharingScheme.

• Other• The transport of fare-paying passengers (in a bus or taxi, but not a

game-viewing vehicle) and their personal effects by road or railway, unless the service is subject to VAT at the zero rate

• (s 12(g)), provided that the transport is• – only by road and railway, but excluding a funicular railway (thus it

is not applicable to air tickets) Local air travel is standard and overseas is zero rated

• – not for the purpose of courier services, since the exemption applies to the transport of passengers and their personal effects, and not to goods, therefore goods by road or rail is standard or

• – for fare-paying passengers (thus a supply of transport services by a hotel to and from the airport will not be an exempt supply if the residents of the hotel are not charged separately for

such service).

• Other• The supply of qualifying educational services by the State, a school, a public higher education

institution or certain institutions in South Africa that meet the definition of a public benefit organisation in s 30(1) of the Income Tax Act is an exempt supply . The exemption is not applicable to technical training provided by an employer to his employees or employees of an employer who are connected persons in relation to that employer.

• The supply by a school, university, technikon or college, solely or mainly for the benefit of its learners, of goods or services (including domestic goods or services) for a consideration in the form of school fees, tuition fees or payment for board and lodging, is exempt

• Membership contributions to employee organisations, such as trade unions, are exempt • The supply of childcare services by a crèche or an after-school care centre are also exempt• All supplies of goods or services by a bargaining council to any of its members to the extent that

the consideration for such supply consists of membership contributions• All supplies of goods or services by a political party to any of its members to the extent that the

consideration for such supply consists of membership contributions

• Denied ito of INPUT VAT, therefore:If there are no Input VAT consequences, there can be no Output VAT consequences

• Acquisition of a motor car:– Motor car as defined– Denied ito ACQUISITION only ie. ancillary costs are not denied.

• Entertainment:– Entertainment as defined– There are many exclusions to the definition meaning that if a supply falls into an exclusion, it

will have VAT consequences – please read exclusions– 2014 changes– 1 April 2014 Amendment, vendors operating taxable transport services who supply

entertainment to passengers and crew as part of those services(reworded).

• Club Subscriptions:– Sport, social and recreational clubs only.– Professional bodies and trade organisations are not denied. Trade unions are exempt

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DENIAL OF INPUT TAX

The VAT Act provides that input tax is denied on certain expenses even if the expenses

are incurred in the course of conducting an enterprise. These include –

• goods or services acquired for purposes of entertainment;

• membership fees or subscriptions of clubs, associations or societies of a sporting, social

or recreational nature;

• the acquisition of a motor car by a vendor (who is not a motor car dealer or car rental

enterprise); and

• goods or services acquired by medical schemes or benefit funds for the purposes of

health insurance or benefit cover.

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“entertainment”

As defined in section 1 of the VAT Act

means the provision of any food, beverages, accommodation, entertainment,

amusement, recreation or hospitality of any kind by a vendor whether directly or

indirectly to anyone in connection with an enterprise carried on by him;

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Club subscriptions of a recreational nature

Input tax may not be deducted on VAT paid in respect of any membership fees to

sporting, recreational and private clubs.

For example, membership of a country club, soccer supporters club, amateur boxing

club, holiday club, tea club, stokvel savings club etc.

However, the VAT incurred on subscriptions to magazines and trade journals which

are related in a direct manner to the nature of the enterprise carried on by the vendor

may be deducted as input tax.

Webinar:

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VAT on membership fees paid to a professional body such as SAIPA

The VAT on any fees or subscriptions to professional organisations paid by a vendor

on behalf of its employees, may be deducted as input tax.

Trade union subscriptions - exempt

Webinar:

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Motor cars

The term “motor car” is defined in the VAT Act and includes vehicles which –

• have three or more wheels;

• are normally used on public roads; and

• are constructed or converted mainly or wholly for carrying passengers.

As a general rule, an input tax deduction may not be made by a vendor if a vehicle

falling within the definition of a “motor car” is acquired, even if it is used in the course

of making taxable supplies and regardless of the mode of acquisition. For example,

the motor car could be acquired by way of outright purchase, importation, ICA,

operating rental agreement or casual hire.

Webinar: Professional Tax Technician (SA)

• Deemed for Output VAT purposes.

• Taxable supply therefore must provide:– Time of supply and

– Value of supply

• Supply is deemed to have taken place therefore it is deemed to be inclusive of VAT:

14/114 is used to calculate Output VAT

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Fringe Benefits

• To constitute a deemed supply:

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Employer –Employee relationship

Listed Seventh Schedule fringe benefit

Taxable supply for VAT purposes

• Time of Supply: End of the month of the receipt of the cash equivalent of the benefit (section 9 (7)).

• Value of Supply: 14/114 x Seventh Schedule fringe benefit value except for right of use of a motor vehicle x extent of taxable supplies.

• Motor Vehicle as defined is a denied supply (not taxable) but right of use of a motor vehicle is specifically provided for in the VAT act as a deemed supply for fringe benefit purposes.

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• Motor Vehicle Fringe Benefit Value of Supply:1. Determined value always EXCLUDING VAT (reduced by

15% for each 12 month period held by employer before right of use was granted.

2. Multiply by:0.3% if Input VAT was denied or0.6% if Input VAT was not denied

3. Less R85 if employee bears full cost of maintenance4. Multiply by number of applicable months5. Multiply by tax fraction (14/114)6. Apportion to extent of taxable supplies.

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• In summary, fringe benefits that are subject to Output VAT (only taxable supplies)- assuming employer registered VAT vendor:

– Sale of asset below market value– Right of use of assets (excluding entertainment)– Right of use of motor vehicle– Free/cheap services– Release by employer of employees debt to the employer –

where owing for trading stockNB – If Fringe benefit relates to exempt, zero rated or supply of

entertainment there is no deemed supply and thus no output VAT is payable on the fringe benefit

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Indemnity Payments• Deemed Supply per s 8 (8) if:

– Ito contract of insurance– Loss incurred in course/ furtherance of enterprise– Loss in relation to taxable supply– Relates to Short term policy– And not long term policy( exempt – financial service)

• No deemed supply per s 8 (8) if:– Goods constituted a non-taxable supply; or – Total reinstatement (stolen or damaged beyond economic repair )of denied supply- motor car or goods

relating to entertainment)– Repairs to motor car - Input was denied at acquisition AND must be damaged beyond economic repair or

theft– But even though input was denied , it was not damaged beyond economic repair or stolen – therefore

deemed supply

• Value of supply: 14/114 x Consideration received x Extent of taxable supplies

• Time of supply: Date of receipt of payment

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• As long as the indemnity payment is made ito the insured’s contract of insurance, there will be a deemed supply for the insured himself at 14/114:

• If the insured pays the third party – This is a payment ito a contract of insurance therefore there is a deemed supply –amount received including VAT – 14/114

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Insurer Pays Insured

Insurer PaysThird Party

Cessation of Business• When a person ceases to be a vendor, there is

deemed to be a supply of all the items in the business on which the vendor originally claimed Input Vat on.

• Time of Supply: Immediately before ceasing to be a vendor (section 9 (5))

• Value of Supply: 14/114 x lower of cost and market value (section 10 (5))

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Excessive Payments• Vendor receives payment in excess of debtor’s debt:

– Initially, no VAT consequences (supply of money)– If not refunded within 4 months = deemed supply

– Time of Supply: End of the Vat period in which the 4 months ends

– Value of Supply: 14/114 x excess portion of the payment

• If eventually refunded by the vendor:– Vendor can claim Input VAT on the amount

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Rental Agreements

ICAs

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• The second hand goods rule is a rule relating to the amount of notional Input VAT claimable on a purchase of second hand goods as defined from a non-vendor.

• This rule applies to all second hand goods other than second hand fixed property.

• Remember: This is a notional Input VAT claim, as no amount was actually paid as the item was purchased from a non-vendor.

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• Requirements:

50

Previously owned and used

(s 1 definition)

Used to generate taxable

supplies

Seller = Resident Non Vendor

Goods located in RSA

No actual VATcharged

• No deemed input tax on second-hand goods is available if• the goods were acquired from a person on a diplomatic or consular

mission of a foreign country established in South Africa• that was granted a VAT refund as contemplated in s 68.• ‘Second-hand goods’ are defined in s 1 as• goods that were previously owned and used, or• in respect of the transfer of a unit (referred to in Item 8 of Schedule

1 to the Share Blocks Control• Act), such a unit, and• certain prospecting and mining rights.• Second-hand goods do not include animals, gold coins, gold and

goods containing gold.

• If requirements are met:– Time of Supply: To the extent of payment

– Value of Supply: 14/114 x Lower of cost and market value

• If a vendor exports a good on which notional Input VAT was originally claimed, there will be no zero-rating available to the extent that notional input was claimed.

• Remember: There are NO VAT consequences for a new goods bought from a non vendor and if second hand motor car or relates to entertainment- input is denied therefore still no notional input.

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Extracts from the Explanatory Memorandum to the VAT Act:

“ While the acquisition of gold and jewellery by VAT vendors from non-VAT vendors should allow for the deduction of notional input VAT, in practice this provision significantly contributes to creating an enabling environment to obtain fraudulent input tax deductions. Jewellery is smelted along with gold coins and illegally acquired raw gold.”

Explanatory memorandum to Bill

VAT Updates:

• Second hand goods

• Do not include animals and gold coins.

• Amendment –Second-hand goods made from precious metals (goods containing gold) is excluded from obtaining notional input

– Effective date: The amendment will come into operation on 1 April 2015.

Fixed Property

Non - Vendor

New

No VAT

2nd hand

Notional VAT

VendorNew + 2nd hand

Actual VAT

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• Fixed property from a vendor:– Value of supply: Consideration paid– Time of supply: Earlier of registration or any

payment made (s 9 (3) (d))– However to the extent of payment

• Fixed Property from a non vendor:– New: No VAT consequences– 2nd hand:

• Value of supply: 14/114 x Lower cost and market value• Time of supply: Earlier of registration or any payment made with

the pre-requisite of registration having taken place AND to the extent of payment (s 16 (3) (a) (ii) (bb) (A))

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• Where commercial accommodation is supplied with domestic goods and services at an all-inclusive charge for:– An unbroken period of greater than 28 days, then

– Consideration in money is deemed to be at 60% of the all-inclusive charge.

• Therefore, provided that the above requirements are met, Output VAT will be levied at only 60% of the all-inclusive charge.

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Importation of Goods

Output VAT levied

Done on a gross basis

Importation of Services

Output VAT levied

Done on a net basis

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• Output VAT levied on importation of any good by any person whether they are a vendor or non vendor (s 7 (1) (b)).

• Principle: – The price levied by the foreign seller excludes VAT as

they are not a registered VAT vendor.– Output VAT is therefore levied on the importation of

the good in order to equate the treatment of imports to that of the supply of local goods.

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• The importer is liable for the Output VAT levied.

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Imported via an agent

Agent calculates Output VAT

Output VAT not on importer’s Output VAT calc

Direct import

Importer calculates Output VAT

Output VAT does go on importer’s Output VAT calc

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Value of Supply

Non BLSN Country

Customs Duty Value

10% Customs Duty Value

Non Refundable taxes and

duties

BLSN County

Customs Duty Value

Non Refundable taxes and

duties

• Output VAT =Value of supply x 14%

• The Output VAT levied is a cost incurred on importing that good and therefore is added to the cost of that good.

• If the good is used in the production of taxable supplies:– Input VAT IS claimable to the extent of taxable supplies.– The cost of the good which includes Output VAT as calculated

above is therefore REDUCED by the value of Input VAT claimed.

• Cost + Output VAT paid – Input VAT claimed

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• Output VAT is levied on the supply of imported services as defined by any person, whether they are a vendor or a non vendor.

• Imported Services:‘..supply of services that is made by a supplier who is a

non resident or carries on business outside the Republic to a recipient who is a resident of the republic

to the extent that such services are utilized or consumed in the Republic otherwise than for the purpose of making taxable supplies – non taxable

supplies.’

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• Principle:– Output VAT is only levied when the services will be utilised

for non taxable purposes (thus meeting the definition of imported services).

Meaning:

Output VAT is only levied when it can NOT be claimed back.

– Services are only utilised for non taxable purposes when:• They are used by a non vendor.

• They are used by a vendor for non taxable purposes ie. in the production of exempt supplies.

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Therefore:

If Output VAT is only levied on imported services to the extent that they are utilised for non taxable purposes,

And

Input VAT is only claimable to the extent that the item is utilised in the production of taxable supplies

Then

No Input VAT is claimable on the importation of a service on which Output VAT has been levied.

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• The connected person provision per s 10 (4) is a rule affecting the value of supply.

• It applies to the seller - vendor only – therefore looking at Output VAT and not input VAT

• Principle:– Supply made for consideration less than market value and– Supplier and recipient are connected persons and– The buyer would not be able to claim a full Input VAT

deduction ie:• The buyer is a non vendor or• The buyer will not use the good in the production of 100% taxable

supplies

– Value of supply is deemed to be market value.

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Allocation of input VAT-s17

Per cost or asset

Taxable use

100%

General use

?%

Non-taxable use

0%

95% rule s17

• 95% or more supplies = taxable supplies

No apportionment, claim 100% input

Allocation of output VAT – s7(1)(a)

Per cost or asset

Taxable use

100%

General use

100%

Non-taxable use

100%

Adjustments to input and output VAT

- Output Tax – No apportionment – s8(16)

- Exceptions – Fringe Benefits and Indemnity Payments

Registration of E-commerce suppliers

• From 1 April 2014

• Foreign suppliers of electronic services, at the end of the month where the total value of taxable supplies made by that person has exceeded R50 000.

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Registration as a vendor

• Compulsory Registration• From 1 April 2014• A person is required to register:- at the end of the month which the total value of the

taxable supplies for the preceding 12 months exceeded R1 000 000

- If it is anticipated that the total value of the taxable supplies would exceed R1 million, if it exceeds this amount ito a written contractual agreement. Therefore the removal of the predictive element of the previous compulsory registration requirements

- E-commerce suppliers as per previous slide

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Registration as a vendor

• Voluntary Registration• From 1 April 2014• A person is may register:- if the value of the taxable supplies is more than R50 000 during a previous

12 month period- He is acquiring an enterprise of which the value of taxable supplies

exceeded R50 000 during the previous 12 months as a going concern- Total value of taxable supplies has not exceeded R50 000 but can

reasonably be expected to exceed that amount within 12 months from date of registration as a vendor – register on payments basis until value of taxable supplies exceeds R50 000

- If that person continuously and regularly carrying on activity listed in a regulation to be made by the Minister. The consequences of the nature of that activity are that it is likely to make taxable supplies.

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The Taxation of Retirement Benefits

1. What is a Lump sum vs. annuity?

2. Why do we have separate tax laws upon Retirement?

3. What are the different types of lump sums one can receive?

4. Value and form of Lump sums

5. Concept of cumulative tax

6. s10C exemption

Overview…

Employee can choose

Lump sum paid out once off

Second Schedule

Fixed amount, paid out

repetitively, ito a contract

Gross Income def par (a)

Lump sums vs. Annuity

Lump sums

Received

Lump Sums from an

Employer

Paragraph (c) or (cA)

Paragraph (d) or (f)

Lump sum from a Fund

Paragraph (e) and (eA)

Types of lump sums

• cA) ‘Restraint of Trade’ Received: Amounts received from an employer on termination of employment, to NOT undertake/ engage in certain occupation/ trade/ employment for a defined period of time.

• Although the amounts are capital in nature they will be taxed in Gross Income in terms of par (cA).

• The payment received is NOT a lump sum for these purposes of the second schedule and is taxed in full in the hands of the individual who received the restraint payment.

• par (d) or (f)- “ Severance Benefits”• Any voluntary reward or amount received or accrued for, in respect of:• the relinquishment, termination, loss, repudiation, cancellation or variation of any

office or employment of any appointment AND• The recipient has attained the age of 55 years OR• Employee suffers from ill heath, is incapable, or infirmity of holding office OR• Termination is due to:• Employer ceasing to carry out trade for which the taxpayer was employed for• Redundant (See later for additional checks!)

• IF above requirements are met then the amount received is TREATED AS A LUMP SUM FROM A FUND.

Lump sums from employer:

Lump sums from funds

Retirement lump sum

Retirement Death

Withdrawal lump sum

Resignation Withdrawal

Lump sums from funds

Type of event = NB

Paragraph (e) per Gross Income definition

Retirement fund lump sum benefit or Retirement fund lump sumwithdrawal benefit, other than included in par (eA) (Public SectorPension Funds)

“Retirement fund lump sum benefit”

• Refer to par 1, Second Schedule for full definition

• 5 types of Funds affected by Second schedule:1) Pensions Fund

2) Pension Preservation Fund

3) Provident Fund

4) Provident Preservation Fund

5) Retirement Annuity Fund

Lump Sums from Funds – paragraph (e) and (eA)

• Calculating the inclusion into gross income • Amount received from Fund Rxxx• Less deductions in terms of paragraph 5/6 (Rxxx)• Inclusion in Gross income Rxxx• PLEASE NOTE: Deductions in terms of paragraph 5/6 are limited to

the actual lump sum benefit received. The deductions can’t create a loss in the gross income of the recipient.

• Calculating the TAXABLE portion of lump sum received from FUND• LS received (actual) – deductions permitted per par 5/6 = Taxable

portion of lump sum in Gross Income • (Therefore, the net portion is the only amount to be included in

Gross Income and NOT the actual Lump Sum received.)

The value and form of Lump Sums

• S10C now allows for the non-deductible portions of the contributions once made toward these funds by the taxpayer, as a deduction against this annuity income received

Disallowed contributions i.t.o s11(k) or (n) nettedoff against annuity income

Previously not allowed as a deduction under par5 or 6 of 2nd Schedule

Applicable to contributions from any fund

S10C exemption

• 2016 Budget Proposal

• A two year postponement of the annuitisation requirement for provident funds and tax free transfers from pension to provident funds.

New Legislation

EMPLOYEES’ TAX

Definitions – Remuneration Par 1 • Amount of Income

• Paid or Payable

• To any person

• whether in cash or otherwise

• whether or not for services rendered

• By way of any

– Salary and wages

– Leave pay and allowances

– Bonus and gratuity

– Overtime pay

– Commissions and fees

– Emoluments and pensions

– Superannuation allowance

– Retiring Allowance or stipend

Remuneration (Par 1) Continued

Remuneration specifically includes:• Gross Income Paragraphs:

– (a) - Annuities– (c) - Any Amount including Voluntary rewards received for services

rendered or to be rendered or any amount received by virtue of employment.

– (cA) and (cB)– Restraint of Trade – (d) – Lump sums received from Employers– (e) – Retirement Lump Sums and Retirement Lump Sum Withdrawal

benefit– (eA) – Amounts from Public Sector Pension Funds– (f) – Amounts received in commutation of amount under employment

contract– (i) – Fringe Benefits (Cash Value as determined in the 7th Schedule

Remuneration (Par 1)

• Fringe Benefits (paragraph (i))

– Cash Equivalents of Fringe Benefits in terms of right of use of Company Car

• 80% of the Fringe Benefit Value determined per paragraph 7 of the 7th Schedule.

• If the employer is satisfied that at least 80% of the use of the motor vehicle in a yoa will be for business purposes.

– Only 20% of the Fringe Benefit Value will be Remuneration.


Remuneration specifically includes: • Allowances in full,

– other than • travel, or

• subsistence or

• holder of public office

– If subsistence allowance not used by month end, it is remuneration.

• 50% of public holder officer allowance.

• Section 8B or 8C gains.

• Amounts in terms of s 7(11)


Remuneration specifically includes:

• 80% of travel allowance referred to in s8(1)(b)

– If the employer is satisfied that at least 80% of the use of the motor vehicle in a yoa will be for business purposes.

– Only 20% of the Allowance will be Remuneration.

– BUT A Reimbursive Travel allowance in terms of s8(1)(b)(iii) is NOT INCLUDED in definition of remuneration.

Remuneration Continued

Remuneration specifically excludes:• Payments to “independent traders”

• Disability pensions.

• Reimbursements • Paid by employer to employee in course of his employment of Expenditure Actually

incurred.

• Annuity in terms of a divorce order. • other annuities, purchased or earned are included – paragraph (a) above

• Subsistence allowance • Unless he receives an allowance but does not spend at least one night away

from home by month end – then is deemed to be remuneration and not subsistence allowance

Employees Tax

• The Amount of Employees Tax to be withheld is calculated on the “balance of remuneration” in terms of Par 2(4) of the 4th

Schedule.

Balance of Remuneration (Par 2(4)

Remuneration Less: Deductible contributions to a Pension Fund

– Limited to allowable deductions in terms of s11(k)

• Deductable contributions to a Retirement Annuity Fund – Limited to allowable deductions in terms of s11(n) (proof to be

provided to the employer)NB 1 March 2016, deductions under new s11k

• Donations by the employer on behalf of the employee to s 18A recognised institutions – Limited to 5% of the employees remuneration after deducting

the above

Annual Equivalent

• Employees tax must be deducted from remuneration of an employee in a specific month.

– Rebates and Prescribed Tax Tables are based on Annual Taxable Income

– The Annual equivalent of the balance of remuneration must be calculated before employees tax can be calculated.

Definitions

Employer (Par 1)Any person who pays or is liable to pay to any person any amount by way of remuneration. It includes an executor or an administrator of a benefit fund, pension fund, RA fund or any other fund.

Employee (Par 1)• A person, other than a company, who derives remuneration

(taken to include directors of public companies)• A person who receives remuneration by reason of services

rendered by that person to/on behalf of a ‘labour broker’• A labour broker (LB)• A personal service provider • Director of a private company

Labour Broker

The definition of an Employee includes: A Labour Broker

A Labour Broker is defined as follows (Para 1):• NATURAL PERSON who conducts or carries on business• Providing clients with persons to perform work, for reward

or• Procuring (obtaining) workers for clients, for reward.• Providing workers, rather than a service.• Distinction between a labour broker and an independent

trader.– client pays labour broker who then pays employees

Labour Brokers

• Are specifically excluded from independent traders

• Definition of ‘employee’ includes a labour broker

• Clients must thus pay employees’ tax (PAYE) according to the tables – if no exemption certificate is held. If held, no employees’ tax withheld

• The tax withheld can be set-off against provisional tax payments.

• S 23(k) limits deduction of expenses incurred by Labour

Broker other than salaries

– i.e. can not try to avoid s 23(m) by changing structure of what is effectively a employment relationship.(Income Tax Purposes)

S23(k) Income Tax Deductions• S23 No deduction shall in any case be made i.r.o. the

following matters(k) Any expense incurred by labour broker or personal

service provider , Other than expenses incurred on:

• Amounts paid or payable to employees, and amounts included in TI of employees

• Any expense or deduction in – S11(c) – Legal Expenses– S11(i) – bad debts– S11(l) – employer contributions to funds– S11(nA) – refunds of salaries– S11(nB) – refunds of restraint of trade payments– Expenses for premises– Finance charges– Insurance– Repairs, Maintenance, fuel iro assets used wholly or exclusively for

trade.

Labour Brokers – IRP 30 (Par 2(5)

Client must withhold PAYE when they pay the labour broker his fees

Unless labour broker has an IRP30 exemption certificate, which details:

• Independent trade

• Registered as a provisional taxpayer

• Must be a registered employer

• Tax affairs up to date

• Does not derive >80% of GI from one client (the 80% test does not apply if LB employs 3 or more full time employees not connected persons)

• May not provide the services of another labour broker to a client

• Must not be contractually obliged to provide a specified employee to the client.

Personal Service Provider

• A personal service company from this date is only subject to employees tax if it is a ‘personal service provider’.

• Any remuneration paid to it is taxed at a rate of 28% for a psp company and 41% if a psptrust.

Personal Service Provider – Definition Par 1

• Any company or trust (note NOT an individual), where any service rendered by the company or trust to a client is personally rendered by any person who is connected in relation to such company or trust. And one of the following requirements must be met:

Personal Service Provider – Definition Par 1 Continued

• The person rendering the service to the client would have been regarded as an employee of the client if the service was rendered directly to that client; or

• Where the duties of the service must be performed mainly at the premises of the client, the person or company or trust is subject to the control or supervision of the client relating to the manner in which the services are performed; or

• Where more than 80% of the income of the company or trust during the year of assessment, from services rendered, consists or is likely to consist of amounts relating to one client.

Personal Service Provider – Definition Par 1 Continued

• A company or trust is excluded from the definition of a PSP where, throughout the year of assessment, three or more employees who are on a full-time basis engaged in the business of such company or trust are employed. These employees may not be holders of shares in the company or a settlor or beneficiary of the trust or be a connected person in relation to that person.

• Where the definition is met and remuneration is paid to a PSP and is subject to the deduction of employees’ tax, the employees’ tax withheld may be set off against the company or trust’s provisional tax payments (paras 21 and 23).


• Once defined as a personal service provider, – certain deductions are denied to the company or trust in

terms of s 23(k) of the Act.

– This provision prohibits the deduction of any expense incurred other than any expense constituting an amount paid or payable to any employee of such a labour broker.

• However in terms of s23(k) the following deductions are still available:– S 11(c) – legal expenses– S 11(i) – bad debts– S 11(l) – contributions to funds by employer– S 11(nA) and (nB) – refunds– Expenses relating to premises, finance charges, insurance,

repairs and fuel and maintenance in respect of assets used wholly and exclusively for the purposes of trade.

Independent Trader

• Definitions of remuneration excludes any amount paid or payables for services rendered or to be rendered by any person in the course of a trade Carried on Independently of the person whom the

amount is paid or payable (Par 1 Definition of Remuneration (ii) )

Therefore these amounts are not subject to employees’ tax

Independent Trader

• The following are not Independent Traders:

A person who is not residents

An employee who is a labour broker or who works for a labour broker or


Independent Trader

A person will be deemed NOT to be carrying on a trade independently if: – Person carries out the trade mainly at the premises of the

service recipient; and

– Person is subject to control or supervision of any other person as to the manner in which the services are performed.

• However if:

– Person employed more than 3 full time employees (excluding connected persons) then IS an independent contractor.

Interpretation Note 17

Variable Remuneration

• NB – s7B – covered slides under Part 1

Case Law applicable to Gross Income

Definitions Cases applicable Principle learnt in the case

Amount CSARS v Brummeria If a taxpayer receives a ‘benefit’ and that ‘benefit’ has an ascertainable value that accrues to the taxpayer. The taxpayer must include that benefit in their Gross Income, generally at market value. (quid pro quo)

CIR v Butcher Bros (Pty) Ltd The Commissioner failed to establish the amount that represented the value of leasehold improvements made by a lessee to a leasehold property. As no amount was established by Commissioner, therefore no amount was included in gross income of lessor. (Subsequent

inclusion Para (h)- leasehold

improvements of Gross income)

110



Amount CIR v Lategan The term ‘amount’ does not only include money but also value of every form of property earned by taxpayer, whether corporeal or incorporeal, which has a monetary value.

Lace Properties Mines Ltd v CIR The general principle is that, if cash not received, the market value of such asset(as valued on the date of receipt or accrual) should be included in gross income

111



received by Geldenhuys v CIR The court held that for an amount to be received by taxpayer, it should be received by him for his own benefit and on his behalf.

MP Finance Group CC (In Liquidation) v CSARS (2007)

If a taxpayer intends to retain amounts received for their own benefit, these amounts will then constitute their gross income.

Pyott Ltd v CIR (1944) and Brookes Lemos Ltd v CIR

Deposits should be kept in a separate trust account and not utilised for the general purposes of the business, then they would not constitute gross income and would not be subjected to tax.

112



accrued to CIR v People's Stores (Walvis Bay) Pty Ltd

‘Accrued to’ means Entitled to the amount, even if the amount is only due and payable in the following year of assessment it will form part of gross income.

CIR v Witwatersrand Association of Racing Clubs

The fact that it is throughout contemplated that no portion of the profits would remain with the taxpayer and that there was a moral obligation to hand over the proceeds to the charities does not destroy the beneficial character of the receipt of those proceeds by the taxpayer.

Ochberg v CIR or Mooi v SIR Taxpayer should be unconditionally to the amount, to be deemed to be accrued to.

113

Income v capital

• Remember Gross Income excludes receipts of capital in nature.

• Therefore we need to determine by what they mean when they say capital in nature.

• Section 82 of the Income Tax Act, Section 102 of the Tax Administration Act states the burden of proof that an amount is capital in nature rests with the taxpayer

• Note: Intention of the taxpayer should always be considered when determining if an amount is capital in nature

114

Change NB!!!!

Case Law applicable to Income v Capital


Intention CIR v Richmond Decision to sell an asset does not mean change in intention.

COT Southern Rhodesia v Levy If taxpayer has mixed intentions look at the main or dominant purpose of which asset was acquired.

scheme of profit-making

CIR v Pick ‘n Pay Employee share purchase trust

The trust had no intention of carrying on business in shares but operated ‘primarily as a conduit for the acquisition of shares by employees.

mixed or dual intention

CIR v Stott Look at the primary intention, subdivision of plots could be to realise the asset to the best advantage.

CIR v Nel If something was purchased for ‘keeps’ and an unusual or unexpected event happens, does not necessitate change in intention

115

Case Law applicable to Income v Capital


change in intention

CIR v Nussbaum Scheme of profit making, change intention.

Natal Estates Ltd v SIR Look at the history and activities of the taxpayer, to see if intention is capital in nature. Determine if something more has been done to proof that the intention has changed to revenue in nature.

nature of the ‘asset’

CIR v Visser Income is what capital produces, the fruit – tree principle.

CIR v George Forrest Timber Indicates the fixed v floatingprinciple.

Damages and compensation

Fourie Beleggings v CSARS ZASCA 37 (31 March 2009)

If they are to fill a whole in profits then they are revenue in nature. But if they are to fill a whole in capital assets then they are capital in nature.

116

Case Law applicable to GDF


Carrying on trade

Burgess v CIR Trade should be given wide meaning and motive for trade is irrelevant.

Production of income

Port Elizabeth Electric Tramway Co Ltd v CIR

Expenditure and income must be closely related

Joffe & Co (Pty) Ltd v CIR Expenditure must be necessary concomitant of the business operations.

C:SARS v BP South Africa (Pty) Ltd

(2006)

Loan incurred to continue income

producing activities is deductible.

BP South Africa (Pty) Ltd v C:SARS

(2007)

Royalties can be deductible under

the general deduction formula.

117



Actually incurred

Edgars Stores Ltd v CIR Only expenditure you have unconditional legal obligation can you claim deduction.

Nasionale Pers BPK v KBI Provision for bonuses is not

deductible, not yet incurred.

CIR v Golden Dumps (Pty) Ltd Expenditure can only be regarded

as incurred once a court case has

been resolved.

C:SARS v Labat An allotment or issue of shares

does not involve a shift of assets

of the company even though it

might, but not necessarily, dilute

or reduce the value of the shares

in the hands of the existing

shareholders and that it can

therefore not qualify as an

expenditure’ 118



Not of a

capital

nature

New State Areas Ltd v CIR If expenditure is incurred to create

permanent asset is capital in

nature

Rand Mines (Mining & Services)

Ltd v CIR

Expenditure creates an enduring

benefit and it adds to the income

earning structure of taxpayer, it is

capital in nature.

119

Trading Stock (Section 22)• Section 22(2): Opening stock deduction: Lower of Cost and

Market Value.• Section 22(1): Closing stock addition: Lower of Cost and Market

Value.• Section 22(8): Recoupments:

– At Cost: If taken for private or domestic use or consumption ORdonated to a PBO, or

– At market value in any other case.

• Section 23F(1) anti-avoidance provision: Stock which has been given a s11(a) deduction, but which is not on hand at year end will not be included in the s22(1) closing stock addition, hence, there will be a deemed addition of the s11(a) amount in gross income per Section 23F.

• Section 23F(2): Where the full amount will not accrue, the amount by which the s11(a) deduction exceeds the amount received will be disallowed and carried forward to the next year of assessment.

Trading Stock (Section 22)• Acquisition for no consideration: Deemed

acquisition at market value (s22(4)). Practice deduction of market value. Will be included in s22(1) closing stock addition at market value if not disposed of.

• Shares held as trading stock are always at cost, no write-down.

• If the taxpayer is a share-dealer, then the shares will be his/her trading stock and section 22 will apply.

• Consider Section 9C. Qualifying share proceeds will be capital in nature. Else, if not held for at least 3 years, then revenue in nature.

• Instalment credit agreement= ICA and is defined in s1 of the VAT act (pg 1099 silke).

Instalment credit agreementcorporeal movable goods / machinery or plant movable or

immovable:

Suspensive sale – par a

- Sold @ stated or determinable sum of money @ a stated or determinable future date or in whole or in part in instalments over a period in the future

- Sum includes finance charges stipulated in the agreement- Aggregate of amounts payable exceeds cash value of supply- Purchaser conditional owner – seller can take back if P fails

to comply with any terms of the agreement

ICAs

Financial lease- par b- Rent @ stated or determinable sum of money @

a stated or determinable future date or in whole or in part in instalments over a period in the future

- Sum includes finance charges stipulated in the lease

- Aggregate of amounts payable and residual value on termination of lease (if any) exceeds cash value of supply

- Lessee entitled to use for a period of at least 12 months

- Lessee accepts full risk but no ownership (destruction/loss/insurance/maintenance /repairs)

ICAs

• The VAT consequences of both the ICA as defined in par a and par b are the same.

• s8(11) deems the supply of the use or the right to use to an asset under an ICA to be a supply.

• s9(3)(c) determines the time of supply to be the earlier of the delivery of goods or the payment of consideration.

• S10(6) determines the value of supply to be the cash value.

ICAs

• Cash value is defined in s1 of the VAT act

– Seller/lessor – banker/financier cost including cost of erection /construction /assembly /installation include VAT (excl. interest / finance charges)

– Seller/lessor – dealer price : cost normally sold for cash including cost of erection /construction /assembly /installation include VAT (excl. interest / finance charges)

ICAs

ICA- par a (sale) - buyer ICA- par b (lease) - lessee

• s24J interest • No s24J interest (unless s23G sale and leaseback agreement)

• Claim certain capital allowances (s11(e), s12C, s12B and s12E)

• Cannot claim capital allowances

• Payments made in terms of arrangement are not deductible

• Lease payments are deductible

o The input VAT claimable must be excluded from the cost of the asset (s23C of the ITA)

o The input VAT claimable by the lessee shall be excluded from each rental payment made by him in the same ratio as such rental payment bears to the sum of all rental payments in connection to the lease (s23C of the ITA). Formula -Input VAT claimable X current payments/ total payments

Income Tax and ICAs

ICA- par a (sale) - seller ICA- par b (lease) - lessor

• CGT consequences and possible recoupment

• No CGT consequences

• Cannot claim capital allowances • Can claim capital allowances

• Instalments received each month are not taxed. The cash value (excluding VAT) of the sale will form the proceeds on sale

• Rental received gross income

• s24J interest • No s24J interest (unless s23G- sale and leaseback agreement)

• VAT is excluded from the proceeds amount

• VAT is excluded from the rentals received (s23C)

Income Tax and ICAs

• Rental agreement is defined in s1 of the VAT act.Rental agreement’ (s 1)Agreement for letting of goods (other than per

instalment credit agreement)

• s8(11) deems a rental agreement to be a supply

• s9(3)(a) determines the time of the supply to be the earlier of the payment and when the rental becomes due and payable.

• S10(3) the consideration paid for the rental.

Rental agreements and VAT

lessor lessee

• Rental income- gross income • Rental payments are deductible

• Claim the capital allowances (see requirements of relevant section)

• Cannot claim capital allowances

• Remove the output VAT from rental received- s23C

• Remove the input VAT from the rental paid – s23C

• No s24J interest (unless s23G sale and leaseback agreement)

• No s24J interest (unless s23G sale and leaseback agreement)

Income tax and rental agreement

Lease premium

Lessor

Special inclusion in the gross income (para (g) definition.)

Lessee

section 11(f) deduction

- over the lease term (limited to 25 years),

-apportioned for months the leased asset is used in production of income

Leasehold improvements

Lessor

Special inclusion in Gross income (para (h) of the definition).

Special s 11(h) allowance:

- Cost less PV of improvements over the s11(g) period at 6% interest

* If the Commissioner deems necessary

Lessee

Section 11(g) deduction on the contracted costs of improvements

- over the lease term (limited to 25years)

- Lease term calculated from date of completion

- Apportion for months the asset is used in production of income

If actual costs exceed contracted costs:

- S 13(1) allowance on the excess if the lessee uses the leased asset in the process of manufacture

- No s 13quin allowance (do not own the property).

Purchase of assets

Building

Used in Manufacture

Section 13

Used for Purpose of Trade

Section 13quin

Residential Buildings

Section 13sex

Low Cost Residential

Housing LoansSection 13sept

Other Depreciable Assets

Consider Small Business

CorporationS12E

Used in Process of Manufacture

Section 12C

Used for Purpose of Trade

Section 11(e)

Used for Renewable

Energy PurposesSection 12B

Moveable manufacturing assets –s12C

• Machinery & Plant

• Used directly in the process of manufacture

• By the taxpayer or lessee

• 2nd Hand: 20:20:20:20:20

• New & Unused: 40:20:20:20– Not available to the lessor if the asset is used by the

lessee

• Allowance is attached to legal ownership

Moveable manufacturing assets – s12C

• Allowance is based on the lower of:– Cost– Market Value

• What happens if there is VAT included?

• Includes:– Installation– Moving– Foundation

• Only applicable if brought into use for the first time

• Not apportioned for time

Moveable assets – s11(e)

• Wear & Tear allowance for moveable assets used for the purpose of trade.

• Written off over a straight line basis –Interpretation Note 47

• Apportioned for time

• The default allowance for moveable property if other provisions are not applicable

Moveable assets – s11(e)

• Allowance is based on the market value– However, if a cost is given then the cost is the best

indication of a market value.– Only use market value if a cost has not been

determined

• If an asset is used partly for trade purposes, the allowance must be apportioned to the extent of trade.

• Small items – Interpretation Note 47 (4.3.5)– Cost of Asset less than R7000– Full write down allowed in the year of purchase– Small item must function on its own – must not be

part of a set.

Small Business Corporations – s12E

Small Business is defined as:

(All requirements must be met)

(Pty) Ltd, CC or co-operative

All shareholders are natural persons

Gross income is not greater than R20 million

Not a personal service provider

Shareholders do not hold any other interest in another company –subject to exemptions

20% of total receipts is not derived from passive income

Small Business Corporations – s12E• Manufacturing Plant

– New and unused– By the taxpayer after 01/04/2001– 100% allowance

• Non-Manufacturing Plant– Elect 50:30:20; or– s 11(e) – Small items

• Allowance based on the lower of:– Cost; or– Market Value

Buildings used for manufacture – s13 S 13(1) provides for an annual allowance of 5% on

manufacturing buildings

This is an allowance based on the cost of buildings

used in the

Process of manufacture or

Building used for research and development (s11D)

Buildings used for manufacture – s13• Capital allowance on

any new and unused building or

any new and unused improvements to buildings

Erected and used wholly or mainly (>50%) used in the process of manufacture or similar process.

• Allowance is granted on the COST of the BUILDING only Less Leasehold improvements in terms of s11(g)

If paid a lump sum payment for Land & Buildings together, need to find a reasonable basis of apportionment to isolate the cost of the buildings.

• Allowance is subject to a recoupment

Buildings used for manufacture – s13 There are two instances in which purchased buildings

qualify for s 13 allowance Used buildings s 13(1)(d)

Where the building is purchased from a person or entity which is entitled to the allowance in terms of s 13 and the building is used by the taxpayer in the process of manufacture If the previous owner was not entitled to an allowance the new owner is not entitled to

an allowance

The allowance is based on the cost to the purchaser and not on the original cost to the purchaser

New Buildings s 13(1)(dA) Where the purchased building is new and unused, the taxpayer may claim a

s13 allowance

Therefore: If purchased, only claim s13 if: The building is new and unused; or

If the seller previously claimed a s13 allowance

Buildings used for manufacture – s13• S13(3) deferral recoupment,

– The recoupment as calculated is deducted

from the cost of the replacement building.

Deduction on replacement asset:(Cost of new - recoupment of old) X applicable %

Deferral available for recoupment only, not

on any capital gain (taxed immediately).

Immoveable commercial Property-s13 quin

5% allowance

New & unused

Owned and used wholly or mainly in the production of income of the taxpayer

Construction commenced post 1 April 2007

Allowance is based on the lower of:

Cost; or

Market value

Not apportioned for time

Immoveable commercial Property s13 quin

• If purchased building/improvement, then cost is deemed:

– 55% of purchase price of building

– 30% of purchase price of improvement

Immoveable residential Property –s13 sex

• 5% allowance

• 5 or more residential units

• New & unused

• Used for trade situated in South Africa

• Construction commenced post 21/10/2008

• Not Apportioned for time

• Allowance is based on the lower of:– Cost; or

– Market Value

Immoveable residential Property –s13 sex

• If units meet the definition of low cost housing in terms of s 1

• Additional 5% allowance

• If purchased building/improvement, then cost is deemed:

– 55% of purchase price of building

– 30% of purchase price of improvement

Learnership allowances – s12H

• s 11(a) deduction for expenditure actually incurred

• R30 000 annual allowance (apportioned for time) from commencement date

• On completion: R30 000 x no. of completed 12 months, Provided:– The learnership contract is not less than 2 years

• R50 000 if the employee is disabled

Intellectual Property

• Intellectual Property – s 11(gB)

– Registration, extension, renewal, etc

– Deduction on total expense incurred

• Intellectual Property – s 11(gC) - Acquired

– Brought into use for the first time

– Excludes trademarks

IP

> 5000

10% Design

5% Other

<=5000 100%

Research & Development – s11D

• Revenue in nature

– 100% allowance

– Additional 50% allowance if approved by Department of Science & Technology

• Capital in nature

– No special allowance

– Use standard allowances

• s 11(e), s 12C, s 13(1)

Recoupment – s8(4)(a)• Recoup previous allowances claimed when

dispose of a capital asset

• Excludes: s 11D & s 13ter

• Special inclusion in Gross Income: paragraph (n)

• Recoupment = Selling Price (limited to cost)

-

Tax Value

• Tax Value = Cost – All allowances

Recoupment – s8(4)(k) Deemed to be sold at Market Value if asset was:

Donated

Sold to connected person

Dividend in specie

Recoupment

Market Value (Limited to

Cost)Tax Value

• Section 11(c) provides for the deduction of certain types of legal expenses NOT

DEDUCTIBLE under s 11(a)…..

152

Legal expenses

• In the production of income?

– Must be linked to the operation entered into for income earning purposes and not merely serve to protect an existing source of income

– If not deductible under s 11(a), may be deductible under s 11(c)

• Capital in nature?

– Incurred in the creation of a right to receive income i.e. an enduring benefit (capital)

– Incurred in the actual earning of the income itself (revenue)

153

Legal expenses

S 11(cA)

Deduction allowed in respect of

Amount actually incurred on/after 23 Feb 2000

In carrying on a trade

As compensation for restraint of trade imposed on:

Natural person;

Labour broker OR

Personal service company or trust

LIMITED to income of the person to whom it is paid (the expense is deductible to the extent it is income to the person it is paid to)

154

Restraint of trade payments

• Limit: deduction shall not exceed in any one year, the lesser of:

– Amount incurred divided by number of years (or part thereof) during which restraint of trade applies, or

– One third of the amount incurred

• As such, minimum period for write off is 3 years

• Remember:

S 23(l) prohibits the deduction of restraint of trade payments EXCEPT as provided in s 11(cA).

155

Restraint of trade payments

• S 11(d)

• Expenditure actually incurred during the year of assessment on repairs of:

– Property occupied for purposes of trade, or

– Property from which income is receivable (i.e. capable of being received), and

– Machinery, implements, utensils or articles used for purposes of trade

156

Repairs

• Meaning of repairs

• The act has no definition, therefore we rely on dictionary:

– restoration by renewal (reconstruction of the entirety to former glory), or

– replacement of subsidiary parts of the whole“Materials used do not need to be identical to the original materials replaced, even if new materials are more expensive” (CIR v African Products Manufacturing Co Ltd)

• Meaning of improvements:

– increase in income earning capacity,

– creation of a better asset(improvements are not deductible as they are capital in nature- CGT)

157

Repairs

S 11(i)

When a debtor fails to pay his debt, that debt becomes bad

Bad debts are deductible if

due to the taxpayer AND

included in income in either the current or a prior year of assessment ( i.e. bad debt arising from sale of goods vs. arising from loan to employee) AND

become bad during the year of assessment – cannot accumulate bad debts and write them off in a later year

158

Bad debts

All three requirements MUST be met!

• S 11(j)

• If a debtor fails to pay his debt in good time, the debt becomes doubtful

• Allowance made at the discretion of the Commissioner (usually grant 25% of doubtful debts)

• Only if such debts would have been deductible under any other provision had they become bad

• Only for debts belonging to the taxpayer on last day of YOA

• In practice, no allowance for debts not previously included in income

• Allowance is added to income in next YOA (thus just postponing tax)

159

Doubtful debts

In other words:

Add back Previous year’s allowance Minus Current year’s allowance

160

Doubtful debts

161

Annuities to former employees or partners and dependents

• Retired due to:

• ill health,

• old age or

• infirmity

• No limit on amount deducted

Former employee

• Partner for at least 5 years

• Retired due to ill health, old age or infirmity

• No limit on amount deducted

• Amount is

• reasonable in terms of services rendered and profits made

• not a consideration for interest in the partnership

Former partner

Section 11(m)

162

Annuities to former employees or partners and dependents:

• No deduction limit

• Has to be dependent of employee/partner who is deceased

• Had to be dependent immediately before death

• Does not have to be an employee/partner who has retired.

Dependents of former

employees / partners

Lump sum gratuities not

deductible under s 11(m)

Section 11(m)

Micro business - Turnover tax

• Turnover-based tax system

• To alleviate tax compliance costs for very small businesses (not necessarily to reduce the tax liability)

• Turnover tax is calculated on the turnover(total receipts) of a micro business and not on its profits


• Elective

• Incorporated and unincorporated enterprises (sole proprietors / partnerships)

– Certain limitations

• Annual qualifying turnover up to R1million p.a.

• Implementation: Years of assessment commencing on or after 1 March 2009


• Not subject to both normal tax and the turnover tax

• S 10(1)(zJ) – exempts from normal tax all income received by or accrued to a registered micro business conducting business in the Republic

• Exclusions – natural persons – investment income and remuneration

• Exclusions – business activities carried outside SA by both co’s and natural persons are not exempt from normal tax and such activities also do not qualify for the turnover tax regime

• Dividends Tax – s64F(h) – a shareholder in a registered micro business is only partially exempt from dividends tax – total dividend paid does not exceed R200 000


• Para 57A of Eight Schedule provides for the exclusion from CGT of certain assets sold by a registered micro business

• Immovable assets/Movable assets

• Business assets not used mainly for business purposes

• VAT – vendors registered under the VAT system may freely register under the turnover tax system if these taxpayers believe that it is in their best interest to do so.

• PAYE,SDL and UIF normal rules apply but can apply to pay biannually

• Donations Tax – normal rules apply


Definitions per para 1 of the Sixth Schedule• ‘Qualifying turnover’ = total receipts from carrying on

business activities, excluding any -– Amount of a capital nature(see later for exception); and– Government subsidies (exempt from normal tax in terms

of s’s 10(1)(y), 10(1)(zA); 10(1)(zG) and 10(1)(zH).

– YOA is for a period shorter than 12 months- then compare qualifying taxable turnover to apportioned R1m for that period

– Receipts – not accruals

– Anti Avoidance – cannot take a business and split into smaller businesses to ensure that each business is within the R1m qualifying turnover threshold.


• The tax base for turnover tax is the taxable turnover.

• It is on this taxable turnover that the actual amount of tax due is calculated

• The taxable turnover is basically all amounts that are

- not of a capital nature

- received by the registered micro business(ie. On a cash basis)

- during that year of assessment

- from the carrying on business activities in the Republic

• The tax base is only based on this taxable turnover definition.

• The turnover tax regime does not provide for the deduction of any business related expenditure. As no deductions or allowances are provided for, the principles of recoupment are also not relevant to a micro business


• ‘Taxable turnover’ means total receipts from carrying on business, excluding capital amounts –

– Including (para 6):

• 50% of proceeds on sale of a capital asset NB – not capital gain

Para 6(a) inclusion: 50% of proceeds included in “taxable turnover”

◦ Immovable property mainly used for business

◦ Other assets used mainly for business

• Investment income of a company / cc (other than dividends and foreign dividends);

– Excludes (para 7)

• For a natural person – investment income

• Government subsidies); and


– Excludes (para 7)

• Amounts accrued before registration as a micro business AND was subject to tax – previous YOA was not registered for turnover tax. For normal tax, you taxed on earlier of receipt and accrual. Amount accrued therefore included in gross income and subject to normal tax. Next YOA, now registered for turnover tax as it is a micro business. Amount that accrued is now received. Therefore no turnover.

• Amounts refunded by suppliers to a micro business – such receipts are only refunds of previous expenses and should not be included in taxable income.

• Amounts refunded to customers by a micro business – when you sell goods or render services – receipt – included in taxable turnover. When later refunded as a result of damaged goods or unsatisfactory services, then such refunds to customers can be deducted in the calculation of taxable turnover.


• Persons specifically included as qualifying micro

business(para 2)

- incorporated bodies

- natural persons

• Trust not included in the definition of micro business and

can therefore not elect to pay turnover tax


• Persons specifically excluded as qualifying micro

business(para 3 and 4)

- persons with interests in other companies

- investment income and professional service limitation

- personal service providers and labour brokers

- excessive capital receipts

- certain company exclusions

- certain partnership exclusions


• - persons with interests in other companies

• This refers to • persons (incorporated entities and natural persons) that, at any

time during the year of assessment, hold any shares or have any interests (unless listed below) in the equity of a private company, close corporation or co-operative and

• a company, a close corporation and co-operative, if any holder of its shares or members hold any shares or have any interests (unless listed below) in any other private company, close corporation and co-operative. This disqualification would not apply to the holding of any shares

• in the equity of another company, if the other company• – has not during any year of assessment carried on any trade, and• – owned assets of which the total market value exceeds R5 000 or• – has taken steps to liquidate, wind up or deregister


• The following interests in certain investments are, however, always permitted:

• shares in listed companies

• portfolios in collective investment schemes

• interests in body corporates established in terms of the Section Titles Act (Act 95 of 1986) and share block companies

• interests in venture capital companies as defined in s 12J

• a less than 5% interest in social or consumer co-operatives

• a less than 5% interest in a primary savings co-operative bank , and

• interests in friendly societies .


• - investment income and professional service limitation

• Paragraph 3(b) provides that a person cannot be classified as a micro business if more than 20% of the person’s total receipts consist of

• income from the rendering of professional services in the case where the person is a natural person, and

• investment income and income from rendering professional services in the case where the person is a company.

• Why Difference – taxable turnover for natural persons exclude investment income and for companies it includes investment income.

• Investment income is defined in par 1 and is limited to only include• income in the form of annuities, dividends, interest, rental derived in respect of

immovable property, royalties or income of a similar nature, and• any proceeds derived from the disposal of financial instruments.

• Professional services include services in the fields of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate, research, sport, surveying, translation, valuation or veterinary science (par 1 – definition of ‘professional service)


• - personal service providers and labour brokers

• If at any time during a year of assessment a person is a personal service provider or a labour broker without an exemption certificate, then that person does not quality as a micro business .


• - excessive capital receipts

• A person does not qualify as a micro business, if the total amount received by a person from the disposal of

• immovable property, and

• any other capital business asset (other than any financial instrument)

• used mainly for business purposes,

• exceeds R1,5 million

• over a period of three years

• The three-year period includes the current year of assessment and the preceding two years of assessment


• - certain company exclusions

• In the case of a company, close corporation and co-operative, that company, close corporation and co-operative is disqualified as a micro business if

• the year of assessment ends on a date other than the last day of February– the year of assessment of a natural person (including a natural person that is a partner in a partnership) always ends on the last day of February, which therefore implies that the year of assessment for a micro business always runs from 1 March to 28/29 February

• any holder of its shares is a person other than a natural person OR

• it is a public benefit organisation or recreational club approved by the Commissioner


• - certain partnership exclusions

• A person that is a partner in a partnership is disqualified from being a micro business if

• any of the partners in the partnership is not a natural person all partners are disqualified when any partner is not a natural person

• that person is a partner in more than one partnership

• The qualifying turnover of that partnership exceeds R1 million


• Registration – para 1 and 8 – register with SARS

• - Registration is voluntary – not obliged even if you fall within the definition of a micro business. Registration as a micro business always applies with effect from the beginning of YOA

• Where a person deregisters voluntarily or compulsorily from the turnover tax, that micro business may never re-enter the turnover tax system.

• Voluntary Deregistration

• - Unless closes down can only deregister after 3 years in turnover tax regime

• - effective from beginning of YOA

• - Compulsory Deregistration


• Compulsory Deregistration

- Qualifying taxable turnover > R1m for YOA

- Qualifying taxable turnover WILL > R1m for YOA

- Specifically excluded

- Then deregistration is effective from beginning of month following the month during which qualifying taxable turnover exceeded R1m or will exceed R1m.

- No minimum period of being registered as a micro business applies as in the case of a voluntary deregistration

- Moves back to normal tax regime with immediate effect, ie. from the first day of month during which the business is deregistered from turnover tax


• - therefore is assessed for 2 periods in the YOA

• - One for turnover tax and one for normal tax

• NB – with a voluntary deregistration, only normal tax

once deregistered in a YOA as a voluntary

deregistration is always effective from the beginning of

YOA


• Second interim tax payment –by the end of the yoa ie.

On or before 28/29 February

• SARS does not receive full second payment – levy

interest

• Penalty is levied when the estimate for the second

interim payment is too low

• The penalty levied where the estimated taxable income

for the second interim payment is less than 80% of the

actual taxable turnover for the yoa


• The penalty is calculated as 20% of the difference

between the tax due on –

• - 80% of the actual taxable turnover and

• - the estimated taxable turnover for the second interim

payment

• Election of biannual payments- has the option to make all

payments for employees’ tax, SDL and UIF biannually

• First payment – end of August of the yoa

• Second payment – last day of the yoa, being end of

February

• From seven days after the end of the above mentioned

periods


• Record keeping – para 14

• Simplify administrative burden of a micro business to

ensure it complies with tax legislation

• Records should be kept of the details of all amounts

received during a yoa

• Records of dividends declared

• Assets and liabilities that exceed R10 000 at the end of

the yoa


Years of assessment ending 29 February 2016

Turnover Rate of tax

R

0 - 335 000 0%

335 001 - 500 000 1% of the amount over R335 000

500 001 - 750 000 R1 650 + 2% of the amount over R500 000

750 001 - R6 650 + 3% of the amount over R750 000

186

training...–no input vat nor output vat consequences. • remember to look out for the exclusions...

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