PROPOSED AMENDMENT TO THE TAXATION OF TRUSTS

a4_bNational Treasury published its much anticipated proposed annual amendments to tax legislation earlier in July. This year the proposed amendments were widely anticipated to shed led on Treasury’s proposals on how to address the perceived abuse of the trust form specifically going forward, especially as relates to the now well known ‘conduit pipe’ principle (in terms of which income received in a trust may ‘flow through’ the trust and instead be taxed in the hands of the trust beneficiaries). Many in the media, and some practitioners too, widely commented and bemoaned the widely anticipated demise of this well-entrenched South African trust law principle at the hands of Parliament.

Instead, a far more nuanced and focussed approach is proposed by the new section 7C of the Income Tax Act, 58 of 1962. In terms of this new proposed provision the conduit pipe principle is not at all affected, but rather low-interest (or interest-free) loans to trusts are being targeted. Briefly, any loan to a trust that is subject to interest at less than the prime lending rate less 250 basis points will be deemed to carry interest at that rate with interest accordingly accruing (and taxed) in the hands of the trust creditor. Consequently the trust creditor is taxed on deemed interest received, and that while typically the trust will be unable to claim a deduction on interest paid. To the extent further that the deemed interest gives rise to an increased income tax liability in the hands of the trust creditor, and the creditor does not recover said increased amount from the trust, the debtor is further deemed to have received a donation which in turn will be subject to donations tax at 20%.

We consider that the proposed amendments (proposed to be effective from 1 March 2017) should address two forms of perceived abuse of the trust for tax purposes:

  1. In the first instance, it is a common estate duty planning practice for an individual to sell assets on interest free loan account to a family trust to ensure that value-growth of the asset (and thus the estate) accumulates in the trust going forward, while the value of the estate of the individual remains the same. Individuals will now have to think twice before entering into these estate duty planning exercises: a sale on interest free loan account may very well still result in an estate duty saving ultimately (although ironically not effectively for the taxpayer but his/her heirs), but now at a cost of interest accruing to the individual throughout his or her lives and which is subject to income tax on an annual basis; and
  1. Secondly, the practice referred to as ‘income splitting’ is addressed (whereby trust distributions are made to various trust beneficiaries who are taxed at lower marginal tax rates): typically these distributions too would be made on interest free loan account, again therefore resulting in income tax consequences for the individuals in the form of ongoing income tax on the deemed interest received.

The public is invited to comment on the proposed amendments by 8 August. We are however of the view that Treasury is unlikely to make any significant concessions in this regard specifically. While we will keep our client base informed of any developments in this regard as appropriate, it may be prudent to contact us now already to start discussing how most efficiently to manage any risks emanating from the above proposals and as they may relate to existing trust structures post 1 March 2017.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

DUE DATES PUBLISHED FOR SUBMITTING ANNUAL AND INTERIM EMPLOYER RECONCILIATIONS

a3_bOn 15 April 2016 the Commissioner for the South African Revenue Service (SARS) announced the due dates whereby employers are required to finalise and submit their annual and interim Employer Reconciliation declarations to SARS. The notice, published on 15 April 2016 in Government Gazette No. 39922, determines that:

  

  • the annual declarations for the period 1 March 2015 to 29 February 2016 are to be submitted by 31 May 2016; and
  • the interim declarations for the period 1 March 2016 to 31 August 2016 must be submitted by 31 October 2016.

The above declarations are done by way of completing and submitting the prescribed EMP501 form to SARS. The form comprises a summary and reconciliation of employers’ pay-as-you-earn obligations, skills development levies due and the unemployment insurance contributions paid or obligations incurred during the periods mentioned above. Completion of the annual Employer Reconciliation also allows the employer-taxpayer to generate an IRP5 certificate to be issued to each employee of the employer, used by him/her to complete their annual income tax returns.

The annual declarations deadline is especially looming. Every year, this deadline is one that many employers miss and it would therefore be prudent to take note of these deadlines now already and plan accordingly. The importance of the declarations, not only for use by SARS, should not be underestimated, also since the information captured here as part of the annual declaration will affect employees when submitting their annual income tax returns later this year.

Quite often, delays on employers’ part in completing the declarations (or even completing these inaccurately due to time constraints and leaving this task until too late) may lead to immense frustration on the part of employees. This since employees may then be either unable to complete income tax returns themselves (due to no IRP5 being captured by SARS), or in the case of inaccuracies on the reconciliation become embroiled in disputes with SARS due to the inaccurate information captured on the employees’ profiles. This will in turn lead to increased costs on the employees’ side to engage SARS to correct this (often through appointing a tax professional), as well as delays in any potential refunds due to them. All this as a direct result of the failure on the part of the employer-function tasked with attending to this statutory obligation in a timely and accurate function, which illustrates why meeting the above deadlines needs to be prioritised and taken extremely seriously.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

REQUEST FOR SUSPENSION OF PAYMENT

The ‘pay now, argue later’ rule contained in section 164 of the Tax Administration Act, 28 of 2011, requires taxpayers to pay any tax debts due in terms of an assessment, irrespective thereof that the assessment in question may be disputed by the taxpayer. In other words – and as the name suggests – even where SARS has issued a taxpayer with an assessment in error, a taxpayer is still required to pay the tax reflected in that assessment irrespective, and will have to claim a refund for that amount only once the error has been corrected. This is obviously quite onerous to taxpayers, and may adversely affect cash flows even where a taxpayer is at no fault whatsoever, or where there is a misunderstanding of the relevant facts on SARS’ side.

Section 164 does offer a limited form of reprieve though, and taxpayers may request the suspension of payment of a tax liability pending the resolution of a dispute. The provision provides that the payment of tax may be suspended by SARS after considering the following factors:

  • whether the recovery of the disputed tax will be in jeopardy or there will be a risk of dissipation of assets;
  • the compliance history of the taxpayer with SARS;
  • whether fraud is prima facie involved in the origin of the dispute;
  • whether payment will result in irreparable hardship to the taxpayer not justified by the prejudice to SARS or the fiscus if the disputed tax is not paid or recovered; or
  • whether the taxpayer has tendered adequate security for the payment of the disputed tax and accepting it is in the interest of SARS or the fiscus.

Notwithstanding the above, SARS may deny a request for suspension of payment of tax, or revoke a decision to suspend payment, if it is satisfied that:

  • after the lodging of the objection or appeal, the objection or appeal is frivolous or vexatious;
  • the taxpayer is employing dilatory tactics in conducting the objection or appeal;
  • on further consideration of the factors referred to above, the suspension should not have been given; or
  • there is a material change in any of the factors upon which the decision to suspend payment of the amount involved was based.

What few people know is that merely by virtue of submitting an application to suspend the payment of tax, SARS is prohibited from instituting proceedings to recover the amount in dispute until it has duly considered the application to suspend payment of tax (which applications are typically considered by a designated committee within SARS). Only once such an application has been considered and denied may SARS institute recovery proceedings within 10 business days after the decision not to grant the relevant request. Therefore, suspension of payment is effectively achieved by submission of an application, and the status quo only affected once the taxpayer has been advised otherwise by SARS after it has duly considered the application and applied its mind thereto.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

HOW TO SAVE ON AUDIT FEES: FINANCIAL AUDIT PREPARATION CHECKLIST

An audit can protect business stakeholders from the risk of fraudulent practices and therefore stakeholders will often require audits to be done annually. If a business doesn’t have a choice whether to have an audit done or not, they can still control the expense to a certain extent by planning for the audit and supporting the auditors as best as they can.

The main purpose of a financial audit is to ensure that a business’ accounting information accurately reflects its financial position. By trying to put yourself in the shoes of an auditor and attempting to anticipate what information they might require to complete their audit procedures, you can prepare a significant amount of the information needed for an audit in advance. Thorough preparation will reduce pressure on the side of both the auditors and the business during the time of the audit and can potentially reduce audit fees.

A business owner and/or management can increase the efficiency and reduce the costs of an audit by following the proposed steps below.

Preparation before the start of the audit

Designate an audit liaison person

Designate one person with experience as well as good communication and organisational skills as the auditors’ main contact with the business. Ideally all communication between the auditors and the business should happen through this person first.

First meeting with auditors

Make a list of items to discuss with the auditors and arrange a preliminary/planning meeting a while before the audit. Some of the points that can be included for discussion are the following:

  • the purpose and scope of the audit
  • information required by auditors
  • who the audit liaison person will be
  • how communication between the auditors and the audit liaison person and ultimately the employees will be handled
  • the expected finish date of the audit
  • a budget for the audit broken down in terms of the time the auditors expect to work on the audit and the resulting costs to the business (for a first audit with a new auditor it might be difficult to budget for audit hours as the auditors will probably not have much background information about the business or experience with the client)

Financial records and other information

Obtain a list of the reports, documents and other information from the auditors that they will require to conduct the audit. Generally auditors will require the following documents where relevant:

  • Income statement
  • Balance sheet
  • Cash flow statement
  • Budget(s)
  • Trial balance
  • General ledger
  • Debtors ledger, age analysis and reconciliations
  • Inventory reconciliations and stock counting records
  • Creditors ledger, age analysis and reconciliations
  • Bank statements and bank reconciliations (including petty cash)
  • Tax related documentation e.g. tax returns submitted and paid during the year being audited
  • Major contracts e.g. sales contracts, purchase agreements, leases, insurance policies
  • Minutes of meetings where important decisions were taken which had or can have a material effect on the business
  • Policy and procedure manuals
  • Internal audit reports
  • Any other information which might have a material effect on the financial health of the businessCollect as many of the above items in advance as you can, review them thoroughly and try to anticipate what questions the records may provoke from the auditors’ side.

During the audit

  • Communicate with the auditors regularly.
  • Respond to auditor queries as soon as possible with accurate information.

After the audit

Audit management report

Obtain an audit management report from the auditors setting out suggested solutions and improvements in the way business is conducted. Implementing as many of these suggestions as possible before the next audit can reduce audit fees for the next audit.

Post-audit evaluation

Identify weaknesses and time-wasters experienced during this audit and consider possible solutions and different approaches to improve the next audit.

As can be seen from the above, there is quite a bit of planning and preparation that can be done in advance to make an audit less disruptive for a business and its employees and at the same time also pay off in reduced audit fees.

Reference List:

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)