VAT AND COMMON LAW THEFT

B1A recent decision has created some interest in whether the taxpayers failing to pay over the correct amounts of VAT can be charged – in addition to other statutory crimes prescribed by the VAT Act, 89 of 1991 – with the common law crime of theft.

In Director of Public Prosecutions, Western Cape v Parker[1] the Director of Public Prosecutions (“DPP”) appealed a decision by the Western Cape High Court that Parker, in his capacity as sole representative of a close corporation, had not committed common law theft in relation to the misappropriation of VAT due and payable by the close corporation to SARS. (Parker had been convicted of common law theft earlier in the Bellville Regional Court and sentenced to five years’ imprisonment, which conviction he appealed to the High Court.)

The Supreme Court of Appeal dismissed the appeal by the DPP as related to the charge of common law theft levied against Parker as related to the misappropriation of VAT amounts, due and payable to SARS. Essentially to succeed, the DPP had to show that the monies not paid over to SARS were in law monies received and held effectively by VAT vendors as agents or in trust on behalf of SARS, i.e. that SARS had established ownership over such funds even before it having being paid over. The court directed that no relationship could be established whereby VAT amounts due were received and held by VAT vendors prior to payment thereof over to SARS. In other words, the DPP could not show that Parker had misappropriated property which belonged to another – an essential element of common law theft that had to be present to secure a conviction.

VAT remains a tax in the proper sense of the word: monies received from customers were that of the taxpayer. Only once monies were paid over to SARS did it become SARS’ property. Even when the VAT in question became payable, such obligation did not per se create a right of ownership over the funds for SARS. Admittedly SARS has a legal claim against the taxpayer for an amount of tax, but it cannot be said to have established right of ownership over any specific funds held by the taxpayer.

It should be noted that Parker only appealed his conviction of common law theft. He was also convicted in the Regional Court of those crimes provided for in the VAT Act (section 28(1)(b) read with section 58(d)) which he did not appeal. His sentence in this regard was maintained, being either a fine of R10,000 of two years’ imprisonment, suspended for four years.

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)

WITHHOLDING TAX ON PROPERTY SOLD BY NON-RESIDENTS

Withholding tax on property soldA remarkable number of non-residents own property in South Africa. While non-residents are not subject to South African capital gains tax generally, an exception is to be found where non-residents dispose of South African immovable property, or shares in “South African property rich” companies.

A obvious practical difficulty arises though for SARS to collect taxes from non-residents once they have sold their properties and have no further connection with South Africa. There is very little SARS can do to collect a tax debt from such non-residents, let alone compel them to file the necessary tax returns.

Section 35A of the Income Tax Act[1] was introduced for this reason. It levies an interim withholding tax on non-residents selling South African immovable property, required to be withheld from the selling price payable by the non-resident, on the following basis:

  • 5% of the selling price where the seller is a non-resident natural person;
  • 5% of the selling price where the seller is a non-resident company; and
  • 10% of the selling price where the seller is a non-resident trust.

In clause 10(1) of the draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, which was released concurrently with the Annual National Budget earlier this year, it is proposed that the rates above be increased to 7.5%, 10% and 15% respectively and effective to disposals of immovable property from 22 February 2017.

While ultimately the withholding obligation lies with the purchaser paying the purchase amount, a conveyancer or estate agent may also be liable where the withholding tax is not withheld from payments made to the non-resident seller.[2]

As referred to above, the withholding tax is not a final tax and its purpose is merely to secure the ultimate capital gains tax liability that may ultimately be due (and which would in most circumstances be substantially less the amount withheld). To the extent that a lesser amount is due in the form of a capital gains tax exposure for the non-resident, the balance overpaid is refunded to the seller upon submission of an annual income tax return.

It is also possible for a non-resident to apply for a tax directive that no withholding tax needs to be withheld from the selling price of the property sold. The directive may be based on either:[3]

(a) the extent to which the seller is willing to provide for security for the payment of taxes due to SARS on the disposal of the property;

(b) the extent of the other assets that the seller has in the Republic;

(c) whether the seller is potentially not subject to tax in respect of the disposal of the property; and

(d) whether the actual liability of that seller for tax in respect of the disposal of the property is less than the amount required to be withheld.

[1] 58 of 1962

[2] Section 35A(12)

[3] Section 35A(2)

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)

PROVISIONAL TAX RULES

A3b

Since the provisional tax season has arrived, it is important to remember the rules regarding your estimates. The provisional tax payment must be received by SARS on or before the due date, 28 February 2017. Failure to do so could result in penalties and interest imposed by SARS.

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IMPORTANT RULES REGARDING PROVISIONAL TAX

Provisional tax is a method of paying tax due, to ensure the taxpayer does not pay large amounts on assessment, as the tax liability is spread over the relevant year of assessment. It requires the taxpayers to pay at least two amounts in advance, during the year of assessment, which are based on estimated taxable income. A third payment is optional after the end of the tax year, but before the issuing of the assessment final liability is worked out upon assessment and the payments will be off-set against the liability for normal tax for the applicable year of assessment.

  1. Provisional tax payments are calculated on estimated taxable income, which includes taxable capital gains for the particular year of assessment.
  2. It is imperative that if you have earned a capital gain during the current year that you declare it for provisional tax purposes.
  3. In the event that you do not advise us of a capital gain that should be included in provisional tax, an understatement penalty may very well be levied by SARS.

There are certain penalties for underpayment of provisional tax, which will be levied by SARS.

  1. If your actual taxable income is more than R1 million a penalty will be levied if the second period estimate is less than 80% of actual taxable income.
  2. If your actual taxable income is equal or less than R1 million a penalty will be levied should the second period estimate of taxable income for the year of assessment deviate from the basic amount applicable to that period.
  3. A penalty of up to 20% of the underpayment may be charged by SARS.
  4. Interest will be charged on all late payments.

Should your payment not reach the South African Revenue Service on or before the due date, a penalty of 10% will be levied on outstanding amounts and/or SARS will consider your estimated income for the 2nd provisional tax payment to be zero and will apply the relevant penalties.

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)

NON-EXECUTIVE DIRECTORS’ REMUNERATION: VAT AND PAYE

A2bTwo significant rulings by SARS, both relating to non-executive directors’ remuneration, were published by SARS during February 2017. The rulings, Binding General Rulings 40 and 41, concerned the VAT and PAYE treatment respectively to be afforded to remuneration paid to non-executive directors.The significance of rulings generally is that it creates a binding effect upon SARS to interpret and apply tax laws in accordance therewith. It therefore goes a long way in creating certainty for the public in how to approach certain matters and to be sure that their treatment accords with the SARS interpretation of the law too – in this case as relates the tax treatment of non-executive directors’ remuneration.

The rulings both start from the premise that the term “non-executive director” is not defined in the Income Tax or VAT Acts. However, the rulings borrow from the King III Report in determining that the role of a non-executive director would typically include:

  • providing objective judgment, independent of management of a company;
  • must not be involved in the management of the company; and
  • is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.

There is therefore a clear distinction from the active, more operations driven role that an executive director would take on.

As a result of the independent nature of their roles, non-executive directors are in terms of the rulings not considered to be “employees” for PAYE purposes. Therefore, amounts paid to them as remuneration will no longer be subject to PAYE being required to be withheld by the companies paying for these directors’ services. Moreover, the limitation on deductions of expenditure for income tax purposes that apply to “ordinary” employees will not apply to amounts received in consideration of services rendered by non-executive directors. The motivation for this determination is that non-executive directors are not employees in the sense that they are subject to the supervision and control of the company whom they serve, and the services are not required to be rendered at the premises of the company. Non-executive directors therefore carry on their roles as such independently of the companies by whom they are so engaged.

From a VAT perspective, and on the same basis as the above, such an independent trade conducted would however require non-executive directors to register for VAT going forward though, since they are conducting an enterprise separately and independently of the company paying for that services, and which services will therefore not amount to “employment”. The position is unlikely to affect the net financial effect of either the company paying for the services of the non-executive director or the director itself though: the director will increase its fees by 14% to account for the VAT effect, whereas the company (likely already VAT registered) will be able to claim the increase back as an input tax credit from SARS. From a compliance perspective though this is extremely burdensome, especially in the context where SARS is already extremely reluctant to register taxpayers for VAT.

Both rulings are applicable with effect from 1 June 2017. From a VAT perspective especially this is to be noted as VAT registrations would need to have been applied for and approved with effect from 1 June 2017 already. The VAT application process will have to be initiated therefore by implicated individuals as a matter of urgency, as this can take several weeks to complete.

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)