HOW THE VAT INCREASE AFFECTS YOUR BUSINESS

B4Consumers and suppliers have by now had an opportunity to familiarise themselves with the increased Value-Added Tax (VAT) rate of 15% since 1 April 2018. There are however many technical considerations related to the increase that remain unclear. One such an uncertainty is with regards to deposits paid prior to the effective date of the increase, while goods and services are only rendered thereafter.

VAT vendors often require that consumers pay a deposit to secure the future delivery of goods or services (for example, an advance payment for the manufacture of goods, bookings in advance for holidays or accommodation etc.). The deposit paid by the consumer is then off-set against the full purchase price once they eventually receive the goods or services. The question arises what VAT rate the consumer will finally be subject to, where they paid a deposit before 1 April 2018, but the actual delivery of goods or services only takes place thereafter.

The answer to this question is found in the time of supply rules contained in section 9 of the Value-Added Tax Act.[1] In terms thereof, the “time of supply” of goods and services is at the time an invoice is issued by a supplier, or the time any payment of consideration is received by the supplier, whichever is the earlier. Two important concepts stem from this rule.

Firstly, an “invoice” needs to be issued by a supplier. In terms of section 1 of the VAT Act, an “invoice” is a document notifying someone of an obligation to make payment. It is therefore not necessary that a “tax invoice” – which has very specific requirements – needs to be issued. If consumers received only a “booking confirmation”, “acknowledgment of receipt” or similar document prior to 1 April 2018 that did not demand payment (such as tax invoice or pro-forma invoice), the time of supply was not triggered, and consumers will be subject to the 15% VAT rate once the goods or services are finally delivered after 1 April 2018.

Secondly, any deposit that was paid by the consumer, would have had to be applied as “consideration” for the supply of the goods or services to constitute “payment”. In this regard, consumers are largely dependent on how VAT vendors account for deposits in their financial systems. If deposits are accounted for separately (which is often the case with refundable deposits or where there are conditions attached to the supply) and only recognised as a supply when goods or services are received by the consumer, the deposit (although a transfer of money has occurred), would not constitute “payment”. For example, the time of supply may only be triggered once a guest has completed their stay at a guest house after 1 April 2018, resulting in VAT being levied at 15%.

The take away from the time of supply rules is therefore that payment of a deposit prior to 1 April 2018 does not necessarily result in a supply at 14% VAT and the rate to be applied is dependent on the specific facts of each case. Both consumers and VAT vendors should also take note that there are a number of rate specific rules that apply during the transition phase, and are encouraged to seek advice from a tax professional when they are in doubt about the rate to be applied.

[1] 89 of 1991 (the “VAT-Act”)

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)

CHANGING BANKING DETAILS WITH SARS

B3In order to prevent fraud, the South African Revenue Service (“SARS”) requires confirmation of new or any changes to existing banking details and will only process any refunds due once these new details have been verified. (This often leads to frustration among taxpayers whose refunds are being withheld without notification of banking details that require verification.)

Taxpayers have various options available on how to proceed with this verification process. It can either be done in person at any SARS branch (if the person is not registered on eFiling) or the details can, in limited instances, be updated when completing the person’s income tax return (for both individuals and companies). The banking details can also be updated when requesting a transfer duty refund or by completing the relevant RAV01 form[1] on eFiling. SARS will not allow updates to the SARS system via other forms of communication (e.g. email, fax, post[2] or telephone).

Registering or changing of banking details for customs and excise clients cannot be done via eFiling. These taxpayers need to visit a SARS branch office and submit a completed DA185 application form[3] together with specific supporting documentation.

SARS will only accept as a valid bank account a cheque, savings or transmission account in the name of the relevant taxpayer. Credit card, bond and foreign bank accounts are not accepted.

Persons that are allowed to change banking details only include the relevant taxpayer, a registered representative of that taxpayer (whose details match those on the SARS system) or a registered tax practitioner acting on behalf of the taxpayer. A tax practitioner may not further delegate an employee to act on behalf of the client, but needs to be present him- or herself to request the necessary changes.[4] SARS lists certain exceptional circumstances where banking details may be changed by someone other than the aforementioned persons (for example, in the case of estates or where the taxpayer is a non-resident unable to go to a branch office).

SARS also provides detailed guidance on the supporting documentation what should be provided when changing banking details. Typically, this includes the original ID document of the taxpayer, a certified copy of that document and proof of the residential or business address of the taxpayer. The same is required of the registered representative or tax practitioner if applicable. SARS also requires the taxpayer to present bank statements of the account holder (not older than 3 months) as proof thereof that the bank details provided are correct.

To avoid having to stand in those long SARS queues (potentially, more than once) ask us to assist with this process.

[1] Registration, Amendment and Verification form

[2] This also includes placing documents in the drop-box at a SARS branch.

[3] Registration / Licensing of Customs and Excise

[4] See form ASPOA – Authority on Special Power of Attorney by Tax Practitioner.

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)

“BOOKING” CAPITAL LOSSES ON SHARES IS NOT THAT EASY

B2There is a number of techniques that taxpayers use to reduce their capital gains tax (CGT) exposure on long-term share investments. A common practice is to utilise the annual exclusion of R40 000 provided for in paragraph 5 of the Eighth Schedule of the Income Tax Act[1] by selling shares that have been bought at a low base cost, at a higher market value and then immediately reacquiring those shares at the same higher value, thereby ensuring that the investments’ base cost is increased by as much as R40 000 per year. If the gain on those shares is managed and kept below the annual R40 000 exclusion, taxpayers receive the benefit of a ‘step-up’ in the base cost of the shares to the higher value for future CGT purposes, without having incurred any tax cost.

A reverse scenario is to build up capital losses for off-set against any future capital gains and taxpayers are often advised, especially during times of market volatility, to ‘lock-in’ capital losses created by the expected temporary reduction in share prices. This involves selling shares at a loss and then immediately reacquiring the same shares at the lower base cost, but with the advantage of having created a capital loss – a technique known as ‘bed-and-breakfasting’.

Without placing an absolute restriction on ‘bed-and-breakfasting’, paragraph 42 of the Eighth Schedule limits the benefit that could have been obtained from the ‘locked-in’ capital loss. The limitations of paragraph 42 apply if, during a 45-day period either before or after the sale of the shares, a taxpayer acquires shares (or enters into a contract to acquire shares) of the same kind and of the same or equivalent quality. ‘Same kind’ and ‘same or equivalent quality’ includes the company in which the shares are held, the nature of the shares (ordinary shares vs preference shares) and the rights attached thereto.

The effect of paragraph 42 is twofold. Firstly, the seller is treated as having sold the shares at the same amount as its base cost, effectively disregarding any loss that it would otherwise have been able to book on the sale of the shares and utilise against other capital gains. Secondly, the purchaser must add the seller’s realised capital loss to the purchase price of the reacquired shares. The loss is therefore not totally foregone, but the benefit thereof (being an increased base cost of the shares acquired) is postponed to a future date when paragraph 42-time limitations do not apply.

Unfortunately, taxpayers do not receive guidance on complex matters such as these on yearly IT3C certificates or broker notes, since these are generally very generic. Therefore, taxpayers wishing to fully capitalise CGT exposure on market fluctuations are advised to consult with their tax practitioners prior to the sale of shares.

[1] No. 58 of 1962

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)

BUYING OUT SHAREHOLDERS

B1We are often approached by clients to advise on the most tax efficient manner in which a shareholder can sell an investment in a private company. Typically, the parties involve a majority shareholder of a company that is interested in buying out the minority shareholders in the company and which will ensure that that majority shareholder becomes the single remaining shareholder of that company.

In essence, two options are available through which a shareholder may dispose of a share in a company to achieve the above goal: it could either sell its shares to the purchasing shareholder, or it could sell the shares owned back to the company (i.e. a so-called “share buyback”). These two different options have varying tax consequences, and taxpayers should take care that these (often material) transactions are structured in the most tax appropriate manner possible.

Where a share is sold to another shareholder, the selling shareholder will simply pay a capital gains tax related cost. For companies, such capital gains tax related cost will effectively be 22.4% of the gains realised, whereas the rate for trusts is 36% (if gains are not distributed to beneficiaries), or up to 18% if the seller is an individual.

Where shares are however sold back to the company whose shares are being traded, that share buyback constitutes a dividend for tax purposes (to the extent that contributed tax capital is not used to fund that repurchase). Capital gains tax is therefore no longer relevant, but rather the dividends tax. Dividends would typically attract dividends tax (levied at 20%), rather than capital gains taxes.

It may therefore be beneficial for an existing shareholder (that is itself a company) to opt for its shares to be sold back to the company whose shares are held (and which shares are therefore effectively cancelled), rather than to sell these to the remaining shareholders and pay capital gains tax. This is because if the shares are sold to the remaining shareholders, a 22.4% capital gains tax related cost arises. However, where the shares are bought back, the “dividend” received by the company will be exempt from dividends tax and therefore no dividends tax should arise, since SA resident companies are exempt from the dividends tax altogether. A company selling its shares back to the entity in which it held the shares may therefore dispose of its investment without paying any tax whatsoever: no capital gains are realised since the shareholder receives a “dividend” for tax purposes, and the dividend itself is also exempt from dividends tax.

Share buybacks have become a hot topic recently and National Treasury has now moved to introduce certain specific anti-avoidance measures and reporting requirements that apply in certain circumstances. Still, there are perfectly legitimate ways in which to structure many corporate restructures where a buyout of shareholders takes place, and taxpayers will be well-advised to seek professional advice to ensure that such transactions are structured in as tax effective manner as possible.

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)