WHEN IT COMES TO STRATEGY, THINK BIG

B2To create a strategic roadmap for your business you don’t need heaps of wonderful resources; you only need to give up your preconceived ideas about strategy. Sometimes the thing that holds a small business back the most is small thinking. If you believe that the size of your business is a disadvantage when it comes to strategic planning, simply because the big companies have all the financial resources and manpower to influence the market, then why start a business at all? Fortunately, money or size of personnel is not what counts when you create a strategic plan – common sense is.

Keep your enthusiasm in check

You don’t need to strategise constantly; rather make sure that you understand the market conditions and that you have attainable goals – don’t waste time on too much planning. You could also try using your company’s small size to out-manoeuvre larger, slower companies by addressing challenges and options and seizing opportunities over short but regular spaces of time.

Challenge assumptions

Believing in the status quo is not part of a successful entrepreneur’s strategy. The business climate is constantly changing with the help of the Internet, social media and other mobile devices. Many companies have landed on the business rubbish dump because they could not adapt to changing times. Question everything. Attempt playing devil’s advocate with your new ideas, then get your team together and devise plans to make the idea viable. Ignore preconceived notions about what can or cannot work – while some business principles are a given, very few business ideas are completely useless.

Avoid myopia

You can build a sales strategy based on the outcome you desire. Don’t miss out on good opportunities because you are too caught up in day-to-day activities to think outside the box and re-examine your progress. Change your perspective and get your team to think in more creative, profitable ways.

Jack (or Jane) be nimble, eager and bold

The market and the needs of customers keep changing, and it’s beyond your control. What you can control, however, is how you adjust to these changes and what new plans you create. Be bold in your new approach and keep an open mind as to the unconventional ways in which to grow.

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)

THE 2017 TAX SEASON IS OPEN

B1The Commissioner for SARS recently published the annual notice to officially ‘open’ the 2017 tax season. Individuals are now able to file their annual income tax returns for the 2017 year of assessment (which ended on 28 February 2017) from 1 July, and we request that our clients contact us so that we can arrange for the necessary. The following time frames will apply:
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  • For a company, within 1 year of its year-end (for example, a company with a financial year-end of 31 March 2017 is required to submit its 2017 tax return by 31 March 2018);
  • For all other taxpayers (including natural persons and trusts), returns are to be submitted at the latest by:
    • 22 September 2017 for persons still making use of manual hardcopy returns;
    • 24 November 2017 for persons (excluding taxpayers registered for provisional tax) making use of SARS’ eFiling system; and
    • 31 January 2018 for all provisional taxpayers making use of SARS’ eFiling system.

As was the case in previous years, companies may only file returns using eFiling – manual returns are not allowed in terms of the above SARS notice.

Not all individuals are required to submit income tax returns. Various criteria are listed which, only if any of these are met, means that a person is obliged to submit a return to SARS.  For example, all companies, whether incorporated in South Africa or not, are obliged to submit returns if South Africa is the place from which the company is effectively managed.  Non-tax resident companies, but which were incorporated in South Africa, must also render returns, as well as non-tax resident companies incorporated outside of the Republic and earning income from a South African source.

Taxpayers (excluding companies) are required to submit returns if they carried on any trade in South Africa during the 2016 tax year. This does not include the mere earning of a salary. A variety of other factors are listed in terms of which non-company taxpayers are required to submit returns. The main exemption from having to submit a return for tax resident natural persons though is if the person earned only a salary from a single employer during the year which did not exceed R350,000, and income from interest for that person was also less than R23,800 (or R34,500 if the person is older than 65).

Quite a number of taxpayers are therefore potentially exempt from the requirement to submit an income tax return, even if registered for income tax purposes. However, even though it may in terms of the notice not be required to submit a tax return, it may still be beneficial to do so. Natural person taxpayers are often under the unfortunate impression that the completion of a return necessarily gives rise to the incidence of tax.  This is of course not so and many may have suffered tax consequences during the year already by having amounts deducted from salaries in the form of pay-as-you-earn contributions deducted from their salaries. This of course amounts to a mere cash flow mechanism introduced to ensure a steady supply of cash to the fiscus and which contributions are set-off from the annual tax liability when the annual tax return submitted is assessed. However, the opportunity to negate this is presented through the completion of a tax return and claiming deductible expenses in the form of e.g. medical aid or pension fund contributions. The principle in this regard is that all income is taxable irrespective of whether a return is completed or not. However deductions can only be claimed by completing a tax return and natural persons specifically should jump at the opportunity to do so.

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)

TAX RESIDENCE FOR INDIVIDUALS

B3According to the South African Revenue Service (SARS), South Africa has a residence-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source.

In an increasingly global society where individuals travel more freely across borders and are able to hold assets in various countries, it becomes important for individuals with ties to South Africa to have certainty whether they are a South African tax resident or not. If they are, their entire income earned from wherever in the world may potentially be taxed in South Africa.

Tax residence is not linked to migration status. In other words, irrespective of which country’s passport one carries, tax residence may still be established in South Africa by virtue of the domestic tests applied by the Income Tax Act.[1] In terms of that Act, an individual will be tax resident in South Africa if either that person meets the criteria of the “physical presence” test, or if that person is “ordinarily resident” in South Africa.

The physical presence test involves a day counting exercise whereby a person will be considered to be a South African tax resident if he/she has been present in the Republic for at least 91 days every year for 6 tax years, and that the days spent in the country in total over this period amounts to at least 915 days in total. If this test is met, the individual will be tax resident from the first day of the last year forming part of the 6-year period referred to.

The question whether a person is “ordinarily resident” in South Africa is a more involved one. The term as used in the Income Tax Act is undefined, but our courts have considered the term to refer to “… the country to which [an individual] would naturally and as a matter of course return from his [or her] wanderings”.[2] The test involves a facts-based and substantive inquiry that in essence involves a person being asked: Where do you consider home to be.

Tax residence is not only relevant for purposes of where a tax liability may arise, but also to understand what tax compliance-related obligations may arise for an individual. It is therefore important for individuals not to confuse migration and tax residence status; the two rather have very little to do with one another.

References:

  • [1] See the definition of “resident” in section 1 of the Income Tax Act, 58 of 1962
  • [2] Cohen v CIR 1946 AD 174

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)

GOODS AND SERVICES ACQUIRED BY VAT VENDORS ON CREDIT

B2It is an established principle that registered VAT vendors may claim a deduction for input tax on goods or services acquired for use in the course of making taxable supplies as part of carrying on an enterprise.[1] For example, a VAT vendor purchases trading stock from another vendor for the purpose of sale to its clients subsequently. Once those goods are purchased by the VAT vendor, even if on credit, input tax may generally be claimed on the goods purchased.

Where the VAT vendor above buys the goods on credit, the input tax claimed may effectively be reversed if payment to the creditor is not forthcoming timeously. In terms of section 22(3) of the VAT Act, where the consideration for the purchase of goods have not been paid by the VAT vendor to its supplier within 12 months of it buying the goods, a portion of the input tax claimed must be effectively reversed and paid over to SARS as output VAT. In other words, where a VAT vendor has claimed input tax, but has not yet settled the amount due to the person providing it with those goods or services in respect of which the input tax is claimed, the input tax claim will be effectively cancelled.

Although it may appear to be a trivial matter to most, the question does become relevant where goods or services are supplied between related persons or entities, such as group companies for instance. When “payment” is made for purposes of the VAT Act has recently been considered in the case of XYZ Company (Pty) Ltd v CSARS.[2] In that case a VAT supply was made between a holding company and its subsidiary, with the amount owing subsequently being moved from the debtors’ book to the loan account which the subsidiary company had in place with the holding company. SARS contended that the purchase price remaining outstanding on loan account has not yet been paid by the subsidiary, and therefore the input tax claimed by the subsidiary had to be accounted for as output tax after 12 months of the supply taking place.

The Tax Court however differed and attributed a wide meaning to the word “paid”. It held that the action of transferring the debt due from the debtors’ book to the loan account of the parties amounted to the payment of the debt arising from the supply. The holding company acquired a new right with new terms, being those linked to the newly created loan account and which differed from the trade debt, even though the counter-party was unchanged. Payment, in a wide sense, is not limited to cash flow only, but also include an exchange and creation of new rights and obligations.

While the judgment deals specifically with the context of section 22(3), a consideration whether amounts have been “paid” or not are not limited to this provision only and the effect thereof may extend wider to other provisions of the VAT Act too, the provisions of section 16(3) – which deal with input tax claimed on second hand goods acquired – being a pertinent example.

References:

  • [1] Section 17(1) of the VAT Act, 89 of 1991
  • [2] Case No.: VAT 1247, 5 September 2016 (Cape Town)

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)

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

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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)

FRINGE BENEFITS ON RESIDENTIAL ACCOMMODATION

A3bEmployees’ remuneration packages are often comprised of more than only a monthly cash salary component. Many employees also receive various other benefits from their employers, be it in the form of an interest free loan, use of an employer-owned vehicle, vouchers or gifts, or the provision of residential accommodation. These fringe benefits are all required to be quantified by the Seventh Schedule to the Income Tax Act, 58 of 1962, and which benefits are required to be included in such recipient employees’ taxable income and subject to income tax (and PAYE).

The provision of residential accommodation to employees is at times controversial and complicated. This article seeks to focus on the calculation of this specific form of fringe benefit popularly provided to employees, and is especially relevant in certain specific industries such as mining and farming, although by no means limited thereto.

The standard approach prescribed by paragraph 9 of the Seventh Schedule to the Income Tax Act is to calculate the fringe benefit by applying the below formula and to arrive at the appropriate “rental value” to be placed on the accommodation supplied to the employee:

(A – B) x C/100 x D/12

A:  the “remuneration proxy” (typically, the remuneration paid to the employee by that employer during the previous tax year);

B:  an abatement of R75,000 (for 2017 specifically, which amount is linked to the annual primary rebate enjoyed by taxpayers who are individuals);

C:  an amount of 17 (increased to 18 if the accommodation consists of at least 4 rooms and either the accommodation is furnished or power is supplied by the employer, and increased further to 19 if the accommodation is both furnished and power is supplied at the cost of the employer); and

D:  the number of months that the employee was entitled to use the accommodation.

The value of the fringe benefit must be declared on the employee’s IRP5 under code 3805.

Where the employer has obtained the accommodation from an unconnected person to supply to its employee, the fringe benefit value adopted may be such actual cost to the employer if less than the fringe benefit value determined in terms of the above calculation. Any fringe benefit value should further be decreased by any amount contributed thereto at the employee’s own expense. Finally, it is worth noting that no fringe benefit arises if the employer is providing accommodation to an employee where necessary for the employee to spend time away from his usual place of residence to perform his/her duties.

It should be noted that the above is intended to serve as general guidance only. Several nuances and specific provisions exist where international considerations come into play, where the employee has a fixed or contingent interest in the property concerned or where the property is made available for holiday purposes only.

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)

ASSETS HELD AS SECURITY BY SARS WHEN A COMPANY IS BEING LIQUIDATED

A2bThe KwaZulu-Natal High Court previously granted an application brought by Van der Merwe and others (acting as liquidators) requiring the Commissioner for the South African Revenue Service to release certain assets held by him under his control in a customs warehouse. The assets in question were being held by the Commissioner as security for payment of outstanding Value-Added Tax and customs duty liabilities owed by the insolvent taxpayer involved. After losing in the KwaZulu-Natal High Court, the Commissioner took the matter on appeal to the Supreme Court of Appeal. This judgment is reported as CSARS v Van der Merwe NO (598/2015) [2016] ZASCA 138 (29 September 2016).

Van der Merwe and the other respondents were all liquidators of Pela Plant (Pty) Ltd, a company that became insolvent and for which Van der Merwe and his colleagues were appointed to act as liquidators. To this end, the liquidators endeavoured to have all the assets of the company sold to realise proceeds from which to repay the creditors of the company to the extent possible. The Commissioner was unwilling to release the assets held, as he contended that he was entitled to hold the assets until the requisite VAT and customs duty owed to him was settled. Only then, in terms of the VAT Act 89 of 1991 and the Customs and Excise Duty Act 91 of 1964, was he obliged to release the assets back to the liquidators. The liquidators on the other hand sought to have the assets released to them, and in spite of the outstanding VAT and customs duty owed to the Commissioner: they had an obligation to realise the company’s assets and to repay the insolvent company’s creditors to the extent possible in terms of the provisions of the Insolvency Act 24 of 1936 read with the 1973 Companies Act.

The Supreme Court of Appeal was therefore confronted with the question “[w]hether the law relating to insolvency in respect of the winding up of a company unable to pay its debts permits a liquidator of such a company to take possession of property of the company in the custody and/or under the control of… the Commissioner and to deal with such property as provided for in the law relating to insolvency even though duty has not been paid in respect of such property in terms of… the Customs and Excise Act… and/or value added tax has not been paid in respect of such property as required in terms of… the Value Added Tax Act…”

The judgment came down on the side of the liquidators yet again, and the court confirmed the judgment of the court a quo. When confronted with the question of whether the Commissioner was entitled to hold on to the assets in terms of the VAT and the Customs and Excise Duty Acts, as opposed to releasing them as required by the Insolvency Act, the court was clear in its direction:“When insolvency intervenes one turns to the Insolvency Act.”  This statute will therefore govern the process.

Nothing precludes the Commissioner though from proving a claim as part of the liquidation process. However, he is not permitted to act unilaterally and of his own volition to retain assets held as security by him in the satisfaction of a tax debt due to him.

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)