COMPANY TAX IN SOUTH AFRICA

B3If you are self-employed or a business owner, you have to pay company tax in South Africa. How much business tax you pay and what deductions you can claim will depend on the size and type of your business.

What is company tax?

Company tax (also called, “corporate income tax”) is what keeps our economy functional. There exists different business categories, who all have to go through registration procedures and have to pay tax. Tax is a rather complicated matter, which is why a lot of people choose to rather pass it on to professional business accountants.

Who needs to pay company tax?

All registered businesses in South Africa have to pay company tax on their worldwide income to SARS. Companies based outside of South Africa, but operating in South Africa, must pay tax on income derived from within South Africa only. The type of companies that have to pay company tax in South Africa include:

  • listed and unlisted public companies
  • private companies
  • close corporations
  • co-operatives
  • collective investment schemes
  • small business corporations
  • share block companies
  • body corporates
  • public benefit companies
  • dormant companies

What steps must be taken?

  1. Register as a taxpayer. Every business liable to tax under the Income Tax Act, 1962, must register with SARS as a taxpayer. You can register once for all different tax types, using the client information system.
  2. Submit annual tax return. Every registered taxpayer must submit a return of income twelve months after the end of the financial year. Returns can be submitted electronically or manually via SARS.
  3. Submit provisional tax returns. Every company must submit provisional tax returns. Your first provisional tax return must be submitted six months from the start of the year, and the second at year-end, and must contain an estimate of the total taxable income earned or to be earned for that period. Payment of the tax must accompany the return. A third “top-up” payment may be made six months after year-end.

Resources

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)

BEWARE OF CAPITAL GAINS TAX WHEN YOU EMIGRATE

B1While many people immigrate to South Africa, we also see many of our clients emigrating from South Africa. And while formal migration-status is not necessarily linked to tax residency, the time of tax migration often coincides with formal emigration linked to passport or visum status. Many are surprised to learn (often after the fact) that emigration for tax residency purposes gives rise to tax consequences in South Africa, and specifically to capital gains tax (“CGT”) consequences in the form of so-called “exit charges”.

In essence, section 9H of the Income Tax Act, 58 of 1962, determines that when a person ceases to be tax resident in South Africa, that person is deemed to have disposed of all his or her assets on the day that the individual emigrates for income tax purposes. In other words, in calculating their income tax exposure, individuals emigrating for tax purposes are regarded as having sold all of their assets at market value on the day before that on which they leave the country. As a result, a capital gain is realised on this deemed disposal that is subject to CGT at the prevailing tax rates. Currently, 40% of capital gains so realised by individuals are included in their annual taxable income, which amount may be subject to tax at rates of as high as 45%.

The policy justification for taxing individuals upon emigration is that taxes are to be levied on all capital growth achieved on assets owned by South African residents while they were tax resident. Once an individual will have emigrated, limited mechanisms would exist whereby capital gains may only be realised upon eventual actual sale of assets subsequently once the individuals are no longer tax resident in South Africa. (It is for this reason that South African immovable property is excluded from the “exit charges” regime; section 35A of the Income Tax Act provides for a withholding tax mechanism whereby CGT may be recovered from non-residents when they sell South African immovable property.)

While one may have sympathy for the policy justification for the levying of “exit charges”, it must be recognised that any deemed disposal of assets necessarily creates a cash flow conundrum for the individuals affected, quite often proving prohibitive for wealthy individuals seeking to emigrate. It is quite possible that assets of individuals emigrating may consist mainly of illiquid assets such as share investments. Upon emigration, these very assets may need to be actually disposed of in order to raise sufficient cash resources to be able to pay the resultant CGT that would have been payable on a deemed disposal of those assets at emigration.

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)

DO YOU NEED A TAX CLEARANCE CERTIFICATE?

B3Taxpayers may require SARS to issue them with a tax clearance certificate for various reasons. This includes a general confirmation that the relevant taxpayer’s affairs are all in order and up to date (a so-called “Good Standing” tax clearance certificate), or a certificate being required to participate in certain government tenders.

Perhaps most notably in recent times, natural person taxpayers are also requesting “FIA” tax clearance certificates, being tax clearance certificates issued to taxpayers who intend to utilise their R10m annual foreign investment allowances to transfer funds abroad for investment purposes. The South African Reserve Bank (through its authorised dealers (most commercial banks)) will not grant approval for transfer of funds in this manner without confirmation from SARS in the form of a FIA certificate being issued that the individual’s tax affairs are all up to date and in order.

Many do not realise that the issuing of tax clearance certificates is a process specifically regulated by the Tax Administration Act.[1] Any tax clearance certificate must be requested in the prescribed form and manner by a taxpayer or his/her representative.[2] A tax clearance certificate must be issued in the prescribed format and include at least the original date of issue of the tax compliance status confirmation to the taxpayer, the name, taxpayer number and ID number (or company registration number) of the taxpayer.[3]

After receipt of an application in the prescribed form, SARS must either issue or decline to issue the tax clearance certificate requested within 21 business days, or such longer period as may reasonably be required if a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.[4]

In practice, SARS often takes well in excess of the 21 business days in which to issue tax clearance certificates, especially for purposes of Foreign Investment Allowance applications. In terms of the Tax Administration Act, SARS may not take longer than the 21 days to process such an application, unless there is some form of proof that tax collections may be jeopardised if the certificate is issued (and which will rarely be the case). Where such delays are experienced though, taxpayers are in practice left with very few remedies, which are conceivably limited to either approaching the Tax Ombud (whose recommendations are not binding), the Public Protector or the High Court for an order forcing SARS to make a decision on issuing a certificate. Most taxpayers will therefore, sadly, simply have to endure SARS’ delays in processing tax clearance certificate applications.

  • [1] Section 256 of the Tax Administration Act, 28 of 2011
  • [2] Section 256(1)
  • [3] Section 256(4)
  • [4] Section 256(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)

SARS TO INTENSIFY ACTION AGAINST TAX OFFENDERS

B1Despite the fact that SARS has upheld their philosophy of education, service, and thereafter enforcement, they have noticed an increase in taxpayers not submitting their tax returns by the stipulated deadlines, and not settling their outstanding debt with SARS. This is not limited to the current tax year but includes substantial non-compliance across previous tax years.

It is for this reason that from October 2017 SARS will intensify criminal proceedings against tax offenders. Failure to submit the return(s) within the said period could result in:

  • Administrative penalties being imposed on a monthly basis per outstanding return.
  • Criminal prosecution resulting in imprisonment or a fine for each day that such default continues.

Types of tax

SARS has reminded all taxpayers that, according to the Tax Administration Act No. 28 of 2011, it is a criminal offence not to submit a tax return for any of the tax types they are registered. These tax types are:

  • Personal Income Tax (PIT)
  • Corporate Income Tax (CIT)
  • Pay as You Earn (PAYE)
  • Value Added Tax (VAT)

It is also important to note that should any return result in a tax debt it must be paid before the relevant due date to avoid any interest for late payment and legal action. To avoid any penalties, interest, prosecutions as well as imprisonment, taxpayers are urged to rectify their compliance by submitting any outstanding returns as soon as possible. Please contact your tax advisor for assistance.

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)

 

EXTENTION OF LEARNERSHIP ALLOWANCES AND EMPLOYMENT TAX INCENTIVE

B4With the focus on skills development and job creation, the existing allowance for learnership agreements has been extended to all agreements entered into before 1 April 2022. Similarly the Employment Tax Incentive (ETI) has been extended to 28 February 2019.

Section 12H of the Income Tax Act[1] allows an employer to claim a “learnership allowance” in respect of registered learnership agreements entered into or completed during a year of assessment. For purposes of section 12H the learnership agreement must be registered in accordance with the Skills Development Act.[2] A qualifying employer is entitled to two types of allowances, namely an annual allowance (deductible in any year of assessment during which a learner is a party to a registered learnership agreement) and a completion allowance (deductible in the year in which the learner successfully completes the learnership).

In order to qualify for the section 12H allowance the learnership agreement must furthermore have been entered into before a certain date. This period has been extended from 1 October 2016 previously to 1 April 2022.

Also, with effect from 1 October 2015, the amount of the allowance depends on the level of qualification held by the learner. In this regard, employers qualify for both the annual as well as the completion allowance of R40,000 in respect of learners who hold a qualification equal to the National Qualifications Framework (NQF) level 1 to 6. In respect of learners who hold a qualification equal to NQF level 7 to 10, the employer qualifies for an annual and completion allowance of R20,000 each.

In respect of a person with a disability, the employer qualifies for an additional allowance of R20,000 where the learner has a qualification equal to NQF level 1 to 6, and an additional R30,000 where the learner has a qualification equal to NQF level 7 – 10, i.e. a total allowance of R60,000 and R50,000 respectively.

The ETI[3] was introduced by Government on 1 January 2014 to address the socio and economic problem of youth development. Eligible employers may reduce the monthly employees’ tax withheld and payable to SARS in terms of the Fourth Schedule to the Income Tax Act with the amount of the ETI. It was initially indicated that this allowance will cease on 1 January 2017. However, the incentive has now been extended to 28 February 2019.

In addition to the ETI, an employer may also be eligible for a deduction of a learnership allowance during a year of assessment if the requirements of section 12H of the Income Tax Act are met as set out above.

[1] 58 of 1962

[2] 97 of 1998

[3] Employment Tax Incentive Act No. 26 of 2013

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)

GONE ARE THE DAYS OF TAX-FREE SALARIES ABROAD

B3Many South African taxpayers earning a salary abroad have for many years been able to benefit from so-called “double non-taxation”. This would be the case where salaries are earned in countries where the employer country would not tax salaries earned in that country, and where a domestic South African income tax exemption would also be available to such South African employees. The UAE for example is renowned therefore that it levies very little, if any, taxes on non-resident employees employed in that jurisdiction. This regime interacts quite well with the South African exemption from income tax provided to South African employees working abroad and in terms of which South Africa would in many cases also not levy income tax on salaries so earned abroad. In other words, a salary earned abroad may potentially not be taxed in either the country of source or residence (i.e. South Africa).

In terms of section 10(1)(o)(ii) of the Income Tax Act[1] salaries earned abroad would be exempt from South African income tax if the salary is earned for services rendered outside of South Africa, and the employee would be absent from South Africa for at least 183 days in a tax year, of which at least 60 are consecutive.

In the annual national budget speech earlier this year, Government warned of its intention to withdraw relief for South African individuals working abroad and effectively achieving double “non-taxation” on salaries so earned. This threat has now been borne out by the proposed withdrawal of the exemption in section 10(1)(o)(ii) of the Income Tax Act, proposed in terms of the draft Taxation Laws Amendment Bill published on 19 July 2017. As is explained by the draft Explanatory Memorandum to the Bill,

“It has come to Government’s attention that the current exemption creates opportunities for double non-taxation in cases where the foreign host country does not impose income tax on the employment income or taxes on employment income are imposed at a significantly reduced rate.”

The draft Bill proposes that section 10(1)(o)(ii) be deleted effectively for tax years commencing on or after 1 March 2019. This would effectively mean that South African residents will be taxable in South Africa on salaries earned abroad to the extent that the source country does not levy tax on the income so earned. To the extent however that income is taxed abroad too, South Africa should grant a credit against taxes payable here in terms of either an applicable double tax agreement or the provisions of section 6quat of the Income Tax Act.

[1] 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)

FURTHER REFINEMENTS TO THE ATTACK ON INTEREST FREE LOANS TO TRUSTS

B2We previously reported on the introduction of section 7C of the Income Tax Act, 58 of 1962. In terms of this targeted anti-avoidance provision, National Treasury sought to attack interest free loans granted to trusts by connected persons of that trust.

Typically, these loans would have arisen by virtue of an individual that would sell his or her asset to a trust of which he/she is a beneficiary for estate duty purposes on interest free loan account. By doing so, the asset’s value will grow in the trust, while the interest free loan will remain a non-appreciable, static asset in the hands of the beneficiary, thereby excluding future capital growth on the asset from estate duty when that individual should one day pass away.

Section 7C deems an interest component to arise on interest free or low interest loan accounts to the extent that interest is not charged at the prescribed rate. The amount of the deemed interest is then treated as an annual donation by the trust, thereby attracting donations tax on the value of the deemed donation made to the trust. Were the trust creditors to actually charge interest on the loans to the trusts on the other hand, this will lead to taxable income accruing in their hands, and which will be subject to income tax being charged thereon at prevailing income tax rates.

The new proposals contained in the draft Taxation Laws Amendment Bill, published on 19 July 2017, contain two significant reforms which further focus the extent of the anti-avoidance provisions of section 7C and counter two specific planning solutions being conceived in practice to counter the application of section 7C in its current form.

The first such proposal to take note of is that loans to trusts are no longer the sole target, but also interest free loans extended to companies (owned by trusts) by the beneficiaries of that trust. This is in an attempt to counter structuring solutions whereby loans owing by a trust were shifted by way of complex restructurings to companies owned by trusts.

The second proposal is aimed at loans due by trusts being transferred from the creditor individual to another, thereby effectively “breaking the link” between the person that extended the loan to the trust and the person now entitled to the amounts due by the trust. In other words, section 7C would only previously apply to the person who extended the loan to the trust. Since the person now holding the loan claim did not originally grant the loan to the trust, the provisions of section 7C, in its original form, would not have applied. The second new revision to section 7C counters this approach making it clear that a connected person acquiring a loan claim is also caught by the provisions of section 7C (and thus required to charge interest) irrespective thereof that that person did not itself extend any loan finance itself to the trust.

The above are still mere proposals, but are proposed to become effective 19 July 2017 if enacted (which appears likely). Taxpayers with loan accounts to trusts are therefore well-advised to seek guidance on how to treat such loan accounts going forward.

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:
.

  • 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)

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)