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)

TAX SEASON 2016: NON-PROVISIONAL TAXPAYERS’ DEADLINE

a2_bMany of our clients are not registered for provisional tax, nor are they required to be so registered. These non-provisional taxpayers should however take note thereof that their annual income tax returns (for the 2016 year of assessment which ended on 29 February 2016) are due shortly, and not only on 31 January 2017 as is the case for natural person taxpayers also registered for provisional tax.

All companies are automatically registered for provisional tax. Therefore, non-provisional taxpayers are typically individuals earning little or no income other than from a salary. These taxpayers therefore need to attend to their annual income tax returns with an increased sense of urgency to meet the looming deadline, which is 25 November 2016 for individuals filing returns by way of SARS’ eFiling system. (Those very few individuals who still submit returns manually should have filed their income tax returns by 23 September 2016 already.)

Government Gazette No. 40041 (dated 3 June 2016) identified those persons required to file annual income tax returns for the 2016 year of assessment. The primary exemption from the requirement to submit a return for tax resident natural persons 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). The converse holds true though that if a person received income in excess of any of these amounts, they will be required to submit an income tax return for the 2016 tax year.

The Government Gazette also determines the dates by when the relevant persons are required to have submitted their returns by. Provisional taxpayers are annually afforded a slightly more lenient deadline to submit their income tax returns by as opposed to non-provisional taxpayers. This requires non-provisional taxpayers to be extra vigilant of the deadline to submit their annual income tax returns for the 2016 tax year by.

We therefore wish to remind our clients of their filing obligations with SARS and to contact us so that we may accumulate the information necessary to assist them in this regard. Failure to submit returns timeously may lead to penalties, as well as interest accruing on their accounts due to SARS. Administrative non-compliance penalties specifically will be levied if a person has more than one annual income tax return outstanding.

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)

HOME OFFICE EXPENDITURE

a4_bWith current day realities manifesting in ever increasing distances required to be travelled to get to an office, traffic congestion, etc. more and more employers are opting to give their employees the option of working from home. The proliferation of “home offices” has surfaced in dramatic fashion in recent times. It is therefore only natural that we have been experiencing an increased number of queries related to whether expenditure linked to home offices are tax deductible. With home office expenditure, we refer here specifically to those costs linked to occupying a specific space in a home for purposes of earning an income. This includes typically rent, interest paid on a bond, repairs, maintenance and other related costs.

Limitations to deductions for tax purposes in relation to home office expenditure is specifically dealt with by section 23(b) of the Income Tax Act, 58 of 1962. In essence it determines that home office expenditure is not deductible save in very strict circumstances, being:

  • where the part of the home used is used exclusively and regularly used for purposes of the taxpayer’s trade; and
  • on condition that the space so used must also have been specifically equipped for this purpose.

Home office expenditure will moreover not be deductible where the trade exercised involves employment or the holding of an office (such as a director for example), unless either:

  • the income earned is in the form of commission or any similar type of variable payment, and on condition that the duties of employment or office held are performed primarily outside of an office environment provided by an employer; or
  • the employment/office duties viewed holistically are mainly performed in the designated part of the home.

If either of the above two exceptions are met, home office expenditure will be deductible irrespective thereof that the taxpayer is an employee or the holder of a specific office. It is noted that section 23(m)(iv) in this regard also does not operate to limit deductions of home office expenditure more than is already the case in terms of section 23(b). (Section 23(m) ordinarily operates as the onerous provision severely limiting the tax deductions available to salaried individuals.)

As a final comment it should be pointed out that the above tests linked to whether home office expenditure is deductible or not all involves objective tests. SARS is also known to be extremely strict in its application of section 23(b). The Tax Administration Act, 28 of 2011, by virtue of section 102 provides that the burden of proof for showing that a deduction should be allowed rests on the taxpayer. SARS is therefore under no obligation to disprove any of the requirements necessary to qualify for home office expenditure. Rather, the taxpayer should be able to show that the space in question is exclusively and regularly used for business purposes and that it has been specifically equipped therefor. It should further illustrate that income earned comprises mainly a variable form of compensation and that no other space is available to the taxpayer, or that the services are performed mainly from the designated space at home.

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 SEASON 2016: NON-PROVISIONAL TAXPAYERS’ DEADLINE

Many of our clients are not registered for provisional tax, nor are they required to be so registered. These non-provisional taxpayers should however take note thereof that their annual income tax returns (for the 2016 year of assessment which ended on 29 February 2016) are due shortly, and not only on 31 January 2017 as is the case for natural person taxpayers also registered for provisional tax.

All companies are automatically registered for provisional tax. Therefore, non-provisional taxpayers are typically individuals earning little or no income other than from a salary. These taxpayers therefore need to attend to their annual income tax returns with an increased sense of urgency to meet the looming deadline, which is 25 November 2016 for individuals filing returns by way of SARS’ eFiling system. (Those very few individuals who still submit returns manually should have filed their income tax returns by 23 September 2016 already.)

Government Gazette No. 40041 (dated 3 June 2016) identified those persons required to file annual income tax returns for the 2016 year of assessment. The primary exemption from the requirement to submit a return for tax resident natural persons 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). The converse holds true though that if a person received income in excess of any of these amounts, they will be required to submit an income tax return for the 2016 tax year.

The Government Gazette also determines the dates by when the relevant persons are required to have submitted their returns by. Provisional taxpayers are annually afforded a slightly more lenient deadline to submit their income tax returns by as opposed to non-provisional taxpayers. This requires non-provisional taxpayers to be extra vigilant of the deadline to submit their annual income tax returns for the 2016 tax year by.

We therefore wish to remind our clients of their filing obligations with SARS and to contact us so that we may accumulate the information necessary to assist them in this regard. Failure to submit returns timeously may lead to penalties, as well as interest accruing on their accounts due to SARS. Administrative non-compliance penalties specifically will be levied if a person has more than one annual income tax return outstanding.

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)

SO WHAT IS THE FUTURE OF TRUSTS?

One of the questions that we are most confronted with by our clients is what the future of trusts are in South Africa.  Some questions even point to the misconception that the trust instrument itself as legal form is on the verge of being scrapped in South Africa altogether!

The current debate raging is not at all that dramatic, although the consequences for taxpayers potentially may be.  The “crystal ball” gazing exercise which we are so often requested to undertake stems from repeated warnings (some less subtle than other) by the Minister of Finance that the use of trusts as a tool to minimise tax exposure, be it in the form of income tax or estate duty, is being revisited by National Treasury to try and find a solution to the perceived abuse thereof.  As recently as in the 2016 budget, the following statement is made:

“Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”

This alludes both to how trusts are commonly used to minimise tax obligations, as well as how Treasury intends to (what could be considered a more focused) approach to trusts in future, while also hinting at what may be expected going forward.

As a first comment, trusts are popular estate duty planning instruments.  Without going into too much detail, typically an individual will sell his/her assets to a trust on interest free loan account.  In the coming years, the value of the assets will increase in the trust, while the value of the loan account will remain the same in the hands of the individual.

Secondly, trusts are potentially useful for income tax planning purposes as they allow for income to be distributed to individuals that are subject to tax at rates more beneficial than that of the trust (which involves ‘income-splitting’ referred to by Treasury above).  Typically these distributions often contains a fictitious element through distributions made on interest free loan account only (with no real intention that such distributions should vest in the beneficiaries).

It would appear as though Treasury is no longer considering an ‘out-and-out’ onslaught on the taxation of trusts (although this is only speculation).  However, the recent budget perhaps betrays what may be expected and that anti-avoidance legislation is to be introduced that will focus only on abusive practices involving trusts.  For both estate duty and income tax structures involving trusts, it is not farfetched to expect to see provisions introduced into tax legislation which will ensure that loan accounts with trusts all bear interest.  The significance of this?  Interest receipts are subject to income tax.

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)

WHY SARS REQUESTS SUPPORTING DOCUMENTS

A4_bMost taxpayers know that sinking feeling when SARS requests supporting documents from them. Which supporting documents must I submit? Am I being audited? Did I make a mistake on my income tax return? Will SARS send me to jail?

Why did SARS choose me?

SARS remains secretive about the way they go about selecting tax returns for verification and auditing. Nobody is exactly sure how SARS determines from which taxpayers they will request supporting documents. SARS has only disclosed that they make use of automated systems which randomly selects tax returns for review and/or determines a risk score for taxpayers based on their tax compliance history and third party data that may be in SARS’s possession.

Am I being audited?

A request for supporting documents does not necessarily mean a taxpayer did something wrong and is being audited by SARS. When SARS requests supporting documentation, they usually do a verification of the taxpayer’s income tax return to confirm that the submitted return agrees with the supporting documents. After the verification process is complete, SARS may decide to do a tax audit. The verification process and an audit are two different processes.

Being selected for an audit does not mean that the taxpayer broke any tax laws. SARS will select taxpayers who have not contravened any tax laws but whose behaviour indicates that the taxpayer might perhaps have transgressed one or more tax laws.

Which tax deductions may trigger requests for supporting documents by SARS?

SARS tends to request supporting documents in certain areas where claimable tax deductions can easily be inflated.

  • Repairs and maintenance claimed against rental income

Where a taxpayer claims repairs and maintenance expenses against rental income, SARS may request supporting documents. SARS can go as far as doing site inspections at the rental property to confirm that the repair and maintenance work has indeed been done on the rental property and not on the house of the owner of the rental property.

  • Claim for home office expenses

SARS wants proof of expense items claimed, for example municipal accounts, cleaning expenses and insurance. To be able to deduct home office expenses, the home office and office equipment must be used exclusively for business purposes. SARS has been known to do site inspections to confirm the exclusive use of a home office for business activities.

  • Deductions against fringe benefits like travel allowances and company cars

In order for SARS to allow the travel deduction, the taxpayer must submit a travel logbook showing kilometres travelled for business purposes.

  • Claim for medical expenses

SARS is looking for proof of payment of qualifying medical expenses paid out of the taxpayer’s own pocket during the year of assessment under scrutiny. A medical invoice must be submitted together with some kind of proof of payment in order for SARS to allow the deduction.

What happens if I do not submit supporting documents when SARS requests them?

If a taxpayer cannot submit the relevant documents, SARS will not be able to verify claims on the taxpayer’s tax return and the deductions will not be allowed.

When might SARS decide to audit me?

Some of the reasons why SARS might decide to audit a taxpayer’s tax affairs are:

  • The taxpayer’s behaviour in the past regarding his/her tax affairs.
  • The complexity of a taxpayer’s tax affairs.
  • SARS found material inconsistencies or irregularities while verifying a tax return against supporting documents.

An audit is a more in-depth process than verification and involves an evaluation (as opposed to verification as in the case of a request for supporting documents) of the information that was submitted in a tax return.

Providing SARS with supporting documents when requested to do so places an additional administrative burden on the taxpayer. However, requests by SARS for supporting documents also protect the honest taxpayer by ensuring that more taxpayers pay their dues.

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)

SO WHAT IS THE FUTURE OF TRUSTS?

A1_bOne of the questions that we are most confronted with by our clients is what the future of trusts are in South Africa.  Some questions even point to the misconception that the trust instrument itself as legal form is on the verge of being scrapped in South Africa altogether!

The current debate raging is not at all that dramatic, although the consequences for taxpayers potentially may be.  The “crystal ball” gazing exercise which we are so often requested to undertake stems from repeated warnings (some less subtle than other) by the Minister of Finance that the use of trusts as a tool to minimise tax exposure, be it in the form of income tax or estate duty, is being revisited by National Treasury to try and find a solution to the perceived abuse thereof.  As recently as in the 2016 budget, the following statement is made:

“Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”

This alludes both to how trusts are commonly used to minimise tax obligations, as well as how Treasury intends to (what could be considered a more focused) approach to trusts in future, while also hinting at what may be expected going forward.

As a first comment, trusts are popular estate duty planning instruments.  Without going into too much detail, typically an individual will sell his/her assets to a trust on interest free loan account.  In the coming years, the value of the assets will increase in the trust, while the value of the loan account will remain the same in the hands of the individual.

Secondly, trusts are potentially useful for income tax planning purposes as they allow for income to be distributed to individuals that are subject to tax at rates more beneficial than that of the trust (which involves ‘income-splitting’ referred to by Treasury above).  Typically these distributions often contains a fictitious element through distributions made on interest free loan account only (with no real intention that such distributions should vest in the beneficiaries).

It would appear as though Treasury is no longer considering an ‘out-and-out’ onslaught on the taxation of trusts (although this is only speculation).  However, the recent budget perhaps betrays what may be expected and that anti-avoidance legislation is to be introduced that will focus only on abusive practices involving trusts.  For both estate duty and income tax structures involving trusts, it is not farfetched to expect to see provisions introduced into tax legislation which will ensure that loan accounts with trusts all bear interest.  The significance of this?  Interest receipts are subject to income tax.

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)

SO WHAT IS THE FUTURE OF TRUSTS?

A2_bOne of the questions that we are most confronted with by our clients is what the future of trusts are in South Africa.  Some questions even point to the misconception that the trust instrument itself as legal form is on the verge of being scrapped in South Africa altogether!

The current debate raging is not at all that dramatic, although the consequences for taxpayers potentially may be.  The “crystal ball” gazing exercise which we are so often requested to undertake stems from repeated warnings (some less subtle than other) by the Minister of Finance that the use of trusts as a tool to minimise tax exposure, be it in the form of income tax or estate duty, is being revisited by National Treasury to try and find a solution to the perceived abuse thereof.  As recently as in the 2016 budget, the following statement is made:

“Some taxpayers use trusts to avoid paying estate duty and donations tax. For example, if the founder of a trust sells his or her assets to the trust, and grants the trust an interest-free loan as payment, donations tax is not triggered and the assets are not included in his or her estate at death. To limit taxpayers’ ability to transfer wealth without being taxed, government proposes to ensure that the assets transferred through a loan to a trust are included in the estate of the founder at death, and to categorise interest-free loans to trusts as donations. Further measures to limit the use of discretionary trusts for income-splitting and other tax benefits will also be considered.”

This alludes both to how trusts are commonly used to minimise tax obligations, as well as how Treasury intends to (what could be considered a more focused) approach to trusts in future, while also hinting at what may be expected going forward.

As a first comment, trusts are popular estate duty planning instruments.  Without going into too much detail, typically an individual will sell his/her assets to a trust on interest free loan account.  In the coming years, the value of the assets will increase in the trust, while the value of the loan account will remain the same in the hands of the individual.

Secondly, trusts are potentially useful for income tax planning purposes as they allow for income to be distributed to individuals that are subject to tax at rates more beneficial than that of the trust (which involves ‘income-splitting’ referred to by Treasury above).  Typically these distributions often contains a fictitious element through distributions made on interest free loan account only (with no real intention that such distributions should vest in the beneficiaries).

It would appear as though Treasury is no longer considering an ‘out-and-out’ onslaught on the taxation of trusts (although this is only speculation).  However, the recent budget perhaps betrays what may be expected and that anti-avoidance legislation is to be introduced that will focus only on abusive practices involving trusts.  For both estate duty and income tax structures involving trusts, it is not farfetched to expect to see provisions introduced into tax legislation which will ensure that loan accounts with trusts all bear interest.  The significance of this?  Interest receipts are subject to income tax.

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)