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)

APPORTIONMENT OF VAT INPUT CLAIMS

A2bGenerally speaking, the VAT portion of expenditure incurred by a VAT vendor in carrying on its enterprise may be claimed back from SARS when the VAT vendor submits is VAT returns on a periodical basis. Typically, these input tax claims are set off against the output tax liability that the VAT vendor may have. However, it is also often the case that the total input tax claims for a certain period may exceed the total output tax amount payable, resulting in a net refund amount due to the vendor for that particular period.

Section 17 of the VAT Act, 89 of 1991, governs the circumstances and the extent to which a registered VAT vendor may claim input tax to be set off against the output tax due to SARS. It specifically addresses those circumstances when goods or services are acquired partly for use as part of the VAT vendor’s enterprise, and partly for purposes of making VAT exempt or personal supplies. In such instances section 17(1) limits the amount of input tax to be claimed to “… an amount which bears to the full amount of such tax or amount, as the case may be, the same ratio (as determined by the Commissioner in accordance with a ruling …) as the intended use of such goods or services in the course of making taxable supplies bears to the total intended use of such goods or services”.

The ruling referred to in section 17(1) (Binding General Ruling 16, Issue 2) sets out the formula as:

y = a / (a b c) x 100

Where:

“y” = the apportionment ratio/percentage;

“a” = the value of all taxable supplies (including deemed taxable supplies) made during the period;

“b” = the value of all exempt supplies made during the period; and

“c” = the sum of any other amounts not included in “a” or “b” in the formula, which were received or which accrued during the period (whether in respect of a supply or not).

In other words, the calculation referred to aims to limit the input tax deduction to the extent that the expenditure item in question is incurred in the furtherance of the VAT enterprise only.

The calculation assumes that expenditure would be incurred by the VAT vendor generally proportionate to the total taxable supplies made by the enterprise vis-à-vis non-taxable supplies. It may very well be that that this assumption is inapplicable based on the facts of the VAT vendor. For example, where a company extends interest bearing loans to customers (thus exempt supplies) while also providing consulting services (a standard rate taxable supply), the above formula may very well be applicable to apportion the portion of input tax claimable on e.g. rent paid on offices and used both to earn interest and consulting income. However, where expenditure is incurred e.g. towards training for employees linked directly to the consulting business only, said expenditure would not be partly incurred for making taxable supplies and partly not, but wholly for the furtherance of the VAT enterprise and thus rank wholly as a claim for input tax.

BGR16 itself provides for an alternative basis of apportionment to be applied if a more appropriate basis exists. It should be borne in mind that section 17(1) also only comes into play if there is an apportionment to be made whatsoever.

We have noted that SARS is applying BGR16 strictly as part of VAT audits in recent months and even if it may be inappropriate to do so where it is to the disadvantage of taxpayers. Such instances should be monitored and pointed out to your tax advisors when applicable to take up with the SARS auditors timeously.

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)

EXPLAINING ZERO RATED VAT

a3bValue-Added Tax, or VAT, is currently typically charged at 14% on all taxable supplies of goods or services rendered by registered VAT vendors. Taxable supplies exclude exempt supplies, such as providing financial services, residential accommodation or educational services (see section 12 of the Value-Added Tax Act, 89 of 1991). Where a VAT vendor makes exempt supplies, it may not levy VAT on invoices rendered for such goods or services provided to the vendor’s clients.

Taxable supplies include though the supply of goods or services at a VAT rate of zero percent. In other words, where a VAT vendor were to supply zero rated goods or services, it will levy VAT on the invoice at 0%, and not the standard rate of 14%. This may appear nonsensical at first, especially considering from an economic perspective when compared to exempt supplies: effectively no VAT is charged on an invoice whether the supply by the VAT vendor is exempt from VAT or charged at a rate of zero percent.

The significance lies therein that the exempt supplies are exempt from VAT altogether, while zero rated supplies still qualify as “taxable supplies” as defined in the VAT Act. VAT vendors may therefore claim input tax for expenditure incurred in order to render taxable supplies, even if zero rated. This will not be the case for VAT exempt supplies.

Put simply therefore: input tax may be claimed against expenditure incurred to the extent that the expenditure is used ultimately to make either zero or standard rated supplies. To the extent that the expenditure is applied to make VAT exempt supplies, no input VAT may be claimed.

To use an example: imagine a VAT vendor, A (Pty) Ltd, which renders services to an Australian based firm (and which is zero rated in terms of section 11(2)(l) of the VAT Act). The invoice to the Australian firm amounts to R100 VAT at zero percent (therefore R100). To render the services, A makes use of a subcontractor which invoices it an amount of R50 VAT at 14% (therefore R57). To the extent that the services of the subcontractor is used to further the enterprise of A in making taxable supplies (even if at zero percent) to the Australian customer, A is able to claim an input tax amount of R7, thereby realising a profit of R50.

Had the services rendered by A amounted to exempt supplies for VAT purposes though in terms of section 12 of the VAT Act (such as supplying financial services for example), A would have still only invoiced its customer an amount of R100, yet unable to claim the input tax amount of R7 on the basis that subcontractor fee is no longer paid in the furtherance of A’s enterprise in making taxable supplies. In this scenario where exempt supplies are made, a profit of only R43 would have been made.

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)

TRANSFER OF A PROPERTY: IS VAT OR TRANSFER DUTY PAYABLE?

a1_bA purchaser is responsible for payment of transfer cost when acquiring an immovable property, but it should further be established if the transaction is subject to the payment of VAT or transfer duty to SARS.

When an immovable property is transferred, either VAT or transfer duty is payable. To determine whether VAT or transfer duty is payable one should look at the status of the seller and the type of transaction.

VAT

If the seller is registered for VAT (Vendor) and he sells the property in the course of his business, VAT will be payable to SARS. A vendor is a person who runs a business and whose total taxable earnings per year exceed R1 000 000. He will then have to be registered for VAT. A further stipulation is that the property that is being sold must be related to his business from which he derives an income.

The Offer to Purchase should stipulate whether the purchase price includes or excludes VAT. If the Offer to Purchase makes no mention of the payment of VAT and the seller is a VAT vendor, it is then deemed that VAT is included and the seller will have to pay 14% of the purchase price to SARS. It is the seller’s responsibility to pay the VAT to SARS, except if the contract stipulates otherwise.

When a seller is not registered for VAT, but the purchaser is a registered VAT vendor, the purchaser will still pay transfer duty but can claim the transfer duty back from SARS after registration of the property.

Transfer duty

When the seller is not a registered VAT vendor it is almost certain that transfer duty will be payable on the transaction. A purchaser is responsible for payment of the transfer duty. Transfer duty is currently payable on the following scale:

  1. The first R750 000 of the value of the property is exempted from transfer duty.
  2. Thereafter transfer duty is levied at 3% of the value of the property between R750 000 and R1 250 000.
  3. Where the value of the property is from R1 250 001 up to R1 750 000, transfer duty will be R15 000 plus 6% on the value of the property above R1 250 000.
  4. If the value of the property falls between R1 750 001 and R2 250 000, transfer duty will be R45 000 plus 8% of the value of the property above R1750 000.
  5. On a property with a value of R2 250 001 and above transfer duty is R85 000 plus 11% on the value of the property above R2 250 000.

Transfer duty payable by an individual or a legal entity (trust, company or close corporation) is currently charged at the same rate.

Transfer duty is levied on the reasonable value of the property, which will normally be the purchase price, but should the market value be higher than the purchase price, transfer duty will be payable on the highest amount. Transfer duty is payable within six months from the date that the Offer to Purchase was signed.

In instances where a party obtains a property as an inheritance or as the beneficiary of a divorce settlement, the transaction will be exempted from payment of transfer duty.

Where shares in a company or a member’s interest in a close corporation or rights in a trust are transferred, the transaction will be subject to payment of transfer duty if the legal entity is the owner of a residential property.

Zero-rated transactions

This means that VAT will be payable on the transaction but at a zero rate. If both the seller and the purchaser are registered for VAT and the property is sold as a going concern, VAT will be charged at a zero rate, for instance when a farmer sells his farm as well as the cattle and the implements.

Exemption

Transfer duty, and not VAT, will be payable when a seller who is registered for VAT sells a property that was leased for residential purposes.

It is thus important for a purchaser to establish the status of the seller when buying a property. The seller who is registered for VAT should carefully peruse the purchase price clause in a contract before signing, to establish if VAT is included or excluded.

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 RELEASES NEW RULING ON DOCUMENTARY REQUIREMENTS FOR VAT PURPOSES

a3_bIn February 2015 the South Atlantic Jazz Festival (Pty) Ltd successfully appealed a judgment of the Tax Court to the Full Bench of the Western Cape High Court (reported as ABC (Pty) Ltd v CSARS [2015] ZAWCHC 8). That judgment dealt with documentary proof required by the Commissioner for SARS to substantiate input tax claims submitted by taxpayers for VAT purposes, and specifically the scope of the provisions of section 16(2)(f) of the Value-Added Tax Act, 89 of 1991.

Since the judgment documentary proof linked to VAT input claims have been a focus of Government, with both the subsequent amendment of section 16(2)(f) as well as the introduction of section 16(2)(g). Especially the latter provision is important here and deals primarily with what documentary evidence will suffice as substantiating proof for VAT input claims submitted by a VAT vendor in the absence of for example an invoice received from the supplier, a bill of entry or credit note. The question in ABC above for example was whether a signed agreement could under these circumstances suffice as substantiating proof for an input tax claim submitted.

Section 16(2)(g) now reads that “… in the case where the vendor, under such circumstances prescribed by the Commissioner, is unable to obtain any document required in terms of [section 16(2)] (a), (b), (c), (d), (e) or (f), the vendor is in possession of documentary proof, containing such information as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished…”

SARS has now released a binding general ruling (BGR36) on 24 October 2016 dealing with those circumstances under which the Commissioner will allow a VAT vendor to use alternative documentary proof to substantiate the vendor’s entitlement to an input tax deduction as contemplated in section 16(2)(g). In order to obtain the Commissioner’s approval to use alternative documentary proof in substantiating a deduction under section 16(2)(g), a VAT vendor must apply for a VAT ruling or VAT class ruling.

In terms of the ruling, a VAT vendor may only apply for approval under section 16(2)(g) to rely on documentary proof, other than the documents prescribed under section 16(2)(a) to (f), if the vendor –

  • has sufficient proof that it made reasonable attempts to obtain the documentary proof required by the Commissioner under section 16(2)(a) to (f);
  • was unable to obtain and maintain the documentation prescribed under section 16(2)(a) to (f) due to circumstances beyond the vendor’s control (see below); and
  • no other provision of the VAT Act allows for a deduction based on the particular document in the vendor’s possession.

BGR36 continues to list those circumstances when it would be considered to have been beyond the VAT vendor’s control to provide the otherwise required documentation:

  • When the supplier has failed to issue a tax invoice, debit note or credit note to the VAT vendor;
  • Where the supplier was contacted but failed to respond to the vendor’s request to be furnished with a complete tax invoice or correct document;
  • The supplier or vendor’s place of business has suffered damage as a result of for example a natural disaster, causing damage to its accounting records, with no possibility of the said records being retrieved or re-issued; or
    (d) The supplier has been deregistered as a vendor.

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 VAT REVIEWS AND AUDITS

A2BIt has become a common occurrence for vendors to receive a notice for a VAT review from SARS, which requires the vendor to submit supporting documentation in respect of a specific VAT201 return within 21 days. If the vendor fails to submit the supporting documentation, SARS may issue an additional assessment, disallowing the full value of the input tax claimed for that period. The vendor then needs to lodge an objection against this additional assessment and submit the necessary supporting documentation to substantiate the input tax claimed.

When a VAT return is submitted, that return is measured against certain pre-set risk factors on the computerised system of SARS. If certain parameters according to this system are exceeded, a review letter will be issued automatically by the system to the particular VAT vendor. No historical profile is maintained per vendor, and there is no limit on the number of review letters that can be issued. SARS can issue a review letter for each VAT period, even for periods where the vendor had made a payment to SARS.

During December 2011 SARS issued a number of limited scope audit engagement letters to various large companies, more specifically companies in the construction industry. The information requested was to be submitted within 21 days from the date of the engagement letters, which were issued between 12 and 20 December 2011. Many of the companies had already closed for the holidays, and had limited or no staff available.  Unfortunately the legislation provides no relief in this regard, except that the notice period should be reasonable. The engagement letters focused in particular on:

  • the VAT treatment of indemnity payments received;
  • bad debts recovered;
  • creditors older than 12 months on which an input tax deduction was claimed;
  • the sale of fixed assets;
  • input tax claimed on deductions relating to “motor car” and “entertainment” expenses; and
  • input tax claimed on supplies that are defined as “financial services”.

Regardless of the care taken by vendors to ensure the correct treatment of VAT claims, errors may still occur. Basic errors made by vendors include the claim of input tax deduction on the use of a rental vehicle for business trips, if that vehicle is a “motor car” as defined.  Year-end functions and staff refreshments are defined as “entertainment”, and no input tax deductions may be claimed. It is only when these supplies are consumed or used to make taxable supplies, that a valid input tax deduction may be claimed.

Amongst others, SARS focuses on the correct VAT treatment of the following during the performance of an audit:

  • validity of VAT invoices issued and received;
  • zero rated sales;
  • employee benefits as defined in the Seventh Schedule of the Income Tax Act;
  • insurance claims received; and
  • sale of capital goods.

It is very important that the staff responsible for the keeping of the accounting records should be adequately trained and informed in this regard, and sufficient controls should be in place to avoid these errors.

This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.