TO AUDIT OR NOT TO AUDIT?

A-04The new Companies Act stipulates that only listed companies, and companies deemed to be in the public interest, are required to be audited and that non-public companies may choose between an independent review or an audit.

Given the value of an audit for non-listed companies – mostly small-to medium-sized entities (SMEs) – this “choice” with regard to the previously mandatory requirement seems like a “privilege” with very little benefits.

It becomes imperative for these directors to understand that an audit is not an expense, but an asset that will yield returns far greater than the original investment. An audit provides a platform, both financial and non-financial, on which non-public companies should build to meet future challenges.

According to the International Federation of Accountants (IFAC), SMEs account for more than 95% of all companies around the world. Governments – including South Africa – believe that provisions, as outlined in the new act, help to lower the regulatory burden and cost for SME’s thereby promoting entrepreneurship in this vital sector of the economy. While few dispute the need to reduce red tape, lessen the regulatory burden and remove the “one-size-fits-all” approach to regulation, certain checks and balances must remain in place so that growing businesses establish good management practices as they become economically significant.

In a recent paper entitled “The Value of an Audit to Small and Medium Sized Businesses,” Pitcher Partners indicate that an independent audit provides far more than “public accountability” and plays a key role in promoting good business practices throughout the economy. It emphasises that the role of audit is critical to guiding governance in smaller companies before they become economically significant, thereby reducing business failure.

An audit provides immediate benefits, with one of the most practical and beneficial returns being the management letter that identifies any processes or operational deficiencies requiring correction or improvement. Having an audit performed on its financial statements will prepare a company for the immense challenges it will encounter as it grows and develops into a more complex organisation, especially if it is a potential candidate for external funding to facilitate expansion or even, ultimately, listing on the JSE.

Removing audit requirements for non-public, owner-managed companies may not result in less bureaucracy and lower cost obligations says IFAC. In its recent research entitled “The Expanding Role of SMPs in Advising SME Clients,” IFAC points out that due to limited capacity and expertise, SMEs frequently need to seek external advice and support. The publication highlights that the changes in regulation in other areas, such as employment rights and environmental regulations, overshadows the relaxation in statutory audit provisions. Despite movements to reduce regulatory “burdens” on SMEs, The World Bank found that the market for advice and support is substantial. In the UK, for example, the Business, Enterprise and Regulatory Reform estimate that businesses spend at least £1.5bn to help them deal with regulations.

An external audit regulation for SMEs ensures that they comply with other laws – a by-product of any audit – which, according to the research paper, remain as unavoidable costs for SMEs in any case. Audits not only reduce the risk of business failure, but equip smaller businesses with an understanding of how to develop management practices that enable them to grasp opportunities while mitigating risk. To grow and prosper in a vibrant SME market, concludes the report, requires an audit which provides the essential outcomes and skills necessary to do so.

The corporate law reform process by allowing non-public entities to choose between an audit and an independent review may do more harm than good. What may seem like a blessing to those who view audits as an unnecessary and costly annual exercise may turn out to be their only safeguard when faced with multiple offences and breaches of the Companies Act. Directors should not fall victim to the misconception that an independent review is necessarily cheaper than an audit. Based on this erroneous belief, the choice of an independent review could prove to be a fatal mistake by not considering the potential cost of a lower level of assurance.

According to research commissioned by KPMG and conducted by Opinion Leader Research, involving an in-depth survey of 200 UK companies, the underlining “importance of the audit process to businesses, nearly two thirds (62%) of the companies that participated in the survey claim that they would conduct their own audit process even if it were not a statutory obligation”.

The advantages of engaging an external auditor to audit financial statements far outweigh the cost of not having one since auditors play an important role in the success and growth of a company – more so for non-public companies that are expanding rapidly.

Ashley Vandiar

(Project director of assurance at the South African Institute of Chartered Accountants (Saica))

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.

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NON-EXECUTIVE DIRECTORS – HAVE YOU REGISTERED FOR VAT?

A-03SARS recently published two Binding General Rulings (number 40 and 41) that have put the tax treatment of non-executive director’s fees to bed, which will come in effect on 1 June 2017.

As it stands, a Non-Executive Director (NED) earning more than R1 million in director’s fees in any 12-month period should register for VAT.

What will happen when the Rulings become effective?

BRG40: Director fees paid to a Non-Executive Director (NED) do not qualify as remuneration and there is no employees’ tax withholding obligation for the employer.

  • The NED may still voluntarily request the employer to withhold employees’ tax.
  • The disallowance of deductions in terms of section 23(m) will not apply to director fees paid to NEDs.
  • BRG40 does not apply to non-South African tax resident NEDs because they cannot qualify as independent contractors by virtue of their tax residence status.

BRG41: Non-Executive Directors (NEDs) must register for VAT and account for VAT on the fees charged to the company.  A non-resident Non-Executive Director (NED) may also be liable to register for Vat, if the services are physically performed in South Africa on a continuous or regular basis, or if the services are conducted on a continuous or regular basis through a fixed or permanent place in South Africa, this will place an additional admin burden on the non-resident Non-Executive Director (NED).

  • Non-Executive Directors that earns less than the VAT threshold of R1 Million in any 12-month period may voluntarily register for VAT;
  • VAT registered Non-Executive Directors (NEDs) can claim input tax on any taxable expense incurred in respect of goods or services utilised or consumed in the course of rendering the service.

What is the role of Non-Executive Directors (NEDs)

Independence is central to the NED’s role and is interpreted to mean “the absence of undue influence and bias”.  Since the Income Tax Act, No 58 of 1962, does not define a non-executive director (NED), SARS shares the view of the King III report in Binding General Ruling 40 (BGR40).

The King III Report on Governance for South Africa states that the crucial elements of an NED’s role are that an NED –

  1. must provide objective judgement independent of management of a company;
  2. must not be involved in the management of the company; and
  3. is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.

Feel free to contact us should you require any assistance in this regard.

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.

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HOW TO REDUCE THE COSTS IN AN ESTATE

A-02Ensure sufficient cash is available to avoid sale of assets – Fisa.

Ingé Lamprecht  /  7 March 2017 00:27

JOHANNESBURG – The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

If the will does not explicitly specify the executor’s remuneration, it will be calculated according to a prescribed tariff, currently 3.5% of the gross value of the assets subject to a minimum remuneration of R350. The executor is also entitled to a fee on all income earned after the date of death, currently 6%. If the executor is a VAT vendor, another 14% must be added.

Assuming an estate value of R2 million comprising of a fixed property of R1 million, shares, furniture, vehicles and cash, the executor’s fee at a tariff of 3.5% would amount to R70 000 (plus VAT if the executor is a VAT vendor). Conveyancing fees will be an estimated R18 000 plus VAT. Depending on the situation, funeral costs may be another R20 000, while other fees (Master’s Office fees, advertising costs, mortgage bond cancellation and tax fees) can easily add another R10 000. By law advertisements have to be placed in a local newspaper and the Government Gazette, with estimated costs of between R400 and R700 and R40 respectively. Master’s fees are payable to the South African Revenue Service (Sars) in all estates where an executor is appointed with a gross value of R15 000 or more. The maximum fee is R600.

Where applicable mortgage bond cancellation costs, appraisement costs, costs of realisation of assets, transfer costs of fixed property or shares, bank charges, maintenance of assets and tax fees will also have to be paid. The executor is also allowed to claim an amount for postage and sundry costs, while funeral expenses, short-term insurance, maintenance of assets and the cost of a duplicate motor vehicle registration certificate may also have to be taken into account.

Luckily, there are ways to reduce the costs involved

Williams says the first step is to try and negotiate the executor’s fee with the appointed executor when the will is drafted. The fee could then be stipulated in the will or the executor could give a written undertaking confirming the agreed fee. But even if the deceased did not negotiate it at the time of drafting, the family or heirs can still approach the nominated executor and negotiate a competitive fee when they report the estate to the executor.

“Depending on who the executor is and what the composition of your estate is, you can probably negotiate up to a 50% discount.”

The composition of assets will generally be a good indicator of the amount of work that needs to be done and the executor will quote a fee against this background. The sale of a fixed property and business or offshore interests may complicate the process of winding up the estate.

If the surviving spouse is the sole heir, and/or there are no business interests and sufficient cash is available to cover the costs, the executor will generally offer a larger discount. Ultimately, the executor is responsible for signing off the liquidation and distribution account, confirming that all the costs are correct and that it will be settled.

Unfortunately, most of the smaller administration costs will have to be paid, with limited scope for negotiation, Williams says.

Costs of security can be avoided completely by exempting the nominated executor from lodging the bond of security in the will, Williams says.

This article was brought to you by the Fiduciary Institute of Southern Africa.

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.

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EXEMPTION FOR FOREIGN SALARY EARNERS

A-01South African tax resident individuals are liable to income tax on their worldwide income. In other words, where a South African tax resident individual were to earn a salary for employment which may from time-to-time be exercised outside of the borders of the Republic, that income earned is still included in that South African tax resident individual’s gross income.

An exemption is available though to South African employees where the extent of the services rendered abroad are significant.[1] The exemption is however limited to income earned in the form of remuneration from an employer and only to the extent that the remuneration received is for those services rendered abroad. In terms of the relevant provision, salaries earned in whatever form for services rendered outside of South Africa will be exempt from income tax in South Africa where the employee has been absent from the Republic for:

  • At least 184 days during a 12-month period (in other words for more than 50% of a 1-year period); and
  • More than 60 days of the above will have continuously been spent beyond South Africa’s borders.

As above, it is important to appreciate that it is not the entire salary earned by the employee for the year of assessment which will be exempt from South African income tax. The exemption is limited to only so much as relates to services rendered abroad. In other words, to the extent that the salary is earned for services that will be rendered in South Africa, that portion of a salary earned will still be taxable in South Africa.

The exemption is typically applicable to employees seconded for periods of time to render services abroad. It is quite likely that even though the income earned may be exempt from South African income tax, that the country in which the services are rendered will seek to levy tax on the employee’s income based thereon that the source of the income earned will be in that other country.

It is therefore possible for employees to benefit from the exemption on foreign earned salaries, whilst also paying very little income tax in the other country, if such a country is one with very low individual income tax rates (typically countries in the Middle East, such as Dubai). This incidence of “double non-taxation” has recently drawn the attention of National Treasury, and the Minister of Finance warned in this year’s Budget Speech that South Africa is considering rescinding the exemption if the other country in which the employment services are rendered does not seek to significantly tax the income earned by the employee.

[1] Section 10(1)(o)(ii) of the Income Tax Act, 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.

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INTEREST FREE LOANS TO DIRECTORS

Blog-04It is very often the case that a company extends an interest free or low interest loan to a director. This manifests either as a true incentive or benefit to that director (mostly the case in larger corporate environments) or in a small business environment in lieu of salaries paid. The latter is especially the case for example where a spouse or family trust would hold the shares in the company running the family business, but which business is conducted through the efforts of the individual to whom a loan is granted from time to time.

In terms of the Seventh Schedule to the Income Tax Act[1] a director of a company is also considered an “employee”.[2] This is significant, since directors can therefore also be bound by the fringe benefit tax regime applicable to employees generally.

Paragraph (i) of the definition of “gross income” in the Income Tax Act[3] specifically includes as an amount subject to income tax “the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit … granted in respect of employment or to the holder of any office…”

Clearly, benefits received by a director of a company would therefore rank for taxation in terms of this provision. The question remains therefore whether loans provided to such directors by the companies where they serve in this capacity would amount to such a taxable benefit, and further how such benefit should be quantified.

Paragraph 2(f) of the Seventh Schedule is unequivocal in its approach that a taxable fringe benefit exists where “… a debt … has been incurred by the employee [read director], whether in favour of the employer or in favour of any other person by arrangement with the employer or any associated institution in relation to the employer, and either-

(i)            no interest is payable by the employee in respect of such debt; or

(ii)           interest is payable by the employee in respect thereof at a rate of lower than the official rate of interest…”

Paragraph 11 in turn seeks to quantify the amount of the taxable fringe benefit to be included in the gross income of the director. Essentially, the taxable fringe benefit would be equal to so much of interest that would have been payable on the loan at the prime interest rate less 2.5%, less any interest actually paid on the loan. The benefit therefore does not only arise on interest-free loans, but also on loans carrying interest at less than the prescribed interest rate.

It is necessary to note that a fringe benefit otherwise arising will not be a taxable benefit if the loan amount is less than R3,000, or if it is provided to the director to further his/her studies.

[1] 58 of 1962

[2] Paragraph 1 of the Seventh Schedule, paragraph (g) of the definition of “employee”

[3] See section 1

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.

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HOW (NOT) TO DRAFT A WILL

Blog-03JOHANNESBURG – It might be easy to argue that a will is an unnecessary document, especially if it won’t make any difference to the distribution of the assets in the estate.

But beware.

The argument is flawed for two reasons. Dying without a will will result in a delay in the administration of the estate. The Master of the High Court will have to appoint an executor on behalf of the deceased and this can delay the process considerably. He or she also has to consult family members before an appointment is made. If they are not satisfied with the appointment, it could result in a lengthy and costly court battle, says Louis van Vuren, CEO of the Fiduciary Institute of Southern Africa (Fisa).

Moreover, the rules of intestate succession are rigid. The estate has to be divided as prescribed even in cases where it may not be practical, he says.

Situations might also arise where someone was convinced that the estate would be divided in a particular way, while it might practically not be the case. In the South African environment there might be more than one surviving spouse for example.

However, the mere existence of a will does not necessarily solve the problem.

“It is a never-ending source of amazement that so many people rely on untrained advisors when preparing their wills, one of the most important documents they are ever likely to sign,” Judge Leach said during a 2012 Supreme Court of Appeals judgment.

Van Vuren says estate and will planning requires a working knowledge of anywhere between 20 and 40 pieces of legislation, the common law rules of succession and the case law on wills.

“You walk unwittingly into a minefield if you think you can do it yourself.”

Practically there are often instances where these wills don’t comply with the formalities of signing a will.

Van Vuren says in a case that escalated to the High Court, a husband bought the necessary forms at CNA and drafted a “will” on behalf of his terminally ill wife.

While there is a process in the Wills Act whereby a court can declare a document that was not properly witnessed to be the will of the deceased, his application didn’t succeed because the particular document wasn’t signed or drafted by the deceased wife.

There may also be instances where invalid or impractical provisions are included.

While a provision to bequeath R1 million to your daughter on condition that she does not marry a Jew, would be invalid as it would discriminate against someone on the basis of religion and therefore contrary to the Constitution, it would also be against the good morals of society in terms of common law principles, Van Vuren says.

In another case that went to court some years ago, the deceased owned several pieces of land. At the time the will was drafted the allocation of these properties to specific beneficiaries wasn’t that important, but shortly before the testator passed away a township development was built on one of the pieces of land, which inflated the value considerably and resulted in a dispute between the beneficiaries. Unfortunately, the land was so poorly described in the will that the executor was unable to determine the deceased’s wishes in this regard. Had the deceased testator sought professional help when the will was drafted, the problem could have been avoided.

 A valid will

For a will to be valid, the Wills Act requires that the testator needs to sign at the end of the document. If the will consists of more than one page, the other pages have to be signed as well.

Two witnesses over the age of 14 who are in sound and sober senses and who can testify in court must also sign at the end.

Van Vuren says to remove the potential for disputes about whether certain pages were included from the beginning it is good practice for witnesses to sign each page, but this is not required in terms of the act.

The act stipulates that the witnesses must sign the will in the presence of the testator and one another.

The testator must also be in sound and sober senses.

Although South Africans have to be at least 16 years old to have a will, there is no upper age limit, which is the case in some European countries. The oldest person found by a court to be in sound and sober senses in South African case law was 107, Van Vuren says.

Importantly, anybody who benefits from a will, whether as beneficiary, executor or trustee, or as a guardian for minor children, should never draft the will on behalf of the testator or sign as a witness.

“There is a section in the Wills Act that disqualifies any of those from inheriting from the testator,” Van Vuren says.

While the common law of succession allows you to disinherit your spouse completely, he or she could institute a claim against the estate in terms of the Maintenance of Surviving Spouses Act if he or she is left without sufficient financial support. This type of claim will have preference over bequests. However, the deceased’s liabilities will have to be settled first, Van Vuren says.

This content was sponsored by the Fiduciary Institute of Southern Africa

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.

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BEWARE OF CAPITAL GAINS TAX WHEN YOU EMIGRATE

Blog-02While 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.

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FIVE INPUT TAX CLAIMS YOU’RE NOT ALLOWED TO MAKE

Blog-01Input tax is the VAT you pay your suppliers in the course of your business as well as VAT paid on goods you import.

SARS allows you to claim the input tax for your relevant tax period when you complete your VAT return. While this is the case, there are input tax claims you aren’t allowed to make.

 NEVER claim input tax claims for these five transactions

#1: Renting or buying a new company car

If you don’t run a car dealership or operate a car rental business, you aren’t allowed to claim an input tax deduction when buying or renting cars.

SUVs, MPVs, station wagons, sport wagons, minibuses, kombis and double cabs fall under the definition of ‘motor car’ in Section 1 of the VAT Act and you won’t be able to claim a tax deduction for buying them.

#2: Entertainment deductions are still a big NO!

You’re not allowed to claim input tax deductions on entertainment. This includes, refreshments for your staff such as coffee, tea and cookies, boardroom lunches, customer entertainment, year-end parties and other functions.

On the other hand, you can claim the input tax on accommodation and meals for you and your staff when they’re away on official business for at least one night. This also includes meals included in the price of air tickets and seminars.

Remember, ‘if your business is to provide entertainment to clients and customers and your charge covers all costs or equals the open market value, you may claim back the input tax,’ says the Practical VAT Handbook.

#3: No invoice, no claim!

Don’t claim VAT on any supply made to you and worth more than R50 if you don’t have a valid tax invoice.

#4: No claim on pay cheques

Salaries, wages and allowances don’t contain VAT, so you can’t claim an input tax deduction when you pay your employees.

#5: Letting a home is VAT-exempt, so no deduction!

Letting your private home is exempt and this means you can’t claim input tax. This also applies to accommodation you may supply to your employees.

For example, let’s assume your company is based in Johannesburg and it buys a flat in Cape Town for staff to stay in when travelling to Cape Town on business. Even though the flat is owned by your company, you can’t claim input tax, not even on the furnishings, the security, or any renovations.

Well there you have it. Unless you’re looking for some unfriendly attention from SARS, don’t even try claiming input tax on the above mentioned items.

Compiled by: Annabel Koffman, Group Publisher: Fleet Street Publications, 08 May 2017

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.

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EMPLOYER ANNUAL RECONCILIATION

Blog images-01The Employer Annual Reconciliation starts on 18 April 2017 and employers have until 31 May 2017 to submit their Annual Reconciliation Declarations (EMP501) for the period 1 March 2016 to 28 February 2017 in respect of the Monthly Employer Declarations (EMP201) submitted, payments made, Employee Income Tax Certificates [IRP5/IT3(a)] and ETI, if applicable.

An updated version of e@syFile™ Employer will be available at the time. Information about the version that you should use will be published on the e@syFile™ page on the SARS website. Remember to backup your current information on your computer prior to installing a new version of e@syFile™ Employer.

You can submit your Employer Reconciliation Declaration (EMP501) and Employees Income Tax Certificates [IRP5/IT3(a)s] online via e@syFile™ Employer, or if you have less than 50 employees, via eFiling.

For more information visit the SARS website www.sars.gov.za or call the SARS Contact Centre on 0800 00 7277.

Sincerely

THE SOUTH AFRICAN REVENUE SERVICE

If you have any questions, visit the SARS website on www.sars.gov.za or call the SARS Contact Centre on 0800 00 7277.

Legal disclaimer: This email is intended solely for the use of the individual or entity to who it is addressed. If you have received this email in error, please delete the email from your system. If you are not the intended recipient you are notified that disclosing, copying, distributing or taking any action in reliance on the contents of this information is strictly prohibited.

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DONATIONS AND TAX

Blog images-02The aim of this article is to alert individuals to donations tax considerations over and above the utilisation of the full R100,000 annual exemption which will inevitably be used to a great degree now that section 7C has been introduced.

With the spotlight on trusts and certain interest free loans to trusts attracting donations tax (through section 7C of the income tax act), I thought it fitting to write about donations in general, including specific considerations regarding donations tax and how it may become increasingly important to monitor the nature of transactions entered into by individuals in order to determine whether a donation has been made.

Within the constantly changing environment of tax law (the budget speech of 22 February 2017 being a good example of significant and sudden changes) it is important to revisit existing legislation and principles in order to ensure that tax planning under new and/or amended laws and regulations does not cause anomalies in other areas.

Compliance with section 7C (explained below) may result in significant donations (deemed) being made during a year of assessment. These need to be considered along with all other donations that are already being made annually, some of which individuals may not even be aware that they are making.

Definition and history

A donation is any gratuitous disposal of property or any gratuitous waiver or renunciation of a right.

Donations tax is a tax on the transfer of wealth from one person to another. It was first introduced in 1955 when the Estate Duty Act was promulgated. The logic behind introducing the two mechanisms at the same time is that, if a person were to attempt to avoid Estate Duty by donating their assets, donations tax would be triggered.

Section 7C

Section 7C of the Income Tax Act came into effect on 1 March 2017. The section provides that if a natural person makes a loan to a trust to which he or she is connected (for example by being a beneficiary), a donation will arise in the hands of the person making the loan if no interest is charged, or interest is charged at a rate that is lower than the “official rate” of interest as prescribed by SARS. The donation will be equivalent to the difference between the amount of interest charged (if any) and the interest as calculated using the SARS “official rate”, currently 8% per annum.

One of the ways to overcome the above, or reduce the donations tax, is to utilise the annual donations tax exemption of R100,000. This being that donations tax is not payable on the sum of all assets donated by a natural person during a year of assessment as does not exceed R100,000. Working backwards from R100,000 to the above section 7C interest on loans, this effectively means that a loan to the value of R1,250,000 will not attract donations tax if no interest is charged (8% of R1,250,000 being R100,000), assuming the full R100,000 exemption is utilised.

The danger with the above mechanism is that, should a natural person elect to utilise the full R100,000 annual exemption on an interest free loan to a trust, then that natural person can make no other donations whatsoever during the year of assessment.

Donations of R100,000 plus R1

A common mechanism historically used in trusts is for loans made by beneficiaries to the trusts to be reduced annually by R100,000. This is through making use of the R100,000 annual exemption for donations tax. It should be noted that there must be an actual flow of cash as a donation instead of merely an accounting entry.

It is important to realise then that if an interest free loan is owing by the trust to a connected person to the trust, the above R100,000 reduction in the loan can no longer be applied to the extent that part or all of the R100,000 is to be used to counter the deemed annual donation of interest not being charged.

Making use of either of the aforementioned mechanisms creates a situation whereby that individual is utilising the full R100,000 annual exemption against the reduction in the loan or to counter the effects of the donation arising from not charging interest, thereby leaving no exemption for any other donations during the year of assessment.

It is therefore important that individuals consider all other donations made during a year of assessment before simply utilising the entire R100,000 annual exemption on a single transaction.

Common exemptions and common donations

Common exemptions from donations tax include:

  • Donations to a spouse
  • Donations to approved tax-exempt Public Benefit Organisations (PBOs)
  • Contributions to the maintenance of an individual

Here are some considerations regarding common “transactions” that would be considered donations:

  • Gifts to children and family members
  • Gifts or aid to disadvantaged individuals or the poor (other than through PBOs as above)
  • Gifts to certain institutions (other than for services) for example charitable institutions not registered as PBOs

It is also important to consider the fact that the waiver of a right to something also falls within the definition of a donation. Therefore, if a loan is due and payable to an individual and that individual chooses to waive the right to that loan, the waiver of the right will attract donations tax.

As mentioned, it is important to take into consideration the above type scenarios when determining to use the entire annual exemption of R100,000, or even a substantial portion thereof since all other donations over and above R100,000 would then attract donations tax.

The tax

For the sake of clarity, donations tax is payable at the rate of 20% of the value of the asset or amount of money donated, payable by the donor. The donations tax must be paid by the end of the month following that in which the donation was made. It should be noted that if the donor fails to pay the donations tax, the donor and the donee then become jointly and severally liable for the tax.

Donations as deductions from taxable income

As an aside, there is a common misconception that all donations made to public benefit organisations are tax deductible. As mentioned above, donations to tax-exempt public benefit organisations are exempt from donations tax. This does not however automatically entitle the donors to deduct such amounts from income for income tax purposes. Such deductions are only allowed if the donation is made to a section 18A approved public benefit organisation which is able to issue the donor with a section 18A compliant certificate/receipt. The scope for registration with SARS as a section 18A approved organisation is far narrower than the “general” registration as a public benefit organisation.

Challenging times ahead

There is a significant challenge ahead for taxpayers who are attempting to protect their wealth for retirement or for future generations. As can be seen from above, donations tax is a mechanism designed to ensure Estate Duty is not evaded. By changing income tax legislation to include a tax on interest not charged on loans made to a trust any number of years ago, the effect is a retrospective application of a current change, in many cases undoing years of honest financial planning. The challenge is to revisit structures and make changes where possible in order to ensure compliance with tax law as well as preserving the planned future effects of financial planning made any number of years ago.

BY STRUAN ROBERTSON, ISSUED BY MEREDITH HARINGTON 23 MAR 2017

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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.

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