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

www.bizcommunity.com

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 WITH COMPANIES

Blog images-03The latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

[1] 58 of 1962
[2] Section 64F(1)(a)
[3] Defined in section 1 of the Income Tax Act

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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ENSURE SUFFICIENT CASH IS AVAILABLE TO AVOID SALE OF ASSETS IN YOUR ESTATE

Blog images-04JOHANNESBURG – 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

Compiled by: Ingé Lamprecht 

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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BUDGET 2017

shutterstock_592131227Following the annual national budget speech delivered by Finance Minister Pravin Gordhan on 22 February, we highlight some of the most significant matters arising below:

  • A new tax bracket will be introduced targeting the wealthy as well as trusts. It is proposed that trusts will from now on be taxed at 45% on all taxable income, while individuals earning more than R1.5million per tax year will pay 45% income tax on such income (estimated to be around 103,000 individuals);
  • The dividends withholding tax rate is proposed to be increased from 15% to 20%. This is linked to the above increase in individual income tax rates to prevent wealthy individuals from exploiting the arbitrage opportunity that may exist in receiving fees in a company and having these paid out as a dividend;
  • The much debated VAT rate has been left unchanged, which was widely expected given the political sensitivity coupled with the effect that this may have on the poor;
  • Increase in withholding taxes on non-residents disposing of immovable property situated in SA;
  • The “duty free” threshold for transfer duty (tax levied on purchasers of immovable property) has been increased from R750,000 to R900,000;
  • The corporate income tax, donations tax and estate duty rates have been left unchanged;
  • The CGT inclusion rate (40% for individuals, 80% for companies or trusts) was left unchanged too;
  • The above and other most significant changes can be summed up as follows:
  WAS NOW
Top marginal PIT rate 41% 45%
Dividends tax 15% 20%
Tax rate for trusts 41% 45%
Estate duty abatement R3.5 m R3.5 m
CGT annual exclusion R40,000 R40,000
Primary rebate for individuals R13,500 R13,635

The Minister also alluded to the following matters which could expect legislative intervention or refinement during the course of the year:

  • Renewed focus on transfer pricing and cross-border tax avoidance schemes;
  • Further refinements to anti-avoidance legislation introduced in 2016 as applies to trusts;
  • Section 42 “asset-for-share” relief to be extended to also provide for the assumption of contingent liabilities (as opposed to only applying to the issuing of shares or the assumption of existing debt);
  • Share issue and buy-back transactions (commonly used as part of corporate restructurings whereby CGT is avoided) are to be addressed as part of an anti-avoidance effort;
  • The anti-avoidance provisions linked to “third-party back shares” (section 8EA) are to be relaxed;
  • Further refinement and relaxation of the VCC regime as relates to rules restricting such investments;
  • Measures will be introduced whereby foreign companies held by foreign trusts with SA beneficiaries will be drawn into the SA tax net under the “controlled foreign company” regime


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 DEREGISTER A TRUST

Blog images-01Extract from Chief Master’s Directive 2 of 2017 – Trusts: Dealing with various trust matters

The deregistration of trusts

There is no provision in the Trust Property Control Act, 1988 that requires the deregistration of trusts.

However, there may be circumstances that may require confirmation from the Master that a trust has been terminated. If a trust has been terminated the Master will close his or her file and may then confirm that the trust has been terminated and that the file is closed. In order to close the file, the Master must request the following documents form the trustees:

  1. Reasons for termination of the trust or, where applicable, the original signed resolution terminating the trust. The resolution must contain the following information:
    • State whether the trust was dormant or active;
    • Whether a bank account was opened in the name of the trust and if so, that it has been closed.
  2. The original letter of authority;
  3. Bank statements reflecting a nil balance or the final statement or a letter from the bank confirming that the account has been closed (if a bank account was opened);
  4. Proof that the beneficiaries have received their benefits; and
  5. An affidavit from the trustees confirming that the trust has been divested of all assets.

When confirming the termination of the trust and informing the trustees that the trust file is closed, the Master must direct the attention of the trustees to the provisions of section 17 of the Trust Property Control Act, 1988.

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 LIABLE FOR VAT

Blog images-02If they receive fees exceeding R1m in 12-month period – SARS.

Ingé Lamprecht  /  14 February 2017 00:04 Moneyweb

JOHANNESBURG – A ruling by the South African Revenue Service (SARS) that non-executive directors are required to register and charge VAT where they earn director’s fees exceeding the compulsory VAT registration threshold of R1 million during a 12-month period will likely create a significant administrative burden for non-executive directors and the companies they serve.

The ruling also raises questions about whether SARS will be able to cope with the large number of VAT registration applications that are likely to be submitted over the next three months before the ruling becomes effective.

Moreover, many listed companies – often holding companies earning mainly dividend income – are not registered for VAT and will not be able to claim a VAT deduction even though their non-executive directors will charge 14% VAT.

After a prolonged period of uncertainty about whether amounts payable to a non-executive director are subject to the deduction of employees tax, SARS issued two Binding General Rulings on the issue on Friday.

Parmi Natesan, executive at the Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA), says there has been much confusion and debate around  the issue in the past, with the IoDSA and other bodies having written to both SARS and National Treasury requesting clarity on the varying interpretation of both the Income Tax Act and the Value-Added Tax Act.

The IoDSA welcomes the fact that clarity has been provided, she says.

Gerhard Badenhorst, tax executive at ENSafrica, says SARS has previously ruled that director’s remuneration is not subject to VAT and although the rulings did not specifically refer to non-executive directors, the scenario described in the ruling was typically that of a non-executive director.

The rulings were withdrawn in 2009, but it was generally accepted that SARS still subsequently applied the principles set out in these rulings.

Badenhorst says in his experience, most companies considered non-executive directors to be employees.

“In most instances, companies purely deducted employees tax and they [non-executive directors] weren’t registered for VAT.”

The SARS ruling now explicitly states that director’s fees received by a non-executive director for services rendered on a company’s board are not subject to the deduction of employees’ tax.

“I think the administrative burden will be substantial for all parties involved and only time will tell whether the additional revenue collected by SARS will be substantial.”

Badenhorst says a further practical issue or question that has arisen is with regard to the VAT registration process.

“It is currently a difficult process to register for VAT purposes as SARS often rejects VAT registration applications  for various reasons, which causes the applicant to submit his or her application a number of times before the application is eventually accepted. The issue is whether SARS will be able to cope with the large number of VAT registration applications that are expected to be submitted over the next three months.”

While the ruling applies from June 1 2017, industry commentators differ on whether non-executive directors could face a VAT liability, penalties and interest related to prior tax periods.

Badenhorst says generally SARS would issue a binding general ruling in draft form, allowing industry to comment before a final ruling is issued, but in this case the ruling was issued in final form, and this issue would have to be clarified.

Since the ruling applies from June 1 2017 it seems that SARS may not seek to apply it retrospectively.

But Chris Eagar, attorney and director at Finvision VAT Specialists, says the ruling is not legislation and merely a confirmation of SARS’s interpretation. Therefore it doesn’t change the law.

If Sars agrees that the situation was unclear in the past, it may decide not to actively pursue the  application of the law retrospectively. However, its role is to apply the legislation as it stands. In such instance, there would be a historic liability going back five years, he says.

Non-executive directors and their employers would typically be on friendly terms and companies could decide to pay the VAT to the director retrospectively, with the employer claiming an input tax credit (if it is entitled to do so). In this way the director will not be out of pocket as far as the tax is concerned, upon payment to SARS.

But penalties and interest may still need to be paid, Eagar argues.

Under the Tax Administration Act, penalties range from 10% to 150%, but it is unlikely that SARS would impose these penalties, as the default seems to have arisen due to “bona fide inadvertent error”. The 10% late payment penalty will remain, however. Where the default constitutes a so-called “first incidence”, it is likely that SARS would waive this penalty upon application. This still leaves the potential VAT liability over the five-year period as well as the interest payable, he says.

SARS did not respond to a request for clarity on whether the ruling would be applied retrospectively by the time of publication.

In a statement issued on Tuesday after the publication of this article, SARS said non-executive directors will not be required to account for VAT in respect of directors fees received prior to June 1, 2017 provided they were subject to PAYE. “SARS would like to encourage those non-executive directors already registered for another tax type to register for VAT via SARS eFiling at www.sarsefiling.co.za or to visit their nearest SARS branch,” it said.

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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KEY QUESTIONS ON ESTATE PLANNING

shutterstock_599566427Estate planning is like backache – sometimes you need alignment.
Tiny Carroll*  /  19 June 2012 09:01

I often say to clients that “Estate planning is like dealing with a backache – sometimes all it requires is a visit to the chiropractor for an alignment to feel some relief.”  In the same way, an estate planning process involves the alignment of estate planning instruments for a client’s benefit during their lifetime and the benefit of their ultimate beneficiaries.

In essence, there are four estates that one has to deal with in the estate planning process:

  • A client’s personal assets (these will be dealt with in their will)
  • Trust assets (These are dealt with by the trustees of the trust in terms of the powers granted in the deed)
  • Contractual arrangements such as life assurance proceeds and buy-and sell agreements (to be paid out to a nominated beneficiary or to the surviving business partners)
  • Retirement fund benefits. (These are regulated by the Pension Funds Act while you are a member of the fund. If you elect a living annuity after retirement you will be able to nominate a beneficiary for the living annuity proceeds).

In addition to having four ‘estates to consider,’ life is not simple, and many things will happen to you along the way – both good and bad. Estate planning has to take all of these events (and potential events) into account and be flexible enough to meet your changing needs.

These are some of the key questions planners should be asking their clients when doing their estate planning:

  1. Do you have a strategic estate plan in place?

Do you have a plan in place that takes the ‘four estates’ and your personal requirements into account?  Does the plan meet the long-term wishes you hold for your estate? Is the plan flexible enough to allow you to change the structure should your circumstances change?

  1. Do you have a signed and up-to-date will?

This is the pivotal point of a successful estate plan – your plan may collapse without it.  A will must express your wishes, be valid, signed and up-to-date. It can only deal with your personal assets; it cannot deal with trust assets. If you’re married in community of property, remember that your will may only deal with your half share of a joint estate.

If you have assets offshore, you can have a foreign will in addition to a South African will, or one will dealing with both your local and foreign assets. If you have a large or complicated estate offshore, it may be better to have a will in the foreign jurisdiction where planners are familiar with the legislation. But be careful when updating your local will that you don’t revoke the foreign one.

  1. Have you used the R3.5m abatement to best effect?

Each estate is entitled to a deduction of R3 500 000. For spouses the unused portion of the R3.5m abatement amount will ‘roll over’ to the surviving spouse’s estate if not used. The abatement can be used in the estate of the first-dying spouse to remove estate duty on growth assets from the second-dying spouse’s estate. The issue is to identify growth assets as opposed to a non-growth asset such as a loan account. Typically a share portfolio can be bequeathed to a trust to limit growth in the surviving spouse’s estate. On the other hand a loan account can be left to the surviving spouse as it gives them the opportunity to keep reducing the amount in this account, thereby saving on estate duty.

  1. Is ‘my’ family trust at risk?

Trustees are required to:

  • give effect to the provisions of the trust deed
  • perform their duties with care, skill and diligence which can be expected of a person who manages the affairs of another
  • exercise their discretion with the necessary objectivity and independence.

Often in family trust situations these requirements are ignored. The control, ownership and benefits become so mixed up that there is no trust and the risk exists that the trust assets actually vest in the ‘planner/client’ thereby doing away with most of the benefits of the trust as an instrument in your estate planning.

  1. Am I using my family trust effectively?

If used effectively, a trust is an estate planning and a tax planning instrument that can save you money and protect your family when they need it most.  Using it effectively could provide many benefits over and above estate duty savings. Despite its tremendous potential as an estate planning instrument, many trusts exist in name only and it is not unusual to come across planners who have established a trust (sometimes at great cost) only to leave the deed in a filing cabinet.

  1. Are my buy & sell agreements going to protect my family?

Research shows that 75% of buy & sell agreements don’t work to the benefit of the client. Typical problems include agreements not properly signed, agreements in conflict with a client’s will, or in-community of property marriages not taken into account.

  1. Are my policy beneficiary nominations up to date?

It’s important to note that nominating a beneficiary can save on executor’s fees but won’t save on estate duty (as the policy still forms part of the estate).

  1. Have I made sufficient provision for liquidity?

An estate plan should also provide for expenses incurred in winding up the estate, to prevent dependants having to sell off assets to meet these expenses. A life assurance policy is a reliable and convenient way to provide for liquidity within the estate.

  1. How will my retirement fund benefits be dealt with?

Whilst you are still a member of a retirement fund, the fund is an asset in your estate and this has implications in the case of divorce. Once you’ve retired and converted the retirement fund savings into a living annuity, you enjoy protection in the case of divorce. In addition, you may nominate anyone as a beneficiary on a living annuity. The benefit of a retirement annuity (or an occupational retirement fund) is that they fall outside of your estate so neither the lump sum nor the annuity is subject to estate duty.

  1. Will my family know what to do in the event of my death?

Make sure that you, your spouse and family build a relationship with a good financial adviser who will be able to walk a surviving spouse through the financial intricacies of the death of a family member. Also make sure that your family knows where to access a copy of your will.

*Tiny Carroll, fiduciary specialist, Glacier by Sanlam

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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