TAX BLOG

TAXtalk:  www.taxtalk.co.za


15 June 2010

Tax implications for 2010 FIFA World Cup players

It won’t be a tax free affair.

As the 2010 FIFA World Cup fast approaches, the South African Revenue Service (SARS) can expect to gear up for an additional injection of revenue from the football team players. For each country participating in FIFA bids, there is the requirement for the relevant taxation authorities and bodies to provide certain guarantees prior to their bids being considered. In this regard, the South African Government pledged “a full guarantee that no taxes would be levied on participants in the 2010 FIFA World Cup”. A tax-free bubble that allows for exemptions that will apply to both South African residents and non residents in respect of income tax, VAT (which will be zero-rated) and a special rebate for customs and excise duty. However, this bubble does not include team players, leaving this particular group of FIFA participants exposed to the ordinary application of South Africa’s tax system.

 Team players may fall within one of four categories and there are different tax consequences depending on the category:

South African residents

This category is applicable to all players who are South African residents and these players will be subject to normal income tax on the remuneration they earn from matches played.

Employees of South African-resident employers

These are players employed by a South African resident employer and who remain physically present in South Africa for an aggregate of 183 days during a particular tax year, which would run from 1 March to end of February the following year. These players will be subject to normal income tax.

Non-resident players

These players would be subject to a 15% withholding tax on amounts earned from all matches played in South Africa (in terms of section 47 of the Revenue Laws Amendment Act No. 31 of 2005 which came into effect from 1 August 2006). The withholding tax must be paid to SARS by the end of the following month in which the match was played, translated at the spot rate when the taxes were withheld. If this tax is not withheld and then paid over, the non-resident player has to remit the tax to SARS within 30 days of its receipt or accrual. If the organiser defaults on withholding the taxes, and the non-resident taxpayer does not hand over the taxes due, the then organiser becomes personally liable for the payment. Players are not entitled to claim any associated deductions of expenses incurred if they fall under this category.

Players who are ordinarily resident in a country that has a double taxation agreement (DTA) with South Africa

Examples of countries who have DTAs with South Africa are the USA, UK and Germany to name a few. In this case, the DTA determines in which country the player will be taxed. Many DTAs are based on the Organisation for Economic Co-operation and Development (OECD) model and, even though South Africa is not a member of the OECD, it often follows the OECD guidelines. Based on Article 17 of these guidelines, sportsmen are generally taxed in the country where they perform, which will be South Africa in this instance, although there can be some variations on this based on the articles of the DTA which could allow certain players to be taxed in other countries. Most of these categories point to a significant boost in SARS’ collections from the players at the time of the FIFA 2010 World Cup.

TAXtalk:  www.taxtalk.co.za

10 June 2010

Foreigners buying property must consider tax implications

Foreigners investing in South African property must consider the accompanying tax implications, an accountant warned on Wednesday.

An Accountant said if an individual was investing in residential property, then he would generally suggest that the property be held in that persons own name.

""The reason for this choice, besides simplicity and administrative cost savings, is a saving on income tax and the soon to be enacted dividends tax,"" he said in a statement.

An individuals maximum rate of tax on capital gains was 10 percent compared with combined taxes of 22.6 percent payable by a company.

He said that holding the property in a local trust could also be considered.

""This is a more costly option and is only considered necessary if the circumstances of the investor are such that the specific advantages of a trust are considered important.""

He said the use of a trust provided flexibility, asset protection, ease of administration on death and savings on estate duty.

However, if revenue and capital gains were to be retained in a trust there was a significantly increased current tax cost when compared with holding of the property in the individuals name.

Hesaid that whichever legal person was used to house the property, tax would be payable in South Africa if the property was let, or a capital gain was realised on its disposal.

""South Africa has a very extensive network of double tax treaties, with the result that tax will most probably not be payable on the property both in the investors country of residence and South Africa.""
He said it was usual under the circumstances that the investor would receive a credit in the country of residence for the tax paid in South Africa.

He said transfer duty was payable by the purchaser on acquisition of the property and the rate of transfer duty depended on the juristic nature of the purchaser of the property.

If the purchaser was an individual, the duty was levied on a sliding scale up to eight percent of the purchase price of the property.

If the purchaser was a trust, the rate was a flat eight percent.

""If the property is let, current tax is payable on the net rental income derived,"" he said.

""The legal person owning the property would need to register for income tax and submit returns reflecting the rental income, less any attributable deductions in the production of the income.""

These deductions typically included rates, levies, service charges, interest on bond and repairs and maintenance.

He said capital expenditure such as transfer duty paid and improvement costs were not deductible for current tax purposes, but qualified as part of the base cost of the property when it was sold and capital gains tax was calculated.

TAXtalk:  www.taxtalk.co.za

08 June 2010

Draft tax law on interest exemption under fire

The proposed removal of the tax exemption for interest earned from certain kinds of investments has raised concern among tax practitioners, who say that the version contained in the draft Taxation Laws Amendment Bill is far harsher than the February budget had led them to expect and will increase the cost of offshore borrowing for local companies.

Treasury and South African Revenue Service officials yesterday briefed Parliament’s finance committee on the proposed law, which includes all the budget’s tax proposals.

In terms of the draft law, the exemption for interest income would be narrowed to apply only to interest- bearing investments listed on the JSE and the interest paid by any one of the three spheres of government , banks, friendly societies, registered medical schemes, collective investment schemes and from dealer or brokerage accounts. All other forms of interest would be taxed at the marginal rate.

The Treasury’s director of tax policy, Cecil Morden, said the amendment was intended to address debt- equity schemes involving closely held companies. The original intention of the exemption was to encourage savings but it had become a tax-planning tool to reduce the tax liability of the rich.

“We need to consider whether it is an effective tool for savings by lower and middle-income earners,” Morden said.

But PriceWaterhouseCoopers director Osman Mollagee believed the proposal was too harsh as it would include all interest derived from loans to companies, investment in trusts and so on. The same situation would apply to nonresident investments.

“It is unnecessarily harsh and everyone is talking about whether this is just another one of Treasury’s ‘hurt and rescue’ provisions which is lightened in the final legislation,” Mollagee said.
Bravura Equity Services’ James Aitchison warned that limiting the exemption and excluding nonresidents from its benefits would make offshore borrowing from foreign banks by South African companies more costly as lenders would add the tax charge onto their interest bill.

Up till now, all South African- sourced interest received by nonresidents was exempt from tax.

TAXtalk:  www.taxtalk.co.za


03 June 2010

Law to clarify how your retirement fund benefits will be taxed

Major changes to the taxation of retirement fund benefits have taken place over the past three years. Proposals in this regard in the Taxation Laws Amendment Bills this year largely refine the changes that were announced previously or correct anomalies that have arisen as a result.

TAXtalk:  www.taxtalk.co.za


1 June 2010

Huge tax breaks on properties not for all

New tax window period to transfer properties held in trusts - what no one told you ...

Many people are interested in taking advantage of the new Sars tax concession that provides a window period for transferring properties currently held in trusts, into their personal names, as provided for in Paragraph 51 of the Eighth Schedule of the Income Tax Act 1963.

Paragraph 51, as introduced by the Taxation Laws Amendment Act No. 17 of 2009, offers a special roll-over concession for when a natural person (which includes his or her spouse or both) acquires, in certain circumstances, a domestic residence from a Company (including a Close Corporation) or Trust.
The Explanatory Memorandum stated that the reasons for the new window period are, as quoted verbatim,:
TAXtalk:  www.taxtalk.co.za


27 May 2010

Beware your CC might be in deregistration

With effect from 1 September 2008, it has become compulsory for every close corporation (""CC"") to lodge an annual return with the Registrar of Close Corporations (""the Registrar"") on payment of a prescribed fee. Even if a CC is dormant, in other words it is not doing business at the moment but intends to do so in the future or only owns a private residential property, it still has to comply with the annual return requirements.

The lodgement of annual returns has two purposes. Firstly, it provides the Registrar with the latest information of the CC, such as its contact numbers and address and information regarding its accounting officer. Secondly, it enables the Registrar to determine whether the CC is still in business. It should be noted that the lodgement of an annual return does not exempt your CC from lodging other returns like a change of membership or accounting officer.

The annual return must be lodged electronically on the Companies and Intellectual Property Registration Offices (""CIPRO"") website, www.cipro.gov.za, within two months of the anniversary of the registration date of the CC. Failure to file an annual return within the time limit will lead to a penalty being levied and ultimately, the deregistration of your CC. If deregistered, it means that your CC will lose its status as a separate legal entity and the members can be held personally liable to the CCs creditors for all outstanding liabilities. Furthermore, all the CCs assets are forfeited to the state.

Now is the time to be more vigilant, as CIPRO has indicated that it will be clamping down on non compliant CCs this year.

TAXtalk:  www.taxtalk.co.za

25 May 2010

Directors can expect heightened shareholder activism under new Companies Act

Directors and officers, charged with making difficult management decisions in the course of their work, may face heightened litigation once the new Companies Act comes into effect in later this year. Increased litigation may also cost directors millions in their personal capacity.

Key provisions in the new Act will raise directors accountability to shareholders and increase the likelihood of shareholders participating in legal action, particularly if the company and its officers caused shareholders to suffer significant financial loss.

“The scope of persons able to bring an action as well as the basis for liability is now much wider,” says Philip Hobson, Financial Lines Manager at Chartis South Africa.

“This means that anyone, including shareholders and staff members, can sue directors and officers directly, which will heighten their personal liability.”

Currently, a shareholder’s relationship with the company means that they can’t, generally speaking, bring an action against officers directly. They have to request the company to bring a law suit against an officer who committed a wrongful act.

However, directors and company officers are unlikely to bring an action against their colleagues, and therefore shareholders have limited recourse to recover damages from wrongful acts committed by company officers.

“Under the new Act, shareholders will have direct recourse against directors and officers in a personal capacity as long as they can prove they have suffered damages,” says Hobson.

This recourse will now be available to a wider range of persons, not just shareholders. Directors will be personally liable for breaches of their fiduciary duties and may be sued for loss and damages caused to creditors, employees, customers, competitors, shareholders or other stakeholders of a company.

For example, if a director makes a bad decision or acts negligently, causing his company to suffer financially, and this results in retrenchment of an employee, that staff member will be able to bring an action against the company officers directly.

Another significant change in the Act is that it specifically provides for class actions by extending liability to a class of persons. Class actions increase the amount of damages claimed exponentially.

Increased shareholder activism and the extension of liability to a wider class of persons means that South Africa is likely to follow the trend in countries like the US, UK and Australia which all have experienced increased litigation against companies, company officers, and directors.

Australia, for example, which has gone through a similar corporate law evolution, has seen claims against directors and officers double in the last 4 years. In the UK, the D&O insurance market is forecast to grow by 27% to £596 million by 2013.

Directors and officers need to be prepared for the changes in the Act and the wider basis for liability, as their own assets will be in the firing line should an action be bought against them. This means they could face very large monetary damages.

Hobson warns that management should make sure they are properly insured for any eventuality.

“Companies, directors and their insurance advisors aren’t well prepared for the risks that could arise from increased shareholder activism and class actions. Considering the Act provides for personal liability, which could cost directors financially, they need to ensure they are adequately covered.”

TAXtalk:  www.taxtalk.co.za


20 May 2010

Here lies the legendary company car...RIP my friend

SARS has released a draft Taxation Laws Amendment Bill which sets out the proposed amendments in relation to company cars effective 1 March 2011. Employees have been holding their breath since March anticipating that SARS had forgotten about the Budget speech announcement but it looks like the days of company cars may be numbered.

The proposed amendments to the legislation affecting company cars are as follows:

• Company cars will be taxed at a rate of 4% of the determined value of the car on a monthly basis. This constitutes a 1.5% increase from the current rate of 2.5%;
• The determined value of the company car will now include the costs of a maintenance plan and VAT. Currently, SARS allows the maintenance cost to be offset against the determined value. In addition, currently the determined value of the car excludes VAT; and
• Employers will be required to withhold employees’ tax at a rate of 80% on the fringe benefit (effective 1 March 2011). Currently, employers withhold employee’s tax on 100% of the fringe benefit.
As can be seen, the changes are considerable. The biggest surprises are not only the rate at which the company car will be taxed on a monthly basis, but also the inclusion of VAT which effectively increases the determined value by 14%!

Should the Bill be enacted, employees who are provided with company cars will be taking home less on a monthly basis.

As an example, Jane the FD has a company car valued at R300 000 (excl VAT). Currently her fringe benefit is R7 500 on a monthly basis (R300 000 x 2.5%). In terms of the proposed legislation, Jane’s new fringe benefit will be R13 680 which will then be subject to 80% employees’ tax bringing it down to R10 944 (((300 000 x 114%)x4%)x80%) . Applying a marginal rate of 40%, Jane could be taking home approximately R1 377 less per month.

Fortunately, employees do have the ability to claim some of the tax back, provided they maintain proof of business expenditure, presumably in a logbook. On submission of the individual’s tax return, the individual could claim the ratio of business kilometres travelled over the total mileage against the fringe benefit calculated, to potentially qualify for a tax refund.

For those individuals who opted for a company car as opposed to a travel allowance because of the paperwork, unfortunately, it looks like they will need to maintain a logbook in order to be able to claim a portion of their tax back. For those who choose not to maintain a logbook, or do not use their company car for business travel, they will have to bear the brunt of the proposed legislation (to the extent enacted in its current form). These individuals will get a rude awakening on assessment when they will need to pay in taxes (i.e. the 20% untaxed amount). For those individuals who maintain a logbook, they will need to justify at least 20% of the fringe benefit amount in order to break even and not pay any taxes on assessment. At the end of the day, it looks like SARS has every intention to strictly tax everything that moves.

TAXtalk:  www.taxtalk.co.za.


18 May 2010

Tax Refund Scam – Beware of email from “SARS”

There has been an email where “SARS” indicates a ‘taxpayer’ is eligible for a refund and that they must follow a specified link to process the refund request in 6-9 days.

SARS has only processed refunds electronically since 1 November 2008 and is only paying refunds into ‘valid’ bank accounts according to their system. The only way to provide SARS with valid bank information is to submit the following documents to the nearest SARS branch office

• Original cancelled cheque or an original bank statement for the taxpayer or an original letter from the bank indicating the taxpayer’s Name, Account number and Branch code

• Certified copy of your ID document

      In the case of a Business or Trust, the ID must be that of the Public Officer 

Please note that the following documents are NOT acceptable:

• Credit Card accounts

• Internet bank statements

• Third party banking details

• Faxed or emailed statements

11 May 2010

Beware of product liability under the new Consumer Protection Act

Section 61 of the Consumer Protection Act, 2008 (the Act) introduces drastic remedies for consumers who suffer death, injury or illness, or the loss of, or physical damage to, movable or immovable property as a result of having been supplied unsafe or defective goods, or if they are given inadequate warnings or instructions regarding hazards which may arise from using the goods supplied.

Although the Act is only expected to come into full operation on 24 October 2010, once it comes into effect, a consumer will be entitled to claim compensation for harm suffered in respect of any defective goods supplied to that consumer since 24 April 2010.

The inadequate protection offered by current consumer protection legislation will be repealed and replaced by the Act, which contains a plethora of consumer rights aimed at protecting consumers from having to agree to unfair contract terms when purchasing goods or services. This article deals only with the product liability provisions contained in section 61 of the Act.

In terms of section 61, all manufacturers and suppliers of the goods which have caused harm to consumers in the manner specified in the section, are jointly and severally liable for that harm, as well as for any economic loss which a consumer may suffer indirectly as a result of that harm. Section 61 applies to all goods which are supplied to a consumer, even if the supplier is exempt from complying with the provisions of the Act.

Therefore, to claim compensation in terms of section 61 of the Act, a consumer need only prove that the supplier supplied the goods to the consumer and the consumer suffered harm as a result of using the goods. This is commonly referred to as ""no fault liability"" because the consumer does not have to prove negligence on the part of the supplier. Any party in the supply chain is open to a product liability claim by the consumer due to liability being joint and several.

Amongst other things, if the supplier can prove that the defect did not exist in the goods at the time they were supplied by that supplier to another supplier, or that it would be unreasonable to expect the supplier to have discovered the defect considering the suppliers role in supplying the goods, the supplier may escape, or minimise, its liability under section 61.

A consumers claim under section 61 prescribes within three years after the harm is suffered or discovered, or three years after the latest date on which the consumer suffers economic loss as a result of such harm. It seems that if a consumer suffers a loss of income which continues for an indefinite period, the consumers claim may never prescribe.

Since liability will effectively arise from 24 April 2010, we strongly recommend that suppliers of goods take immediate action to assess their risk and implement preventative measures to minimise their liability under the Act with effect from 24 April 2010. In particular, suppliers should ensure that their insurance cover provides sufficient cover for product liability claims. Since product liability cover is required for consequential and foreseeable loss, it is anticipated that such cover will come at a substantial cost to the supplier. It is quite likely that such costs will be passed on to the consumer in the form of higher prices.

When the Act is fully operational, suppliers of goods and services will not be permitted to contract with consumers on terms which have the purpose, or effect, of depriving consumers of any of the consumer rights contained in the Act. This means that suppliers will no longer be able to contract out of, or contractually limit their product liability as they have done in the past.

TAXtalk:  www.taxtalk.co.za.


06 May 2010

Information the currency of tax collection

THE South African government plans to improve the exchange of tax information between government agencies and departments as well as with other countries.

Finance Minister Pravin Gordhan said in his February budget speech that plans were in place to make the exchange of information between government agencies simpler. The government is also considering revisiting the secrecy provisions that limit the ability of official agencies under the umbrella of the finance minister to share information with each other.

The proposals, which have still to be drafted by the National Treasury, are intended to narrow the tax gap, improve the rate of tax compliance, and further reduce the amount of lost tax revenue. All of these are considered necessary for the tax authorities to make better use of their resources.

The South African Revenue Service (SARS) would like to see more interaction between government departments. One of the causes of the financial crisis could be traced to the lack of information, says Joseph Rock, head of the Large Business Centre at SARS.

SA is also obliged to provide information on request to other countries with which it has a double-taxation agreement, even though SARS may not have any interest in the information itself, says Vedika Andhee, a director in human capital and PAYE (pay as you earn) at Ernst & Young.

Better communication with foreign administrations requires smooth links at home, and for now the computer technology in place at SARS does not “speak” to other government agencies. This means SARS’ computer system is unable to obtain information on taxpayers from these agencies . This situation is a result of the confidentiality restrictions between government agencies, Rock says.

Maemo Machete, deputy director of the Large Account Unit at the Department of Home Affairs, says the department can talk to other countries and foreign embassies and exchange information on matters relating to illegal migration and other types of criminal activity. However, the department’s database is not connected to that of SARS or other agencies. Machete’s department would, however, like to see a link between the two departments in the future.

SARS collected R598,5bn in revenue for the 2009 -10 financial year, R8,1bn more than the revised estimate announced in the February budget.

SARS commissioner Oupa Magashula has pointed out that tax administrators will need to strengthen their co-operation and share information if they are to manage multinationals effectively.

Magashula says SA is moving towards closing the tax gap. However, he says that it is difficult to quantify the tax gap. “We have to be certain that we can depend on a figure and explain it before we release any percentage.”

Every year, SARS carries out between 65000 and 70000 audits, Rock says. “SARS tries to identify the areas of biggest risk (when carrying out an audit),” he says.

Only those considered the biggest risk will be audited, he says, adding: “These are not necessarily the big fish. Those that don’t comply are high-risk. We focus our attention on them.”

Beric Croome, a tax executive at Edward Nathan Sonnenbergs, says SA is in the process of negotiating or finalising various tax exchange agreements with other jurisdictions. These include Argentina, Bermuda, the Cayman Islands, Isle of Man, Jersey, Lichtenstein, Monaco, and San Marino.

When these agreements are in place, SARS will be able to call for the exchange of information, Croome says.
Last year, the Group of 20 leaders at the Pittsburgh summit called for greater tax transparency and a better exchange of information.

In response, the Organisation for Economic Co-operation and Development (OECD) last month announced a peer review process on the exchange of information.
SA is not a member of the OECD but has observer status. The OECD has announced that SA will be subjected to the review process in the course of next year.

TAXtalk:  www.taxtalk.co.za.


04 May 2010

Tax deductions and the naked news reader

Can our TV stars claim back tax for looking beautiful?

Recently, a United Kingdom Tax Tribunal was required to adjudicate on whether Sian Williams, a BBC news presenter, was entitled to deduct costs incurred on professional hairstyling and colouring, professional clothing for studio appearances and laundry of professional clothes, for tax purposes.

The taxpayer maintained that the expenditure was allowable under section 336 of the Income Tax (Earnings and Pensions) Act, 2003. Her Majestys Revenue and Customs (HMRC) disallowed the deductions claimed by the taxpayer.

TAXtalk:  www.taxtalk.co.za.


29 April 2010

New criteria for remission of interest from April 1

Vendor now liable for a penalty amounting to 10% of the outstanding tax.

Where a vendor has failed to pay the VAT due in respect of any tax period within the prescribed period, the vendor is liable for a penalty amounting to 10% of the outstanding tax. In addition, where payment is made on or after the first day of the month following the end of the period allowed for payment of the tax, interest is payable on the outstanding tax. This interest is calculated at the prescribed rate of interest.

Currently, the Commissioners discretion for remitting any interest is based on whether it can be shown that either:
• The failure to pay on time, did not, having regard to the output tax and input tax relating to the supply in question, result in any financial loss (including loss of interest) to the State; or
• The vendor did not benefit financially as a result of the non-compliance (taking interest into account).

In other words, the vendor could elect to use one of two options that were available in order to convince the Commissioner that the interest imposed on the underpayment of tax should be remitted.

With effect from 1 April 2010, the Commissioners discretion to remit interest will be based on a single test that will determine whether interest imposed on the late payment of VAT will be remitted. The decision to remit interest will be exclusively determined by whether the late payment was as a result of circumstances beyond the vendors control. This test is evidently very different from the previous two options available to a vendor.

Contrary to the legislation prior to the amendment, in future, it is only where a vendor does not have full control over all the processes necessary to return and pay its VAT within the required time frame, that it will be able to avoid an interest charge and in doing so, benefit financially. An example of such circumstances envisaged would be when a vendors payment instruction could not be carried out by the vendors bank because of failure in the banking system.

An interpretation note will be issued setting out the circumstances under which interest may be remitted.

TAXtalk:  www.taxtalk.co.za.



27 April 2010

Drive your company car and pay less tax!

Company cars have been on the SARS watch list for some time. However, the reality of the situation is that individuals will continue receiving company cars and it is likely, with the amendment to the travel allowance legislation, that there may be a marginal increase in the number of company cars that are provided.

The provision of a company car has a fringe benefit tax attached to it (to account for the private element). It was announced earlier this year that SARS will be re-considering the value of the fringe benefit (although legislation has yet to be introduced addressing this aspect). Currently, company cars are taxed at a rate of 2.5% of the “determined value” of the motor vehicle. The concept of “determined value” is comprehensively defined in the Income Tax Act but would generally be the original cost of the vehicle to the purchaser (where the sale occurs between parties acting at arm’s length).

The original cost of the vehicle excludes any finance charge, interest, VAT etc. In the current economic environment, when acquiring a motor vehicle from a dealership, it is a common selling point that the vehicle comes with a 3/5/6 year warranty and a maintenance contract. The vehicle’s selling price would therefore have this maintenance contract built in (although the breakdown of this cost is not specifically stipulated on the invoice).

One way of reducing the tax on a company car is to reduce the determined value of the car or to reduce the percentage points applicable to the determined value. As an illustration, where the employee does not receive a travel allowance and bears the full cost of maintaining the company vehicle, the value of the private use of the company car (i.e. the fringe benefit) must be determined by deducting 0.18% from 2.5% (i.e. the fringe benefit is calculated at a rate of 2.32% of the determined value of the vehicle on a monthly basis).

Arguably, in situations where a maintenance contract is included in the purchase price, the determined value should be reduced by the cost of the maintenance contract. The reduction in the percentage points cannot however be utilised as it only applies in instances when the employee bears the full cost of maintaining the vehicle.

Assume that a company purchases a car for R250 000 (excl VAT etc). The car has a 3 year maintenance contract which costs R40 000 and this cost is built into the purchase price. The determined value to be utilised in computing the fringe benefits tax would be R210 000. This amounts to a reduction in the fringe benefit of R12 000 per annum (R1 000 per month)!
There are those who would argue that the determined value cannot be reduced in this way. However, it appears that SARS approves of the method stated above. They have specifically stated in the Employer Guide that “Where a motor dealer includes a maintenance contract in the purchase price of a vehicle, the value of the maintenance contract should be excluded from the calculation of the value of the benefit received by an employee when the right of use is granted to such employee.”

In light of SARS ratification of this method, it would be a wise idea for employers to request that the dealership provide them with a breakdown of the purchase price separating the maintenance contract from the actual cost of the motor vehicle. The fringe benefit will therefore be much lower once the maintenance cost is removed. At the end of the day, recipients of company cars may have smiles on their faces as they will be seeing a greater take home pay on a monthly basis!

Disclaimer
The information contained in this article / publication provides general guidance. It is not intended to constitute substantive information and cannot replace the specific advice which should be sought from an appropriate professional advisor in relation to the actual facts of a matter, before taking any particular course of action.

TAXtalk:  www.taxtalk.co.za.


20 April 2010

Death benefit payouts: weigh up your options carefully

There is no reason you cannot arrange your tax affairs to your best advantage, or to the best advantage of your dependants.

In the context of dependants, estate planning has become a highly creative playground, mainly to the benefit of tax consultants. This is one of the reasons the South African Revenue Service is considering scrapping estate duty. But taxation at death does not include only estate duty; it also involves income tax and capital gains tax (CGT). (Death is a CGT event.)

One area that is often overlooked in estate planning is what happens to the retirement fund benefits if a fund member dies before retirement. The benefits can be from a pension fund (either defined benefit or defined contribution), a provident fund, a retirement annuity fund or a preservation fund.

It is an issue to which retirement fund trustees should also give a great deal more attention, particularly because members (or their dependants) may come looking for the trustees in their individual capacities if inappropriate fund rules do not permit the correct choices to be made. It is not, however, the job of trustees to provide tax advice. That must be sought from a financial adviser.

I recently asked Jenny Gordon, a senior legal adviser at Old Mutual, two questions about the payment of benefits on the death of a fund member.

1. LUMP SUM OR ANNUITY?
When it comes to retirement fund benefits and assured benefits in both defined benefit and defined contribution funds, what options - in other words, taking an annuity or a lump sum payment - do the beneficiaries have on the death in service of a member, and what are the tax consequences of each decision?

Gordon says there is an inter-relationship between the Pension Funds Act, the Income Tax Act and the rules of a fund.

In terms of section 37(c) of the Pension Funds Act, Gordon says, fund trustees have the discretion to apportion a benefit between dependants and beneficiaries, except where the rules of the fund provide for surviving spouse or child pensions.

She says the Income Tax Act contains provisions that relate to the payment of annuities (pensions) and other benefits to the dependants or nominees of a deceased fund member.

If you retire from a fund other than a provident fund, up to one-third of the benefit may be commuted to a cash lump sum. But if you die before retirement, there is no restriction on the amount that may be commuted, Gordon says. So, on your death, a fund can pay your beneficiaries the full amount as a lump sum.

Gordon says there are a few provisos. These are:


Taxation of lump sums. Any lump sum that becomes payable to a beneficiary following the death of a member is deemed for tax purposes to accrue to the deceased member immediately before death. This means that any amount taken as a lump sum will be taxed in the same way as if the member had retired the day before he or she died.

The tax implications are as follows: the first R300 000 of the lump sum paid will be tax-free; the second R300 000 will be taxed at 18 percent; the next R300 000 will be taxed at 27 percent; and anything above these amounts will be taxed at 36 percent.

The tax-free portion of the lump sum will be increased by:

* Any contributions you made to the fund that were not allowable as tax deductions;
* Any portion of the fund that was in a state pension fund before March 1998 (when contributions to such funds were exempt from tax) and was transferred later to the existing fund;
* Unclaimed benefits that were taxed and then transferred to the fund; and
* Divorce order settlements that were taxed and then transferred to the fund.

When the tax is calculated, lump sum benefits paid at death will be aggregated with any lump sums taken previously on retirement since October 1, 2007 or as a withdrawal since March 1, 2009. CGT and estate duty do not apply.

The lump sum is subject to income tax because your contributions to retirement savings were deducted from your taxable income in the build-up stage and the investment returns in this phase were also exempt from tax.


Partial or full annuities. If the fund rules allow it, Gordon says, the beneficiaries can choose to take an annuity or a partial annuity instead of a lump sum. In this case, any annuity portion will not be taxed as if it were in the hands of the member.

The annuity will be taxed in the hands of the beneficiaries/ annuitants at their marginal rate of tax. This will also apply if, in terms of the rules of the fund, an annuity is paid to a surviving spouse or child: the pension will be taxed in the hands of the recipients of the annuity at their marginal rates of tax.

Gordon says it makes no difference tax-wise whether the deceased member belonged to a defined benefit or a defined contribution fund. However, it is more common to find provision for surviving spouse and child pensions in the rules of a defined benefit fund than in those of a defined contribution fund.


Life cover. If there is life cover on the fund, the life cover will be paid out in the way prescribed by the fund.

If there is no rule to the contrary, the life cover may be paid to the dependants/beneficiaries as a lump sum. It will be added to the accumulated retirement fund benefits and taxed according to the rates that apply to lump sums taken on retirement or death.

The life cover benefit is taxed because the premiums were tax-deductible, normally in the hands of the employer.

Again, Gordon says, the fund rules may dictate how the life cover benefit is paid. The rules may prescribe that the benefit is paid, in whole or in part, as a surviving spouse or child pension.

Annuity may be better
So, in the light of everything that Gordon has said, beneficiaries need to take great care when given the choice of a lump sum or an annuity.

It is important to remember that tax applies only once a payment, whether in the form of a lump sum or an annuity, is made. This means that the death benefit can be transferred into an investment-linked living annuity, where the capital will continue to generate investment growth tax-free, while only the amounts drawn down will be taxed in the hands of the recipient.

Clearly, from a tax point of view, a beneficiary should always take the first R300 000 of a benefit as a tax-free lump sum. But should you take the next R300 000 as a lump sum or as an annuity?

Most of the research I have seen shows that you should not take it as a lump sum. If you take the next R300 000, which is taxed at a rate of 18 percent, you will pay R54 000 in tax and you will have R246 000 left to invest. But if you invest the R300 000, you will earn returns on the full R300 000, and, over the longer term, you are likely to be better off than if you had paid the tax upfront.

Then there is the issue that if the beneficiaries take the first R300 000 as a lump sum and the rest of the benefit as an annuity, the pension payment may well be taxed at a lower effective rate of tax, especially if there are a number of dependants or beneficiaries who have no other source of income and the pension payment is split between them.

So, in the vast majority of cases, it is probably best to take only the first R300 000 of a death benefit as a lump sum and the rest as an annuity (see: ""Example: lump sum versus annuity"").

2. TRUSTEES OBLIGATIONS
The issue of the choice between taking retirement fund death benefits as a lump sum or as an annuity raises the second question: what, if any, obligation do the trustees of a fund have to explain these choices and their consequences to members and/or their dependants?

Gordon says trustees have certain fiduciary duties to ensure the good governance of their funds and that the benefits provided for in the fund rules are actually delivered. Trustees must also follow rules of conduct in relation to their duties to members, beneficiaries and other stakeholders. These obligations are governed by legislation, and further guidance is provided by the Financial Services Board in a number of guidance notes.

Gordon says that guidance note PF 8 deals with the minimum disclosure that funds must provide. Members must be provided with an explanatory statement within three months of joining a fund. They must also be furnished with an annual benefit statement that shows the benefits that will be paid on retirement, death, disability, ill health/early retirement and withdrawal.

In addition, on certain events, such as death, after the trustees have decided to whom the benefits will be paid in terms of section 37(c) of the Pension Funds Act, the recipients of the benefits must receive a letter that notifies them of the decisions made by the trustees and that sets out all the options available to them, Gordon says.

These are the minimum disclosure requirements, but funds that wish to provide more than the minimum may do so.

Another guidance note, PF 130, states that retirement funds should implement a communication policy to ensure that relevant information is conveyed to you, the member, to assist you in your decision-making, Gordon says.


EXAMPLE: LUMP SUM VERSUS ANNUITY
On death in the 2009/10 tax year, the member, who belonged to a defined contribution fund, has an accumulated retirement benefit of R1 million and a death benefit on group life cover of R2 million (a total benefit of R3 million). The member leaves a wife and two children.


TAXtalk:  www.taxtalk.co.za.


15 April 2010

SA prepares for wage subsidy system

to be released next month, Sarss systems get ready.

JOHANNESBURG - In a desperate attempt to prevent jobless growth, a problem now also afflicting America, South Africa will release a white paper next month, which will look at ways to deal with this burden.

At a press briefing on Thursday, Finance Minister Pravin Gordhan revealed that growth alone is not good enough for SA, ""we want growth that will be more labour absorbing like bringing the young into economy"".

Unemployment is endemic amongst youth - almost ¾ of the unemployed are between the ages of 15 and 34.

In the last quarter we created only 18 000 jobs while a million were lost last year, he added.

One of the ways SA is hoping to do this is through a wage subsidy, announced by Gordhan in his maiden Budget speech. When asked on Thursday when we could expect more details, Gordhan told MoneywebTax.co.za that a white paper will be released next month for discussion.

The wage subsidy effectively will allow companies who hire young people for two years without work experience to get their money back from the South African Revenue Service (Sars).

At least 800 000 are expected to qualify initially for the tax incentive. Under consideration is a cash reimbursement to employers, operating through the Sars payroll system and subject to minimum labour standards. ""It will be available to tax-compliant businesses, non-governmental organisations and municipalities,"" Gordhan said at a Budget briefing.

MoneywebTax can confirm that Sars is in the process of preparing its systems for the wage subsidy. In a recent interview with MoneywebTax, Sarss Mark Kingon told us that the new simplified employers declaration forms and PAYE requirements will make its systems ready for the wage subsidy.

Under the new PAYE requirements, employers, subject to the requirements of PAYE, are required to register all employees regardless of how much they earn from August, says Kingon.

Employers will need to register them on the Sars e@syFile system.

Some, like Oupa Bodibe, the principal analyst at the Competition Commission and Kimani Ndungu, a senior researcher at the National Labour and Development Institute, question whether a wage subsidy will work arguing that the problem of youth unemployment, needs a raft of interventions - and not simply a single mechanism such as a wage subsidy.

The starting place they argue should be our education system, ""where we must rethink the investment made so far in the study of critical subjects like mathematics and science.

""At the higher education level, the emphasis should be less on formal degree qualifications and more on practical, skills oriented, vocational training.

""Similarly, between matric and enrolment in a college or university, we should introduce national youth service, where young people are placed in gainful activities such as public infrastructure development"".

Lets hope the white paper will set as on the path to growth with jobs.

TAXtalk:  www.taxtalk.co.za.


13 April 2010

Tax Implications of 2010 Rental Income

With only months to go before the start of the 2010 FIFA Soccer World Cup, many property owners are considering renting their private homes to international soccer lovers. Bellville-based chartered accountants C2M warn that owners need to take the tax implications into account before making this decision.

Director Arno Nel CA (SA), cautions entrepreneurs that SARS will claim their share of any rental income and that they should not spend the additional income before considering this. “Speculation is rife about the rental potential on properties, rates of up to R70 000 a day have been mentioned for upmarket properties in desirable locations. If you take a hypothetical income of R300 000 during June and July 2010 for a property registered in the name of a couple, the rental income will be split between the involved parties and could potentially push them into a higher tax bracket. If one of them earns R290 001 per year, his or her annual tax obligation will almost double from R67 260 to R120 000. In general, you’ll have to make a tax provision of a quarter of your gross income generated during the World Cup,” mentions Nel.

Nel explains that as with any rental income, expenses related to the maintenance of the property and interest payments on a bond will be deductable. Certain renovations required to generate the rental income as well as pro-rata expenses such as levies, rates and taxes, insurance and electricity can also be declared. “This will only be possible if owners can proof that such costs are directly linked to the rental contract and that any enduring benefit is incidental to the income generated. This requires detailed record-keeping of all expenses and I would advise all owners to invest in a comprehensive rental contract, which stipulates everything included in the accommodation package, including associated services such as meals and transport.”

Owners should note that any rental expenses incurred during the period that they are renting out their primary residence will not be tax-deductable. Although the argument can be made that the expense occurred during the production of income, Section 23g of the Income Tax Act restricts the deduction of such personal expenditure.

There is some good news as property owners, who offer accommodation to World Cup guests, will still be able to take advantage of the R1,5-million Capital Gains Tax exclusion when they decide to sell the property, even though the property was not used exclusively for domestic purposes. “As long as the rental activity is limited to this once-off occurrence, SARS won’t consider the property as one involved in trade,” explains Nel.

Property owners should also note that rental agents are obligated to supply SARS with a detailed breakdown of rent collected and the related beneficiaries. SARS will therefore be able to trace this on the relevant tax returns of those individuals who have received rental income.

TAXtalk:  www.taxtalk.co.za.


8 April 2010

Give back my taxes!

Every year, the Minister of Finance reports back on the taxes that SARS has managed to collect during the course of the year from taxpayers. Some of this money is rightfully theirs, but a significant portion is actually due as a refund to taxpayers who do not claim these refunds as a result of tax ignorance. These are the lower income earners, the very ones that Government has indicated that they wish most of the tax relief to go to.

Taxpayer education is definitely something that the South African Revenue Service (“SARS”) has been working on (to their credit). However, the aim of taxpayer education is primarily to ensure that people pay their taxes. Arguably, there has been little or no education for those who have paid taxes and are due a refund because their earnings are under the tax threshold (i.e. the level of earnings on which tax becomes taxable).

Those affected are the students who are paying their way through varsity by doing casual work and the man on the street who cannot get permanent work and therefore works on casual basis at different employers. Most of these people earn under the tax threshold.

There are thousands of people who fit into this category. This tax year, the tax threshold is R57 000 i.e. people who fall under this threshold do not pay taxes. However, casual workers are generally taxed at 25% on the very first cent that they earn. These individuals should therefore receive their taxes back but the only mechanism for them to do this is to register as a taxpayer and file a tax return. Arguably, not even 10% of these individuals know that they can claim their taxes back.

This is a failing on SARS’ side as well that of employers. Failure by SARS to educate individuals of their rights and knowingly (or unknowingly) benefiting financially is not defensible.

As indicated, in order to obtain a refund, one needs to register for taxes and file a tax return. For those individuals who now wish to claim their refunds for the last few years, the same process needs to be followed. The problem that they will probably face is that the SARS computer system will impose a penalty for late registration and late filing of tax returns. Alternatively, if they go into the tax office, it is likely that the official will refuse to register them because they are under the threshold.

SARS should consider a simplified manner to deal with these individuals. One method for SARS to consider is for SARS to use the individuals’ bank details on the employees’ tax certificate. At the end of the year, SARS could then send a letter to the taxpayer at the address stipulated on the certificate requesting that these individuals declare whether or not they have earned any income from other sources. To the extent that they are actually under the threshold, the taxes should be refunded. Alternatively, the withholding rate of 25% should be substantially reduced or removed in total.
The fiscus has been financially benefitting from the ignorance of taxpayers for several years. Steps now need to be taken to educate and enable people to rightfully claim back their taxes. So SARS, give them their tax back!

TAXtalk:  www.taxtalk.co.za.


18 March 2010

SARS announces changes to cheque deposits

Pretoria, 17 March 2010 - From 1 April 2010, the South African Revenue Service will NO LONGER accept cheque payments made using the abbreviation ‘SARS’. All cheques must from 1 April 2010 be made out to “South African Revenue Service”.

This decision has been taken as part of the ongoing efforts by SARS and the banking institutions to limit the opportunities for fraudulent activities as well as decrease possible losses due to similar account names.

Taxpayers can also take advantage of other methods of payment to SARS such as the use of online banking, electronic funds transfers (EFT’s) or payments through the secure efiling channel

SARS would like to urge all taxpayers to view this decision as a further step towards protecting payments to SARS and to prevent fiscal theft through cheque fraud. If you wish to make use of alternative payment methods, see SARS Payment Rules.

10 February 2010

Change in definition brings relief to companies, CCs and trusts

Many a consultant, freelancer or labour broker has been frustrated by the definition of their services and the confusion about their status that has led clients to withhold tax from their fees.

This confusion has come about because of the numerous changes SA Revenue Services has made to the relevant definitions in the Fourth Schedule to the Income Tax Act, in recent years, says Erika Petersen-Holmes a partner in Shepstone & Wylie Attorneys’ Commercial Department, who reminds business that this has changed .

Since March 2009 there has been some relief, in that the definition of ""labour broker"" has been amended to exclude all companies, close corporations (CCs) and other juristic entities, but natural persons can qualify as ""labour brokers"" for tax purposes.

This means that labour brokers that are companies, CCs or trusts now no longer need to apply for exemption (IRP30) certificates and their clients need not withhold PAYE from their fees.

That is, unless the labour broking company, CC or trust qualifies as a personal service provider.

Three factors must be met before an entity qualifies as a personal services provider. Firstly the entity must be a company, cc or trust. Secondly the services must be rendered personally by people who are connected to the company, CC or trust. Thirdly any one of the following must apply:

• the people performing the services would be regarded as employees if they were providing the service directly to the client; or

• the duties are performed mainly at the clients premises and the person is under the clients control and supervision; or

• more than 80% of the companys or trusts income comes from one client.

However, even if these requirements are all met, the company or trust will still escape classification as a personal service provider if it has three or more full-time employees who are not members or shareholders of the company or trust and are not connected to the members or shareholders.

TAXtalk:  www.taxtalk.co.za.

9 February 2010

SARS gives SME Companies & Taxpayers a break on mandatory employee information

South African Revenue Services (SARS) has given company and individual taxpayers some breathing space as regards the compulsory electronic submission of employee tax certificates requiring additional mandatory information fields after February this year.

SARS has since acknowledged that the electronic submission of certificates with many new compulsory information fields was placing a major burden on employers, particularly
SME companies where details of former employees are concerned.

Grant Lloyd, managing director at payroll and HR software specialist Softline Pastel Payroll, said SARS, has since introduced what it terms “Relaxed Validations” which give employers a breather.

Some of the new mandatory fields for the current tax year concluding at end-February have now been declared optional and SARS will introduce an electronic solution to cater for bulk IT reference number registrations.

“In essence this means that taxpayers unable to provide the required information for all of the mandatory fields will not have their 2009/2010 certificates, due by the end of Employer’s Filing Season 2009/2010, rejected,” said Lloyd. “However, they will receive a warning from SARS that incorrect and missing details must be corrected and supplied with electronic submissions to be made in August, which will be the first of two submissions required by SARS for the 2010/2011 tax year.”

“In any event,” said Lloyd, “SME companies should ensure that their preparations for the compulsory electronic submissions with full employee tax details receive serious attention. Their houses must be completely in order by the time the first submission of the new tax year is required in August. They will have been warned by SARS.”

Another complication was some confusion about whether staff earning salaries amounting to less than R60 000 a year have to provide their employers with a personal income tax reference number. The fact is that they do not have to apply for a tax reference number and therefore do not need to submit the information.
.
Companies using an automated payroll solution need only capture employees’ information and their payslips. During the year end procedures, the electronic tax certificates are generated automatically in the IRP5.10 file. This file can be imported directly into SARS e@syFile and the payroll EMP501 Reconciliation Report to complete the PAYE, SDL and UIF Reconciliations. This saves businesses considerable time and cost compared to manual calculation and capturing.

“It should be borne in mind that the e@syFile system introduced in two versions, one for employers and one for tax practitioners, is now compulsory for 2009/2010 submissions,” said Lloyd. “This should be welcomed as the system eases the burden on SARS, employers and taxpayers. Again, employers using compliant automated payroll software benefit from streamlined and simplified PAYE submissions to SARS. Companies can download the e@syFile software from the SARS website ( www.sars.gov.za ).”

TAXtalk:  www.taxtalk.co.za.

19 JANUARY 2010

Tax-free retirement fund withdrawals may not be for you

Changes to the way in which withdrawals from retirement funds are taxed have thrown a lifeline to some people who have lost their jobs over the past year as a result of the economic downturn.

But a number of people may be mistaken in believing that they will benefit from the changes.

Before you make any withdrawals from your fund, ask a qualified financial adviser to help you understand all the implications, Mike Sacks, an independent financial adviser and one of the finalists in the 2009 Financial Planner of the Year competition, says.

An amendment to the tax laws during the past year means that people who are retrenched can withdraw up to R300 000 tax-free from their retirement funds.

But many people are not aware that this concession is only for legitimate retrenchments when an employer ceases to trade or generally reduces staff, Sacks says.

He says you will not qualify for the R300 000 tax-free withdrawal if you are offered a voluntary retrenchment that is actually a sham for choosing to leave the company under favourable conditions.

Another example of a sham retrenchment would be where a company has a policy in terms of which staff of a certain age and with a certain number of years of service are entitled to take ""retrenchment"". This ""retrenchment"" may also not be recognised under the Income Tax Act.

In both the above cases, the tax-free amount you will enjoy will be only R22 500, which is a lot less than R300 000. The balance of any lump sum withdrawal (that is, after the tax-free amount) up to R600 000 will be taxed at 18 percent.

Sacks says people who are offered retrenchment packages need to be very careful, as there is a big difference in the tax you will pay, depending on whether or not the withdrawal is for a retrenchment recognised by the law.

He says you also need to be aware that if you make a withdrawal from your retirement fund - for whatever reason - this will have a knock-on effect on the tax concessions you enjoy at retirement.

If your retrenchment qualifies you for the R300 000 tax exemption, you will enjoy that benefit when you are retrenched, but you will not get it again at retirement.

Sacks suggests that you obtain some professional advice if you are offered a retrenchment package.

You do not only want to minimise the tax you will pay, but you also need to try to keep your savings plan for retirement on track.

Another legislative change introduced at the beginning of the year concerned the Estate Duty Act. The change means that investments in retirement annuities (RAs), pension funds, provident funds and living annuities can be disregarded when calculating your estate.


If you have surplus funds to invest in an RA from which you do not retire before death, the change may offer you an estate duty- effective way to provide estate duty-free cash that can then be passed on to a dependant, Sacks says.

The introduction of regulated beneficiary funds, into which pension, provident and RA benefits can be transferred for the benefit of a minor child, is also an issue that parents, particularly single ones, should consider in their estate planning, Sacks says.

The Act now determines that the payment of a lump sum benefit to a beneficiary fund will be taxed as a lump sum payment on the death of a retirement fund member in the deceaseds estate, except if it was paid into the beneficiary fund between March 1 and September 1 this year. Income payments from a beneficiary fund to a minor will no longer be subject to tax.

The new tax rates on withdrawals from retirement funds may also provide an opportunity for people who are in debt and have the opportunity to make a withdrawal, Sacks says. The first R22 500 of a withdrawal is tax-free, and thereafter amounts up to R600 000 are taxed at 18 percent. This may be an attractive rate at which to access your retirement savings if you are over-indebted and need to settle or reduce your debts, Sacks says.

However, plundering your retirement savings and losing the tax benefits you will enjoy at retirement should be a last resort, he says.

If you do not have debt, you should preserve your retirement savings whenever you change jobs, especially now that withdrawals before retirement will count against you when the tax on your lump sum withdrawal at retirement is calculated, Sacks says.

Before you make any decisions, seek advice from a qualified adviser, who can help you ensure that your long-term retirement plan is on track. The worst time to discover that you do not have enough savings to fund your retirement is when you have already reached retirement age, Sacks says.

TAXtalk:  www.taxtalk.co.za.



18 JANUARY 2010

Non SA Residents - Expat Benefits

How to make sure you don't fall on the wrong side of Sars.

Does your South African resident company provide fringe benefits to expatriate employees? If so, is your company withholding monthly employees tax (PAYE) in respect of these benefits?

Over the last few years, there has been a marked increase in the number of foreign expatriate employees who render services in South Africa on international assignments.

Typically, in terms of this arrangement, the expatriates foreign employer would, for the duration of the assignment period in South Africa, continue to pay his salary whereas the South African company who is utilising the services of the expatriate, would be responsible for providing the expatriate with certain fringe benefits whilst on assignment in South Africa.
These fringe benefits typically include providing the expatriate with the use of residential accommodation, car hire, a company car, armed response, a subsistence allowance, living allowance etc. In some cases, the South African company may also settle the expatriates South African income tax liability on his behalf to the extent that his South African tax obligation exceeds the foreign tax obligation which he would have incurred had he remained in his home country. This so-called ""tax equalisation"" also constitutes a fringe benefit granted to the expatriate.

However, a common mistake made by many South African companies in these circumstances, is that they do not withhold PAYE in respect of these fringe benefits provided, where the expatriate is physically present in South Africa for 183 days or less (ie, the cut-off period prescribed by most double taxation agreements (DTAs) when determining whether an expatriate is taxable in his home country or in South Africa).

This failure to withhold PAYE exposes the South African company to significant tax risk. The reason for this is due to the fact that when a South African resident company pays any remuneration or provides any fringe benefits to any expatriate employees, that company has a PAYE (and skills development levy!) obligation, regardless of:

Whether the expatriate is physically present in South Africa for more or less than 183 days during any period; or

Whether the expatriate is legally employed by the South African company.•

No tax relief is granted by the DTA in these circumstances, as this tax relief only applies if the remuneration or fringe benefits are paid or provided to the expatriate by a non-resident employer.

Furthermore, the expatriate will also personally be liable to income tax in South Africa and should therefore register as a South African taxpayer.

Thus, every South African company that utilises the services of expatriates from offshore, regardless of the length of stay of the expatriate in South Africa, should withhold monthly PAYE in respect of any remuneration paid or fringe benefits provided to that expatriate. An IRP5 certificate must also be issued to that expatriate.

Failure to withhold the required PAYE and account for the skills development levy may result in Sars imposing interest, penalties and 200% additional tax in respect of the companys outstanding obligations.
That said, it is generally not a very simple task for the South African company to actually withhold the PAYE from the remuneration paid or fringe benefits provided to the expatriates. This is due to the fact that there are a number of unique tax issues that must be considered when doing these PAYE calculations which are often not catered for by the companys existing payroll system. These issues include:

The need to track the number of days and historic remuneration• figures for purposes of calculating the residential accommodation fringe benefit; and

The requirement to calculate the fringe benefit arising on• settlement of the expatriates income tax obligation by the South African company.

In order to overcome these problems and correctly withhold PAYE in respect of its expatriates, companies will generally need to put their expatriates on a separate (often manual) payroll which should take into account these unique tax complexities. Whilst the initial set up of such an expatriate payroll may be a painful process, the long-term benefits far outweigh this.

Given that Sars has recently established an Expatriate Unit to specifically deal with expatriate tax issues, now is certainly a good time for your company to get its expatriate PAYE affairs in order.

TAXtalk:  www.taxtalk.co.za.


15 JANUARY 2010

More action in the pipeline as environmental legislation gets started

South African businesses came under increasing pressure to treat sustainability as a business imperative last year.

It was prompted by a mix of fiscal interventions, tighter pollution laws and inspections, higher energy prices, a new corporate governance code and a global focus on climate change.

In the last budget delivered by former finance minister Trevor Manuel in February, environmental taxes were either introduced or increased.

The measures were expected to bring additional green revenue of about R7.8 billion to the fiscus in the year.

Most of it would come from higher taxes on fuel via the general fuel levy and a surcharge on non-renewable forms of electricity, implemented in July at 2c a kilowatt-hour and regarded as the countrys first tax designed to incentivise the switch away from coal and diesel for power generation.

Smaller amounts would be generated from increasing international air departure taxes, a new tax on incandescent light bulbs and higher taxes on plastic bags. And it was announced that import duties on vehicles would take into account carbon emissions this year.

Many companies started feeling the wrath of the law as environmental inspectors under the Green Scorpions continued a programme to check compliance with pollution legislation - the first time in decades that business is being held to its legal obligations.
Sectors where deficiencies were found included iron and steel, cement, pulp and paper, and oil refining. No prosecutions have yet resulted, but the government plans to reintroduce environmental courts in priority areas so that environmental crimes do not get lost in the criminal justice system.

The courts will deal in large part with new legislation falling under the National Environmental Management Act, some of which came into effect last year. Municipalities are being given responsibility for monitoring ambient air quality and source emissions while emissions producers will have to apply for new permits, based on a set of standards established with input from business.

A process is under way to set standards for producer responsibility in terms of the Waste Management Act, which was gazetted in March. It will result in standards for classifying and dealing with waste, and remediating contaminated land, among other things.
Any business deemed to be producing hazardous waste will incur the higher costs of more careful treatment and disposal. It is expected to increase companies operational costs.

Last year waste tyre regulations also came into effect, facilitating the process of companies such as cement producers burning tyres to power kilns.
It was a year to focus on environmental efficiencies even for those firms deemed to be low emissions producers and polluters. This was highlighted by rising energy costs and the prospect of paying still higher prices for power as Eskom proposed raising tariffs 45 percent a year for three years. Following public outcry and a dramatic leadership tussle, Eskom lowered its request to 35 percent a year, an increase that business nevertheless fears will cripple economic recovery. A decision on the application is due in about March.

A key driver behind keeping prices lower is demand-side management, particularly the states electricity conservation plan. Although the power saving plan stalled for much of last year as recession staved off a power crunch, it is likely to be a top priority this year and may result in users being obliged to cut power usage by 10 percent. First among them are likely to be about 150 big industrial users that use about 40 percent of the nations electricity.

Some of these firms are starting to come under pressure to integrate sustainability into their business models from other sources: codes of corporate governance, as well as peer pressure from directors. The King 3 code of corporate governance, which comes into effect in March, gives far greater emphasis to sustainability in boardrooms than its predecessors. In particular, it encourages firms to integrate these issues into business operations and reporting. It applies to all South African companies, and remains a condition for JSE-listed firms, but critics say it is wishy-washy in the absence of censure and because companies can simply explain why they are not adhering to any aspect of the code.

In October the Institute of Directors, involved in drafting the latest version of the codes, launched a seven-step guideline for directors to integrate sustainable development into their business strategies, and urged firms to start by redefining the composition of their boards.

They advise businesses to, among other things, appoint a dedicated director responsible for sustainable development as well as an external advisory expert; to put sustainable development components in the performance agreements of all directors and senior managers; and to educate shareholders about the value of viewing returns over the longer term.

Climate change would naturally be a key issue within this matrix. The bulk of the JSEs top 100 companies are already starting to grapple with the risks and opportunities of climate change as they participate in the Carbon Disclosure Project. There is a growing realisation that businesses ignore global warming at their peril.

At global climate change talks in Copenhagen last month, big business made its presence felt (although many executives present were from the low-carbon sector and it is clear the global business lobby does not speak with one voice on climate change). But on some issues there is agreement: the need for a clear way forward and the need for certainty on carbon prices. The failure to seal a deal in Copenhagen perpetuates unpredictability.

In South Africa, a draft green paper on climate change is due to be published by the end of the first quarter, and a white paper is expected by the end of the year. A full legislative, regulatory and fiscal package is expected in 2012.

The UN meets often to thrash out issues relating to a global deal on climate change but it billed the 15th meeting of the Conference of the Parties (COP) last month as something special.

The Copenhagen meeting, said the body representing world governments, would be a turning point. The science of climate change certainly indicated that urgent decisions were required. But two weeks of talks produced no legally binding deal. The US scurried to pull together a last-minute political agreement, but it had the buy-in of barely 15 percent of nations gathered there.

The points of disagreement were numerous. Among the key differences was the continuation of the decade-old Kyoto Protocol, which required developed nations to cut emissions off a 1990 base. It is due to expire in 2012, and developing nations were united in seeking its continuation alongside a new deal for other nations.

But chunks of the developed world remained bitterly opposed to this option, preferring to renegotiate the rules of the game under a new single-track agreement that included the US and developing nations. Many of those same developed nations have not met their Kyoto targets. Some, such as Canada, have increased emissions. References to ""kill Kyoto"" flew around Copenhagen.

While the scientific body under the umbrella of the Intergovernmental Panel on Climate Change had called for developed nations to cut emissions between 25 percent and 40 percent by 2020 off 1990 levels, developed countries offered just 14 percent to 19 percent. The USs offer amounted to roughly 3 percent. Taken together, the emissions pledges would not be enough to contain the average global temperature increase to 2°C, the level at which scientists say runaway climate change would kick in.

On the other end of the spectrum, island nations and least developed countries, particularly in Africa, called for the average rise to be contained to 1.5°C - indicating the extent of the chasm between parties.
The developed world then accused China of blocking a deal because it would not agree to a long-term target. Developing nations, including South Africa, rallied to the Asian nations defence by accusing rich countries of shifting the burden of action to developing countries. If developed nations would commit to only a portion of required cuts, then it implied that developing nations must make the remaining cuts.
Funding the transition to a low-carbon economy, and the adaptation to climate change, was another hurdle. This issue was always going to depend on the largesse of those with the pockets. In the end, they committed $30 billion (R220bn) in quick-start finance over the next three years, and a looser target of securing $100bn a year by 2020 from both public and private finance.

Parties to the conference walked away without pledges of specific amounts from individual nations. While some African countries acquiesced to the 2020 target, others were adamant that closer to $200bn was actually required. There is also uncertainty as to whether the funds will be diverted from existing aid - UN climate secretary Yvo de Boer coined the term ""Aidswash"" - and processes for disbursing it.

At the end of the year, the 16th COP takes place in Mexico where most of the same issues will come on the table again. For a successful outcome, the level of trust between nations and political will to secure a deal will have to be stepped up considerably.

TAXtalk:  www.taxtalk.co.za.


14 JANUARY 2010

SARS sees collapse in collections

Tax collections R26m lower than previous year for first eight months.

South Africas fiscal gap could widen further after finance ministry figures showed government expenditure had soared while tax collections were much lower compared to last year.
The data released by the National Treasury on Monday showed tax collections for the first eight months of the 2009/10 fiscal year were 26 billion rand lower than the same period in the previous year.

Finance Minister Pravin Gordhan has said tax revenue for the 2009/10 fiscal year would likely undershoot the target by about 70 billion rand.

In October, the Treasury forecast a record budget deficit of 7.6 percent of gross domestic product in the 2009/10 fiscal year but analysts say it could be higher.

""The 26 billion rand shows government coffers are still under pressure given that households and companies continue to feel the pinch,"" said Jeffrey Schultz, macro strategist at Absa Capital.

""While we see evidence of mild economic recovery, that recovery is likely to be slow and put pressure on government revenue for some time ... Theres a risk to the upside in terms of them revising the budget deficit up.""

South Africa emerged from its first recession in 17 years in the third quarter after three quarters of contraction. The recession slashed company profits and led to about a million job losses.

The National Treasury figures also showed expenditure in the climbed to 489.5 billion rand compared with 403.2 billion in the previous fiscal year as the government sought to counter the recession with increased spending.

TAXtalk:  www.taxtalk.co.za.

30 NOVEMBER 2009

Retirement lump sum tax benefit

Tax-free for former members; taxable for active members upon retirement.

Are you a member or former member of a retirement fund who has received an allocation from an actuarial surplus pertaining to such fund, and not sure what the tax treatment is?

The good news is that if you are a former member of a retirement fund by virtue of you having resigned, been retrenched, or already retired, such payment will be tax-free. According to an Advance Tax Ruling issued by the South African Revenue Service (Sars) on May 12 2009, any lump-sum payment arising from the distribution of an actuarial surplus to former members of the fund will not be included in gross income.

This non-inclusion of the amount in gross income has the effect of making such a payment tax-free, and therefore does not need to be declared on any IRP5 or IT3 certificate.

When completing your tax return, however, it is a good idea to include such a lump sum in the section ""amounts considered non-taxable"", especially if you are required to complete a statement of assets and liabilities. If you do not show this amount, you may end up with an unexplained increase in your net assets, which could trigger an audit. Any refund that may be due to you would be delayed as a consequence of such audit.

The news is however not as good if you are an active member of a retirement fund, and the actuarial surplus is added to your share of fund - this amount, according to the Advanced Tax Ruling, will not be excluded from the gross income under paragraph 2C of the Second Schedule upon your eventual resignation, death, withdrawal or retirement from such fund.

The effect of this statement is that the taxable portion of your lump sum (after taking into account any general exempt amounts) will include the distribution of the actuarial surplus.

However, the position is slightly different if you were a member of a government pension fund prior to January 1 2005. Any lump sum payments relating to service prior to this date remains free of tax, and while the Advance Tax Ruling is silent in this regard, it could be argued that this tax-free concession should apply to any portion of the actuarial surplus that can be attributed to service prior to this date.

TAXtalk:  www.taxtalk.co.za.

 

Disclaimer        BBBEE Blog         PAIA Manuals        Social Responsibility