Tax Blog

Shareholders, trusts and companies need to ensure they are aware of the looming changes to dividends tax legislation as the new Dividend Withholding Tax (DWT) will be effective from 1 April 2012.

“The new way dividends will be taxed can have consequences on both the shareholder and the company declaring the dividend which neither party may be aware of. We therefore encourage companies and shareholders to increase their awareness of the new regime so as not to be caught off guard,” says a Tax Consultant at an Auditing Firm Johannesburg.

The main change is that, unlike under the outgoing Secondary Tax on Companies (STC), this tax cost will no longer be borne by the company declaring dividends. Rather, the DWT will shift the tax incidence to the shareholder and will require that dividend tax is paid to the South African Revenue Services (SARS) by the company on behalf of the shareholder at the time that the dividend is paid.

The new dividend tax will be levied at 10% on any dividend which is declared and paid by a South African resident company or a foreign company listed on the JSE.

Foreign recipients are not excluded. According to her, companies are required to withhold DWT at either the local rate of 10% or at a reduced rate if a double taxation treaty permits it.

“To qualify for the reduced rate, non-resident shareholders will be required to inform the declaring company that they reside in a treaty country and qualify for a reduced rate of tax in respect of the dividend,” she continues.

Another area that would affect companies is with regards to STC credits, or dividends received by a company that is in excess over dividends paid. “Currently this is carried forward to the next cycle, but with the introduction of DWT, these existing credits can only be used for up to five years after 1 April 2012. The credits will reduce the amount of DWT payable to SARS,” she says. In order to make use of any STC credits, the balance of STC credits need to be reported to SARS on 31 March 2012. This will take the form of a deemed dividend declaration of nil and an IT56 form to be completed and submitted to SARS.

Notably, there are exceptions and the DWT will not apply if the beneficial owner of the share is, inter alia:

- A South African company

- The Government and various quasi government institutions

- Public Benefit Organisations

- Environmental rehabilitation trusts

- Pension, provident and similar funds

- Medical schemes

- A shareholder of a micro businesses-however, only the first R200 000 of dividends paid during a particular year of assessment will be exempt.

“With respect to the entities above, the onus will be on the shareholders or unregulated intermediaries, such as a trust holding shares on behalf of a beneficial owner, to submit a declaration to the company that pays the dividends that they are exempt from DWT.

“In addition, the recipient shareholder must furnish a written undertaking to the company that it will inform it of any change in beneficial owner of the dividends. Failure to obtain such documentation will require DWT be withheld,” she says.

The festive season is upon us, people need to carefully analyse their spending habits in order to enter into the New Year without financial constraints.

Over the years, consumers have become victims of festive overspending. For many consumers the beginning of the year starts off gloomy due to financial constraints which results in sourcing alternatives such as loan options. Organisations such as the South African Savings Institute (SASI) have introduced annual Festive Season Savings Campaigns (FSSC) with the aim of reminding consumers that there is still a life after the festive season and as such, individuals need to take note of that fact in celebrations over the November – December period.

Issues that have become a grievance to institutions such as statistics provided by SASI, illustrating that household savings-to-disposable income is roughly zero (0.2%) while household debt-to-disposable income is approximately 80%. A worrying factor totalling onto South Africans positioning towards saving can be bundled together with how various individuals have different views towards the need to save.

Establishing and defining a professional relationship

The financial planner should clearly explain or document the services to be provided to you and define both his/her and your responsibilities. The planner should explain clearly how he/she will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.

Gathering data, including goals

The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need.

Analysing and evaluating your financial status

The financial planner should analyse your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analysing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies

Developing and presenting financial planning recommendations and/or alternatives

The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.

Implementing the financial planning recommendations

You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your “coach,” co-ordinating the whole process with you and other professionals such as attorneys or stockbrokers.

Monitoring the financial planning recommendations

You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, he/she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.

The recent consumer forum held in November at Gallagher convention, Minister in the Presidency, Trevor Manuel spoke about South Africa being a nation of highly indebted families. They are 18.84 million credit active people in South Africa. About 8.8 million of the 18.84 million were described as having impaired credit. This is all as a result of spending money we have not earned yet and spent it on goods that we don’t need. South Africa has a low savings rate and so people borrow money at emergency rates.

What’s happening in the headlines can affect you as an investor. Here’s what’s going on, what you need to know, and what you should do.

The cold, hard facts

The New York Times is reporting that the “Robin Hood Tax” - a tiny, worldwide financial-transaction tax on trades, bonds, and other financial instruments - is starting to get attention from the world’s 1% and 99% alike.

The idea is backed by German Chancellor Angela Merkel and French President Nicolas Sarkozy, billionaire philanthropists Bill Gates and George Soros, and even Pope Benedict XVI. The tax has also become a rallying point for labour unions, Occupy Wall Street, and demonstrators around the world, including a group that marched on the G20 meeting recently in southern France.

Some context

Merkel sees it as a way to make the global financial system pay for its role in the financial crisis. Gates sees it as a way to funnel money from the G20 nations to the world’s poor. Others see it as a way to curb the high-speed trading many blame for causing wild swings in financial markets.

In the opposing camp, British Prime Minister David Cameron says his country would adopt it only if it were levied globally; otherwise, trading would flee London to markets without the tax. Likewise, the Obama administration says the tax could drive trading overseas and would hurt pension funds and individual investors.

Cypriot, British companies increase chance of re-domiciling to Malta as form of tax rescue

More and more Cypriot banks, in their troubled state are increasingly threatening to move to Malta. As Cyprus continues to experience the debt burden, the country is seeking new forms of austerity measures – in order to avoid EU bailout.

Being a member of the Eurozone, Cyprus experienced pressure from Brussels as its deficit double the EU’s 3 per cent of GDP ceiling. The European Commission also predicts this could increase to 5 per cent in 2012.

Action therefore needs to be taken. What is the Cypriot government’s next move? It would appear that its intention is to establish a support fund for banks as well as a legal framework for state intervention which is opposed by the Association of International Banks (AIB). The AIM states that such measures could drive its members to leave the island for a more tax-friendly environment such as Malta, Agence France Presse reported.

UK companies are simultaneously increasingly moving their set up to other jurisdictions – mainly Malta, Ireland and Switzerland. One of the reasons for this move is the UK’s high business taxes. In addition it would appear that this also results from the aggressive approach of HMRC to tax collection – which was set up 5 years ago and has since collected £16.5bn from investigating tax evasion and avoidance in the last 12-month period. The single main contributors to this amount were corporation tax enquiries – clearly showing that it is businesses that have been affected the most by this.

The above might result in making the British jurisdiction a less attractive one for businesses and lead to other jurisdictions, such as Malta to be much more desirable jurisdictions.

Withdrawal of Article “The Consequences of Tax Reference Numbers being required for all Employees” and apologies to SARS

Following discussion with Sars, I have been shown that my interpretation of guidelines and review of the actual circumstances of the application of the Act, is incorrect and therefore I tender my sincere apologies to All.

In an attempt to convey the correct interpretation and provisions of the Act, I have re-drafted the Article to align with the Act and Sars views as stated per correspondence.

Registration of Employees:

The provisions of section 67 requires any person who becomes liable for any normal tax or required to submit a return as envisaged in section 66 to make application for registration. However, those Employees who only earn ‘net remuneration’ to which SITE applies (s 67(2)) do not need to make application.

Therefore those Employees who are not liable for normal tax or who earn ‘net remuneration’ are not required to make application for an income tax reference number, however, Sars are not prohibited from registering any class of Employee.

Duties of the Employer:

Following the process of Reconciliation of remuneration and disclosure of employees tax on the annual and bi-annual returns the duties of an Employer in terms of the Act in so far as disclosure of the income tax reference number of the Employee are confirmed in terms of para 14(1)(c) of the Fourth Schedule and section 69(2)(a)(i), which in the first instance requires the Employer to disclose the income tax reference number where the Employee is registered in terms of section 67 and secondly, requires the Employer to furnish the income tax reference number, if that number is available.

Accordingly, an Employer is required to furnish the income tax reference number on the IRP5/IT3A in circumstances where the Employee is registered and the number is available.

Penalties for non-submissions of return:

The receipt of IT88’s by Employers for Employees following failure to submit returns will occur in circumstances where section 66 notification by the Commissioner through Gazette Notices (580 of 2010 & 531 of 2011) have not been complied with.

Subject to certain provisions stated in para 3 of the notice, any person who’s gross income for the year of assessment ended 2011 for persons under the age of 65 exceeds R 57 000 and for persons over the age of 65 exceeds R 88 528 are required to furnish a return.

Further para 3(a)(i)(aa) of the Notice, exempts a person from submission of a return if the remuneration paid does not exceed the annual equivalent of R 60 000 (after deduction of allowable contributions to any pension fund and medical fund) and from which only SITE has been deducted.

Para 3(a)(i)(bb), exempts a person from submission of a return if the remuneration paid from a single source which does not exceed R 120 000 for the full year of assessment and employees tax has been deducted from the full amount (after the deduction of allowable contributions to any pension fund, retirement annuity fund and medical fund) in terms of the prescribed tables.

Accordingly, the application of the provisions of section 66 read with the Notice needs to be applied to the Employee to determine if such Employee, even if such Employee has a income tax reference number, whether or not such Employee will be required to submit a return. Any Employee falling outside of the exemptions provided in the Notice may be subject to administrative penalties for non-submission.

In Summary:

Through my experience following my previous Article it is recommended that Employers review the relevant section of the Act, read with the Government Notice to ensure compliance and if assisting staff in determination of the requirements of submission of returns that all material aspects be considered before such decision is made.

South Africa’s new Companies Act aims to reduce the bureaucratic burden on small businesses – but, says Kevin Phillips of financial software developer idu Software, private sector business practices are likely to undermine some of the Act’s intentions.

The promised gains are most likely to materialise in the area of financial reporting requirements, says Phillips.

“In terms of the Act, companies are required to undergo an annual audit once they exceed a threshold Public Interest Score,” says Phillips. “The score is quite easy to calculate: Put plainly and at the risk of over simplifying you count one point for each employee, each individual shareholder, each R1m of turnover and each R1m of debt to a third party.”

“Owner managed entities with a public interest score below 100, in terms of the Act, no longer require an audit or independent review,” adds Phillips. “If the score is between 100 and 350, an independent review is needed. However all entities with a public interest score greater than 350 must have an audit.”

Strictly speaking, says Philips, “this means the vast majority of the SME market shouldn’t need to go to the annual trouble and expense of an audit. If you are an owner-managed small business, there is likely to be little an audit can tell you as a shareholder that you don’t already know.”

However, he cautions, in reality audits are still likely to be required. “The requirements for reporting to the government are one thing, but banks may have other ideas,” he says. “If you want an overdraft or other form of financing, I’m afraid an audit may still be required but now as a banking requirement.”

“This is one case where red tape can’t be laid at the door of government,” notes Phillips. “Anybody who lends you money is still in all likelihood going to want the reassurance of independently reviewed or audited financial statements.”

South Africa’s Minister of Finance, Pravin Gordhan, in his introductory remarks to parliament on the Taxation Laws Amendment Bills, 2011, clarified the final disclosure requirements under the anti-avoidance rules within the country’s tax code that were originally introduced to facilitate intra-group transactions.

“Section 45 (of the Income Tax Act) was only intended,” Gordhan insisted, “to facilitate the movement of assets within a single group of companies without incurring undue tax charges”. The section gives companies roll-over relief and facilitated transfers among companies that operate as a single group.

The corporate rules provided for a deferral of income tax or capital gains tax, but the government had become concerned about the use of the rules as a tax-free mechanism to obtain interest deductions linked to excessive debt (and other hybrid instruments masquerading as debt) in facilitating, for example, leveraged buyouts and other restructuring.

As the revenue loss resulting from transactions involving the corporate rules had been estimated to be in the order of ZAR3bn (USD380m) to ZAR5bn a year, the National Treasury temporarily suspended the operation of section 45 for an 18-month period in June this year to enable an in-depth investigation.

However, in August, following consultations, the Minister of Finance lifted the proposed suspension of section 45 to allow transactions that are commercially-driven to continue, as long as these transactions do not result in “an unacceptable revenue loss”.

In his remarks, Gordhan confirmed that “section 45 has become a core acquisition tool in the case of leveraged buyouts of target companies. In essence, a leveraged buyout exists when parties purchase a target company with debt. (However,) while we as government are not opposed to leveraged buyouts per se, at issue is the excessive debt often associated with these transactions.”

He took issue with the cases where the levels of debt amount to 75% to 95% of the total balance sheet of the target company. The net effect of these excessive levels of debt is to generate interest deductions that effectively wipe out taxable company profits for a minimum of 5 to 7 years. Needless to say, these excessive deductions come at an unacceptably high price to the (tax base).”

“Under the final proposal,” he confirmed, “section 45 will be retained but tightly controlled. More specifically, taxpayers will need to obtain South African Revenue Service pre-approval before obtaining interest deductions associated with section 45. Excessive debt funding not only undermines the tax system but also raises concerns in terms of systemic economic risk – making companies far too prone to economic downturns.”

He concluded that “issues arising from section 45 point to a larger set of problems in the tax system – the role of debt versus share financing. Shares are often disguised as debt, and debt is often disguised as shares. Therefore, it should be recognized that the debate around section 45 is the beginning of a longer journey. At issue is how to curb these practices while recognizing the need for flexible mechanisms to obtain funding. One can accordingly expect further announcements in this area in the years ahead.”

The move from a secondary tax on companies (STC) to the dividends tax (a withholding tax) will see a loss to the fiscus and an increased administrative burden on companies and taxpayers alike.

Piet Nel, a member of Saica’s National Tax Committee, says these changes will be implemented on 1 April 2012 and is aimed to bring SA in line with international best practice where the tax is levied on shareholders and not on the company.

Nel adds that STC creates several problems. “For example, STC is not recognised as a tax levied on the resident of another country for treaty purposes. This means that a local company paying dividends to a non-resident investor would not be able to reduce the rate of STC in respect of a dividend paid to a resident of a treaty country.”

In terms of the proposed new dividend withholding tax, companies will be expected to deduct the tax from the dividends paid to shareholders and to pay it over to SARS.

This is convenient for SARS and Nel says as it will be similar to how the PAYE system works whereby companies collect employee taxes on SARS’s behalf.

In terms of the proposed legislation, Nel says, the onus will be on shareholders to inform companies paying dividends that they are exempt from dividends tax. This is also applicable to public benefit organisations, regulated intermediary companies and pension funds. Similarly, a non-resident shareholder would have to inform a company that they live in a treaty country and qualify for a reduced rate of tax in respect of the dividend.

This will create an additional administrative burden for companies as they will have to ensure that these records are in place before the first dividend is declared under the new legislation.

If the company does not have a “declaration and undertaking” from a shareholder, Nel says the company will be obliged to deduct the 10% withholding tax on payment of the dividend.

Share buy backs or capital distributions to shareholders do not fall under the scope of the dividend tax Nel says. These are essentially a part of your original investment (or capital) being returned and is a disposal which could result in a capital gain for tax purposes.

The impact of the new legislation will be detrimental to the fiscus, says Nel. Currently if a listed company declares dividends to a pension fund or an institution in a treaty country it has no exemption from STC and it has to pay the 10% tax over to SARS.

Under the new regime, the dividend paid over to the pension fund is exempt, so SARS will lose out on that tax. Nels says that the purpose of this is to provide a further stimulus for retirement savings.

The same will apply for dividends paid to treaty institutions where a lower tax may be levied in terms of treaty agreements.

The state ’s decision to abandon a clause in the new Taxation Amendment Bill requiring research and development projects (R&D) to be pre-approved for tax incentives has been welcomed, even though there will still be an approval process.

The initial inclusion of the pre- approval clause in the Taxation Laws Amendment Bill raised concerns that firms involved in R&D would be bogged down with more red tape. SA spends less than 1% of its gross domestic product (GDP) on R&D. The government aims to increase that to 1,5% in 2014.

However, Catalyst Research Solutions MD Dolv Paluch said the incentives had failed to raise R&D spending, with the figure sliding from 0,95% in 2006 to 0,92% at present. This compares poorly with China where R&D spend is 1,5% of GDP and Australia’s 2% of GDP.

Mr Paluch said there was still uncertainty about the practical implications of the approval system introduced in the bill. He is concerned about the additional red tape introduced in the bill.

He expressed concerns about firms having to expose their intellectual property when filing applications for approval. “It will require a huge amount of trust that their information will not be leaked.”

Until section 11 D of the Income Tax Act was amended, companies undertook research and claimed the tax incentives at the end of the tax year. Mr Paluch said the nature of research was such that one was never sure what direction it would take. Without the regulations that will flow from the finalised act, questions remain on how the process will work and how the South African Revenue Services will interpret it.

Imraan Patel, the deputy director-general in the Department of Science and Technology, said the regulations could only be published for public comment once the bill has been signed into law by President Jacob Zuma .

Company taxpayers, including Close Corporations, can now be asked to complete and submit supplementary information in order for SARS to verify their income tax return. This could alert the Receiver to potential areas of investigation, areas that would otherwise have been difficult to identify. “Detection risk has increased at a compound rate,” says Dirk Kotze, tax partner at global audit, tax and advisory firm Mazars.

The South African tax system largely operates on a self-declaration basis, where it’s up to taxpayers to disclose correctly income and expenditure in order to be assessed for tax.

SARS then exercises its power to question taxpayer submissions based on information it may have from other sources such as employers, banks or customers, and taxpayer comparisons that fall outside certain norms, or by reconciling various parts of the same information submitted by a taxpayer.

Business taxpayers especially submit various declarations throughout their tax year that contains information and amounts that are also submitted on other returns. Company VAT returns, for example, reflect sales data that is also disclosed on the company tax return. Similarly, employers’ payroll declarations contain information on gross salaries, which is also separately disclosed on company tax returns.

“SARS has now pushed the burden of reconciling all this information onto taxpayers, starting with company taxpayers for the time being,” says Kotze.

The new supplementary declaration calls on taxpayers to reconcile the following:

“Taxpayers will then have to substantiate any differences between the various items. This declaration will be a powerful tool in SARS’ hands,” says Kotze. “If SARS rejects a taxpayer’s explanations, this could lead to further queries and enforcement action.”

The cost burden on taxpayers will also increase as completing the supplementary declaration won’t be easy, and may require the assistance of professionals.

“Taxpayers, and especially company taxpayers for now, must therefore tread carefully in all submissions made to SARS by ensuring that the correct submissions are made at the correct time and from the correct source,” Kotze concludes.

Estate duty – the satirical culmination of the age old adage of death and taxes. Many have attempted to circumvent payment of this tax through complex and creative structures, such as splitting property between a trust and the surviving spouse. Some of these structures often entailed costly or restrictive repercussions for the beneficiaries and even the person doing the planning.

Thrifty planners started looking for a less costly way to pass property across generations and utilise tax and duty savings for maximum benefit. Enter the ‘usufruct’. The concept has been around for a long time and can be traced back centuries. The English word usufruct derives from the Latin words usus and fructus, nouns meaning ‘use’ and ‘enjoyment’.

A usufruct originates from civil law, where it is a real right of limited duration held over the property of another. The holder of a usufruct, known as the usufructuary, has the right to use and enjoy the property, as well as the right to receive profits from the fruits of the property. ‘Fruits’ should be understood as referring to any replaceable commodity on the property, including amongst others – actual fruits, livestock and even rental payments derived from the property.

Example: A husband leaves his farm to his trust with a usufruct to his wife, thereby ensuring that she receives the right of use and enjoyment over the property without her actually having to run the farm.

A usufruct grants the holder the right of use of the property, for the rest of their life or a defined period, but not ownership. The ownership still resides with the original owner and their portion is now known as the ‘bare dominium’. A responsibility is placed on the usufructuary to preserve the property for the ultimate owner.

Usufructs can have serious consequences when it comes to Capital Gains Tax, so any legal process one intends following needs to be investigated and advised upon by a trained professional. One may not be immediately concerned with the legal implications, but a qualified person will be able to give advice as to what will happen years into the future, if for instance one intends on selling the property.

Where a usufruct is granted, the value is calculated by capitalising the annual yield on the property at 12% over the life expectancy of the usufructuary, which is then deducted from the market value of the property asset to determine the bare dominium value. This bare dominium value will be the base cost when the asset is disposed of by the bare dominium owner. The increased capital gains tax liability will then be taxed at the trust’s increased rate, currently an effective rate of 20%, when using the trust example above. If there is a one year rollover, there is a further part disposal and then the base cost is reduced.

If a financial institution holds a mortgage bond over your property, they are unlikely to agree to the registration of a usufruct. You will need to settle your bond first.

Another aspect that must be borne in mind is that the usufructuary usually has a responsibility to maintain the property for the bare dominium owners as well as pay the rates and taxes. In practice this is difficult to monitor and control in a situation where the usufructuary does not duly exercise their responsibility i.e. to pay for rates and taxes relating to the property which leads to disputes between usufructuary holders and bare dominium owners.

A direct bequest to a trust will attract estate duty on the full value of the asset/s in the estate. On the other hand, a deduction is allowed in respect of bequests to a surviving spouse which will not attract estate duty. It is to be noted that on the spouse’s death, the full amount inherited plus any growth will attract estate duty within the spouse’s estate. By using what has become known as the “one year roll-over”, estate duty and capital gains tax can be limited in both the estates. This is how it works:

- On her death the usufruct terminates, and the trust becomes the full owner of assets, for the

- By allowing the usufruct to continue for one year after the wife’s death, the amount of the value of

This technique reduces the overall estate duty liability. Nonetheless, this method may be regarded as rather aggressive, and as such it may be curtailed by SARS at some stage.

The use of a usufruct with a one year rollover has been the subject of attention on the part of SARS recently. Yet to date, SARS has not been able to draft effective amendments to the Estate Duty Act to prevent this estate planning arrangement. The rollover construction is therefore not without its risks.

The ability to save tax and duty in the short term needs to be weighed against the longer term tax position taking into account the future growth on assets, protection against creditors and possible changes in legislation. Where these additional factors have not been taken into account the purpose and intended outcome of utilising a usufruct may fail. Therefore, when sourcing estate planning and will drafting services, ensure that the advisor is up to date with issues like these and can explain the possible ramifications.

The legislation should be the starting point of all things tax-related. Taxpayers are quick to respond to communications from the South African Revenue Service (“SARS”) without asking the question: In the terms of what section of the Income Tax Act am I obliged to provide the information?

Let’s take for instance the request from SARS for employers to register employees as taxpayers. Is this a valid request and if yes, in terms of what section of the Act, is the employer obliged to do so?

Section 67 of the Income Tax Act states that every person who becomes liable for normal tax or who becomes liable to submit a tax return must apply to the Commissioner to register as a taxpayer. Section 67 also states that any person whose income is derived solely from net remuneration and is only subject to SITE withholding, is not required to register as a taxpayer.

Section 69 of the Income Tax Act examines the duty to furnish information or returns. This section is relevant to employers as it governs the monthly and annual returns that are submitted. Section 69 stipulates (amongst others) that every person shall, if required by the Commissioner, furnish the Commissioner with the full names, address and income tax reference number, “if that number is available”.

Critical in this instance, is the reference to the word “available”. Where the information is available, it should be provided to SARS. Where the information is unavailable, it cannot be provided to SARS. Accordingly, where an employee is not registered as a taxpayer, the tax reference number cannot be furnished to the Commissioner as it is unavailable. In addition, where the employer has made numerous unsuccessful requests to an employee to provide his/her tax reference number, this information would be unavailable.

SARS, in its requests to employers may potentially be relying on Section 69 (3) of the Income Tax Act. Loosely worded, Section 69(3) states that every person to whom a return or a written request for information is sent by the Commissioner, must complete the return or comply with the written request for information in accordance with the requirements of the Commissioner and return it to the commissioner.

In the case of S v Ziegler, which specifically dealt with the powers available to SARS in terms of Section 69(3), the court indicated that information which an addressee does not possess cannot be insisted on. In addition, it was stated that where a person is confronted with a request for information which he does not have, he can answer “unknown” or “not applicable”. More importantly, it was stated that “There is no reason to suppose that Parliament in enacting section 69(3),…had any other manner of coercion in mind. Information is demanded whenever necessary and whenever applicable. Taxpayers, who cannot, without any fault of their own, furnish information required…do not commit an offence. Nor do they commit an offence if they answer a peremptory question by saying “not applicable” if such be the case.”

In conclusion, there does not appear to be anything compelling an employer to register an employee as a taxpayer. It is clear that the annual declaration requires the employer to input the employees’ tax reference number. However, in terms of the legislation and case law, the employer should fill in this information where it is “available”. It does not connote an obligation by the employer to register the employee as a taxpayer in order to be able to fill the blank space in the annual declaration. In fact, as section 67 indicates that the individual must register as a taxpayer, it may be possible to argue that where an employer registers an employee (without the specific consent of the employee to act on his/her behalf), the employee can take legal action against the employer.

The brouhaha over section 45 – which allows groups of companies to move around assets tax free – appears to be over. Treasury has responded to public outrage over its moratorium on section 45 with a slight caveat.

On Tuesday at the release of its Mini-Budget, Treasury revealed that things are back to normal with regards to section 45, unless the transaction you engage in looks suspicious says Prof Osman Mollagee, the deputy chair of SAICA’s National Tax Committee.

In such cases SARS will have a closer look at these transactions before it allows you to deduct interest from your taxable income, adds Mollagee. Should you be found wanting SARS will deny the interest deduction which will increase the company’s tax liability, says Mollagee.

Treasury initially put a halt to section 45 as it was being used to facilitate tax-free reorganisations to increase deductable debt.

Mollagee cites the manufacturing of interest deductions as an example of a suspicious transaction that it will look at.

Further says SAICA’s project director Muneer Hassan no deduction will be allowed for interest to facilitate liquidations undertaken in terms of section 47, unless approved by SARS.

This compromise says Mollagee has left corporate taxpayers pretty happy but from SARS’ perspective it is going to be a mountain of paper work.

Regulations are still to be introduced which will provide further clarity of how the approval process will function, says Hassan.

Now that section 45 is back it will be interesting to see if Mustek’s management buyout is back on the cards

Automated Payroll Software ensures leave pay is a breeze and complies with BCE Act

The end of the year is in sight and companies face the administrative burden of making the complex calculations related to determining the correct leave pay due to individual employees.

The process is governed by the Basic Conditions of Employment Act (BCEA) which sets out the legal structure of all employment contracts and the rights of employees to ensure they are fairly treated in terms of annual leave and severance or notice pay.

Many of the calculations for leave pay are quite complex and arriving at the correct allocations manually or on spreadsheets is a time consuming exercise.

“All of these calculations have to be correct or the company will breach the provisions of the BCEA,” says Grant Lloyd, managing director of payroll and HR software specialist Softline Pastel Payroll, part of the Softline and Sage Group plc.

The BCEA aims to ensure that leave pay is fully representative of individual employees’ actual earnings and Lloyd says the calculations have to take into account variable income types and must be based on the average earnings of each employee over the 13 weeks preceding the date upon which leave becomes effective.

“There are many elements that affect the calculations such as overtime, commissions, allowances and other payments. The bottom line is that they lead to fluctuating income so each employee’s income has to be calculated individually. It can be a nightmare to execute this manually or on spreadsheets.”

Automated payroll and HR software retains detail of all of the variable income paid to each employee so that the calculation for the average income over the 13 weeks preceding the leave is not only accurate but is available immediately with a few key strokes.

Circumstances may lead to some employees benefiting from higher variable earnings during the three months prior to the leave date. For example accounting staff may take leave when company financial year-end audits are completed, thereby benefiting from the overtime payments they may have received during the preceding 13 weeks.

Similarly, people employed in the construction industry which usually shuts down in mid-December, are also likely to have worked overtime to ensure contracts are completed before shut-down and therefore their leave pay calculations will be affected.

“In consultation with management, payroll administrators can establish parameters that the software will automatically follow so that calculations of average earnings are always consistent with the requirements of the BCEA and fair to all concerned,” said Lloyd.

Users of automated payroll and HR software also benefit from the fact that the software developers monitor amendments to the BCEA and provide updated versions whenever new legal requirements are promulgated. “The automated payroll and HR software therefore always operates in full compliance with the Act, ensuring also that the BCEA leave payments are not subject to basic finger trouble, interpretation or even fraud.”

In addition, automated payroll and HR software solutions offer functionality that enables the user to give the entire company an increase, based on either a set value or a specific percentage as well as process a production bonus or commission using only one screen. This not only saves time, it allows global changes to be made to any transaction within the payroll system for all, or a selection of employees.

Automated payroll systems turn leave and bonus processing into a quick, accurate and simple task that eliminates administration headaches before the December holidays.

While a decision is awaited on the recommendations of the Gambling Review Commission, the Minister of Trade and Industry Rob Davies has warned that online gambling remains illegal in South Africa.

Speaking while attending the International Association of Gaming Regulators’ annual conference in Cape Town, Davies said South Africans should not “jump the gun” on internet gambling simply because the Gambling Review Commission had proposed that the country should allow the licensing of online gambling operators.

Davies pointed out that it was also illegal for online gambling sites to offer their services in South Africa, even though their servers were hosted outside of the country, and added that banks, under the Financial Intelligence Centre Act, could question those South Africans that netted winnings from internet gambling sites.

The Gambling Review Commission had recommended earlier this year that bringing these activities into the regulatory net and providing punters with a choice of licensed operators under a single regulator would be likely to provide an outlet for existing demand, provide some punter protection, and would discourage consumers from seeking out unlicensed sites.

Davies confirmed that regulations have already been developed by his department on online gambling, but that they have been held back, until public hearings on the Gambling Review Commission’s report have been completed.

Bringing online gambling into the regulatory net would also also allow the government to tax the sector. Under current proposals, tax revenues would be generated from licence fees and the taxation of the operators’ profits, as well as a 15% withholding tax on all winnings above ZAR25,000 (USD3,160), which was announced in the 2012 budget and which would take effect from April 1, 2012. The details of that tax are still awaited.

A comprehensive report in our Intelligence Report series examining the new possibilities that offshore e-commerce open up for business, and analysing the offshore jurisdictions that have led the way in offering professional e-commerce regimes for international business, with a particular focus on e-gaming, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report6.asp

The changes to Regulation 28 of the Pension Funds Act are due to come into effect on December 31, 2011. At face value what appear to be minor changes in terms of reporting and tweaks to the asset classes and limits, are in fact much more onerous. “The changes,” says Francesca Kilfoil, employee benefit specialist with PSG Konsult Corporate, “will result in huge ramifications for all industry players.” Kilfoil presented a paper at a recent Employee Benefits Conference in which she took a look at some of the cost implications of the regulation changes.

Regulation 28, in terms of section 36 of the Pension Funds Act No 24 of 1956, governs the asset allocation of all retirement funds, which includes pensions, provident funds, retirement annuities and preservation funds. According to the National Treasury all retirement fund investments should be invested “in a prudent manner whereby economic development and growth can be achieved.”

“The intention of Regulation 28 is very clear,” says Kilfoil. “It aims to protect the savings of the retirement fund member and ensure adequate risk adjusted returns, at a member level, to meet sufficient liquidity needs and liabilities. In line with the funds’ interest, all investing should be stable, transparent and sustainable in the long-term and apply across all asset classes. This means a broader investment selection and lower correlation between portfolios.”

The revised regulation has been long awaited as it was last amended in 1998. Drafts of the revision were released in February and December 2010 for public comment. The final regulation was approved by the Minister and gazetted on March 4, 2011 with an effective date of July 1, 2011. However, in considering the practical difficulties for funds to effect full compliance in such a short period of time, the Financial Services Board (FSB) applied a six month transition period until December 31, 2011.

“During this initial six month period, which we are almost half way through, funds are expected to adjust their monitoring and reporting systems and ensure that the investments are realigned within the new asset class parameters,” explains Kilfoil.

“With the deadline looming and a great deal of uncertainty around the implementation of the required reporting, does this allow sufficient time for retirement funds to fully comply with the revised regulation? And, more importantly, is the December deadline realistic?” Kilfoil asks. “However, before we debate this, let’s take a look at the appropriateness of the revised regulation as the changes do come at a significant cost to the industry. Which, I believe will result in pension fund members carrying the load.”

According to the FSB there are currently around 3500 registered funds with private retirement assets totally R1.1 trillion. South Africa’s gross savings as a percentage of GDP is approximately 15.4% which lags significantly behind China – in first position – at 53.8% and with only around 5% of South Africans making adequate provision for their retirement, it is important that pension funds are properly managed and reviewed on a regular basis.

“In terms of their fiduciary duties and responsibilities Trustees are going to have to ensure that their funds are moving towards full compliance within the transition period,” says Kilfoil. “Apart from the actual asset classes and limits, the most significant change is in terms of reporting. Investment limits now apply at an individual member level and no longer at a fund level. As a result, for the larger funds, especially those offering individual member choice, compliance could mean an extensive exercise to implement new monitoring and control measures. This could prove to be a very expensive exercise and our concern is who will ultimately pay for these system enhancements.”

The Registrar is allowing funds to be exempt from having to report any breach of the regulation limits immediately, on a member level, and is satisfied that member breaches can be reported on a quarterly basis. With the first report due for the period ending March 31, 2012.

However, should a fund be in breach of a regulation limit, the fund has a maximum of 12 months to realign the investment. Any such breach must be reported to the FSB immediately. This poses another reporting obstacle for retirement funds as market movements could be the cause of funds being non-compliant. With regular monthly contributions to group schemes, should a fund be in breach of a limit, the investment must not be permitted if it exacerbates the breach. This in turn could complicate the requirement to invest contributions within a certain time period.

“The revised regulation is probably the most onerous for asset managers,” maintains Kilfoil. “Currently all asset managers are required to report compliance on fund level but, effective January 1, 2012 this requirement is was also at a member level. For those operating in a retail space this is probably no big deal as they already have systems, processes and procedures in place however, on the institutional side, substantial system modifications will be required.”

She explains that currently institutional asset managers do not hold member records – they are held by the fund administrator – who in most cases are separate legal entities. As such, some kind of interface between the asset manager and fund administrator will be required or the asset manager has to spec, test and implement monitoring systems before the end of the year in order to report any breaches. It is possible that the new regulation may force certain parties to merge their businesses in order to comply. Alternatively asset managers may have to outsource this function to a third party!

“This is where costs become a factor,” says Kilfoil. “Asset managers may have to increase fees by 2 or 3 basis points to recover or partly finance the increased cost of outsourcing, merging and system adjustments.”

Asset managers also need to take cognisance of the new “look- through” principal and apply it to all investments at an underlying asset level. This means that a fund cannot attempt to circumvent the asset class limits in the regulations where the asset is actually made up of a number of underlying assets. The fund is required to disclose the underlying assets in each asset class so that the real economic exposure is apparent. Private equity and hedge funds are to be excluded from this principle as these vehicles are to be seen as the final asset.

Hedge Funds create an additional challenge because pricing changes monthly and not daily, which will impact the requirement for the reporting of breaches on a daily basis. “How can this be accommodated and at what cost?” she asks.

“We know that the ultimate responsibility for reporting non compliance lies with the Board, however, credible and accurate data needs to be fed from the asset manager whilst it is the administrator who holds the member records. It will be the employer’s responsibility to inform and educate their members regarding Regulation 28 or at least allow the consultants to do so.”

As for the members – Regulation 28 can be viewed as a positive or negative. Members with individual member choice can construct a 100% risky portfolio with a combination of equities, property and hedge funds. Members are not permitted to invest outside of the limits laid out in the Regulation however currently there are cases whereby members who participate in umbrella arrangements are invested 100% in property or 100% in equities.

Traditionally, members close to retirement have moved their accumulated assets into cash or near cash instruments. The new regulation will only permit a maximum of 25% in any single money market instrument, which again has potential for increased costs.

“Our concern is that the new Regulation may discourage funds from offering individual member choice as a result of a potential increase in costs due to the reporting requirements. Ultimately, we suspect, it will be the member who picks up any additional costs incurred in the implementation of Regulation 28. This will most probably be in the form of higher asset management fees,” says Kilfoil.

“It is essential that Investment Policy Statements are revised to take into account the new reporting requirements and that an appropriate risk management policy is adopted. It is furthermore essential that Trustees are made aware of any additional fees or potential risks.

“So my questions around Regulation 28 remain, is the compliance deadline realistic, have the cost implications been carefully considered and are we discouraging individual investment choice?”

I currently own a home and have a bond on it. I need to move closer to my place of work. I intend to retire in about five years to a town closer to the coast so do not intend to buy another home in Johannesburg.

1. Sell my current home (Northern Suburbs) and rent a property closer to my work (Central).

2. Purchase a home (Coastal) in the said coastal town and rent it out, thus earning rental income.

For arguments sake let us assume the rent I pay is R8000 a month for the Central house and the rent I charge in C above (Northern Suburbs) is R10 000 while the rent I charge in B (Coastal) is R7 000.

One cannot answer this question as the answer is dependent on many variables. I will however explain the basic tax principles that apply.

The sale of a primary residence subject to the primary residence and annual exclusion is subject to CGT;

Interest earned subject the annual exemption will be subject to tax at the taxpayers marginal tax rate;

Rental earned subject to permissible deductions will be taxed at the taxpayers marginal rate.

Those facing retrenchment or retirement can look forward to better tax breaks from this year, with retrenchment or retirement tax-free payments increasing from R30,000 in a lifetime to R315,000, effective from the 2012 tax year.

This is according the executive chairman of a payroll software company, who says that prior to March 2011, if an employee was retrenched or put on retirement, the extra payments made to the employee because of the retirement or retrenchment were tax-free up to a specified limit of R30 000. Anything in excess of this limit was taxed at the employee’s average rate of tax for that year.

He notes that it was only the additional payments due to such an employee that were tax-free, and not the normal salary and leave pay due to the employee up to the date of retirement/retrenchment.

“Such additional payments were tax-free up to an aggregate amount of R30 000,” he explains. “That was a lifetime aggregate, so that if an employee was retrenched twice and used up R20 000 on the first retrenchment, he or she would only be entitled to R10 000 tax-free on the second retrenchment or, if he was retrenched once only, on retirement.”

From March 2011, such payments are treated as though they were payments from a pension or retirement fund on death or retirement. He says that this means that such payments are tax-free up to an aggregate amount of R315 000.

“In other words, all retrenchment payments, plus retirement payments, plus lump sum payments from a pension or retirement fund on retirement or death are tax-free until the combined total of such payments reaches R315 000,” he adds. “Once this limit is reached, all future payments are taxed in accordance with the rates applicable to lump sum payments from a pension or retirement fund on retirement or death. These tax rates are much more favourable than normal income tax rates.”

The inclination of courts to interpret tax law as the legislators intended rather than in the literal sense has given the SA Revenue Service the edge in litigation, says Des Kruger, tax director at Webber Wenzel.

“One gets a sense that the judiciary is a bit pro SARS in a sense, especially in tax avoidance issues, as they tend to take a policy position instead of literal interpretations,” Kruger said.

While Kruger emphasised he was not bringing the courts into disrepute, he said there was a “golden rule” of interpretation that the literal sense was used first.

Kruger was commenting on the ability of SARS to win litigation cases. According to the receiver’s 2010/11 annual report, it had a success rate of 65% in cases that were either won outright or settled in favour of the taxman.

A summary of the revenue appeal cases that SARS fought in the courts show that out of a total of 105, it won 10, lost eight, conceded 13, there was one settled against SARS, 54 settled in favour of SARS, and 19 cases were withdrawn. Conceded cases were settled out of court when both sides agreed the legal costs outweighed the amounts disputed.

High court revenue cases showed a more even outcome with SARS winning one and losing one, while one case was withdrawn.

Out of four revenue cases that ended up in the Supreme Court of Appeal, SARS won three and lost one.

One of those cases was the ruling in favour of SARS against Dave King’s Ben Nevis company for R2.7 billion. SARS was in the process of selling farms, aircraft and other assets of the company in order to collect the outstanding amount.

SARS spokesperson Adrian Lackay said while government’s tax collector was very pleased with the overall result of the cases, it did not believe it received any special favours from the courts.

“If we cannot settle a case through the preferred alternative dispute resolution (ADR) process, then we have to compile a docket and forward it to the National Prosecuting Authority. If they decide to go ahead and prosecute, and we will be the plaintiff and give the lead evidence, the onus is still on the state to prove guilt beyond reasonable doubt,” he said.

Lackay said that there had been a slight increase in the number of cases that had gone to court, but the increase was not significant.

Kruger said the ADR process had proved to be a useful route to settle a tax case without the costs of going to court. He said that SARS tended only to take cases to court if they were unsure of the merits of the ADR hearings and defendants generally decided to go to court if they believed they had an even chance of winning.

“There is great pressure on listed companies in particular to settle cases as soon as possible as they don’t want to have a contingent liability hanging over their heads when going into a new financial year,” Kruger said.

Lackay said that listed companies were very aware of their reputations and generally decided to settle out of court.

Finance Minister Pravin Gordhan said recently that tax legislation had become extremely complex.

“When I assumed office (in 2009) tax changes amounted to 30 pages, now it runs into about 200 pages,” Gordhan told students at the University of Cape Town.

Kruger said that increased complication was also a factor in determining the slight increase in cases going to court.

“There is a refrain that there have been too many changes and many are ill conceived. The quantity of changes has been mind boggling. The problem lies within SARS and the tax law profession to understand all these changes,” Kruger said.

The new Companies Act is the single most important piece of legislation affecting business to be passed in decades, says attorney Carl Stein – and yet few business owners and directors are fully aware of its implications.

“There hasn’t been a major overhaul of the Companies Act for nearly 40 years,” says Stein, a corporate law partner at Bowman Gilfillan. “During that time the way companies do business has been revolutionised. The new Act reflects a profound philosophical shift in the way we understand the relationship between companies and the broader society.”

A company’s duty is no longer solely to its shareholders, says Stein, the lead author (with assistance on accounting matters from UCT’s Prof Geoff Everingham) of the new book The New Companies Act Unlocked. Stein and Everingham are presenting day-long seminars on the new Act in Johannesburg, Durban and Cape Town in October.

“In the wake of scandals like Enron, there has been growing global awareness that since companies have such profound impacts on economies, they owe a duty to society as a whole,” adds Stein. “The new Companies Act grants new rights and remedies to a range of stakeholders, including employees, creditors, suppliers and minority shareholders – who used to have fewer rights than a minor child”.

The new Act has been written to encourage stakeholder activism, says Stein. “For example, the concept of the class action has for the first time been introduced to the Companies Act; and there are some other new remedies and powers granted to trade unions that are quite startling. This will probably lead to a big uptick in litigation.”

The Act is “a genuinely revolutionary piece of legislation”, notes Stein. “But it is also very complex, and can be difficult to understand if you don’t make a careful study of it. The book and seminar series are designed to make the Act intelligible to company owners and directors who are not professional corporate lawyers, but who need to be familiar with the law and how it affects them.”

Seminars are due to be held in Cape Town on Monday October 17, in Durban on Tuesday October 18 and in Johannesburg on October 25 and 26.

Taxpayers over the age of 65 are likely continue to enjoy the tax deductions they can currently use when the tax deductions for those under the age of 65 are converted into tax credit next year.

The National Treasury told Parliament’s standing committee on finance this week that this will be what it proposes when it tables the Taxation Laws Amendment Bill in Parliament in October.

Cecil Morden, the treasury’s chief director of economic tax analysis, says taxpayers over the age of 65 will continue to be able to deduct their medical scheme contributions from their taxable income in full, as well as all the medical expenses they incur which they do not recoup from their medical scheme.

In the case of taxpayers under the age of 65, the monthly rand amount you enjoy as a tax deduction for medical scheme contributions paid, or as a deduction against the taxable fringe benefit if an employer subsidises your medical scheme contributions, will be scrapped from March next year if the Taxation Laws Amendment Bill, as outlined by the treasury this week, is approved.

If the bill is approved as proposed, taxpayers will get a tax credit, which would be like a tax rebate equal to 30 percent of the rand amounts that are currently allowed as a deduction.

This means that if the proposal is implemented from March next year, people under 65 paying tax at marginal rates higher than 30 percent will pay more tax; those on a tax rate of 30 percent will be unaffected; and those paying tax at rates lower than 30 percent should see their tax reduced.

In the draft Taxation Laws Amendment Bill, which was tabled in June, the treasury had proposed that the tax credits also apply to over-65s from next year. It had also proposed a supplementary credit for over-65s.

However, this week Morden indicated that the treasury had decided to shelve all changes to the medical scheme and medical expense deductions for those over 65, leaving them to continue to enjoy the deductions they do now.

The change in the proposals means taxpayers over the age of 65 who pay tax at a rate of less than 30 percent will not immediately benefit from the reduced tax liability that comes with the tax credit system proposed for taxpayers under the age of 65.

However, the treasury plans to come up with new proposals for converting to a tax credit all the remaining tax deductions for medical scheme contributions and medical expenses. Morden indicated these proposals would probably be announced in next year’s budget for implementation in 2013.

Next year, taxpayers under the age of 65 will continue to be able to deduct their unrecouped medical expenses, as well as contributions that exceed a certain limit, if together these expenses exceed 7.5 percent of taxable income. This is broadly in line with the current system, Morden says.

The proposed medical tax credits for taxpayers under the age of 65 should be welcomed by medical scheme members who earn less than R235 000 a year.

In explaining the proposed tax credit system to Parliament’s standing committee on finance this week, the National Treasury published a table that shows how much tax you save each month as a result of the current tax deduction you can claim for medical scheme contributions (see the “Tax deduction versus tax credit”, link below).

The table illustrates who will benefit and who will pay in more if the tax credit, which is similar to a tax rebate, is equal to 30 percent of the rand amounts currently allowed as a tax deduction for medical scheme contributions.

The monthly tax deductions for medical scheme contributions for the 2011/12 tax year are R720 a month for an adult member, R720 a month for the first dependant and R440 a month for each dependant thereafter. You benefit from these deductions at your marginal rate of rate. Therefore, a medical scheme member on a tax rate of 18 percent receives a tax reduction of only 18 percent of these rand amounts, whereas a member on a tax rate of 40 percent receives a tax reduction of 40 percent of these amounts.

For example, a single member of a medical scheme who pays at least R720 a month in contributions and is on a tax rate of 18 percent receives a tax reduction of R130 a month, whereas a single member who pays R720 a month in contributions and is on a tax rate of 40 percent receives a reduction of R288 a month.

The monthly amounts you can claim as a deduction may be increased by inflation for next year.

If the tax credit had been implemented in this, the 2011/12, tax year, it would have amounted to R216 a month (30 percent of R720) each for the member and first dependant and R144 a month each (30 percent of R440) for subsequent dependants.

For example, the single member taxpayer on tax rate of 18 percent would have paid R86 a month less in tax, whereas the single member on a rate of 40 percent would have paid R72 more in tax each month.

Besides the tax credit for medical scheme contributions, you may qualify for a further deduction if your medical scheme contributions exceed four times the tax credit. That is, at the current tax rates, the contributions for a single member must exceed R864 a month and for a family of four they must exceed R2 880 a month.

The amount in excess of, for example, R864 or R2 880 a month must be added to your unrecouped medical expenses.

If the total of your excess contributions and expenses added in this way exceeds 7.5 percent of your taxable income, you can claim the amount above 7.5 percent as a deduction from your taxable income.

Taxpayers with disabilities or those who have a disabled dependant will be able to deduct all their unrecouped medical expenses and their medical scheme contributions that exceed four times the medical tax credit.

These taxpayers will also be able to deduct expenses incurred as a result of their disability as outlined in the list of approved expenses published by the South African Revenue Service.

Morden told Parliament that the tax credit for unrecouped expenses for taxpayers under 65 is likely in future to be converted to a tax credit at a tax rate of 25 percent and not 30 percent.

One of the common misperceptions for consumers surrounding medical cover is that a comprehensive medical scheme will be enough to meet their needs. However, while this should be sufficient to meet their immediate healthcare needs, it may not be enough to pay for all financial commitments, particularly for self-employed professionals.

A study released in November 2010 by the Association for Savings and Investments of South Africa (ASISA) estimated that over the course of the following 12 months, an estimated 52 000 income earners would suffer total and permanent disability. The same report also revealed that the average South African income earner is underinsured by R900 000 in the event of disability.

According to Tamar de Freitas, Product Specialist at PPS, the financial services provider to graduate professionals, these figures highlight the necessity of breadwinners having sufficient protection in place. “Income replacement and income disability policies are hugely important as the benefits pay a monthly income when the claimant is not able to work temporarily or permanently up to a defined age. It also ensures the continuation of an income stream at a time when one may need to concentrate on their recuperation.”

“Income protection benefits are ideally suited to the self employed professional, as any time taken off work due to ill health or incapacity will have a direct bearing on their ability to earn an income. Professionals who have a private practice such as veterinarians or a doctor do not just need to cover their own salary but also the salaries of their staff as well as locums to work while they are ill.”

De Freitas says it is also important for people to remember that a salary will not be paid immediately as income protection schemes include waiting periods. “Most income protection schemes tend to operate with a three month waiting period. However, a shorter waiting period – for example seven days – may be ideal for professionals.”

She says many companies also limit income protection benefits to 75% of the earned income. “If this is the case it may be advisable for certain professionals to consider additional options such as top up schemes, which pay out 100% of the income for varying periods of time. However it is also important to bear in mind that with the rising cost of medical care, as well as other unforeseen incidental costs such as needing a driver or family counselling sessions, additional income may also be required.”

De Freitas advises consumers to take the time to speak to their financial adviser about the type of income protection benefit that may be most suitable for their needs and whether additional top up schemes may be necessary.

By now you should all be aware that it is Parliament’s intention to convert medical expense tax deductions to tax credits.

The proposals were first announced in this year’s Budget Speech. At that time it was muted that a Discussion Document regarding the proposed changes would be issued later that month. Due to the complexities, however, of the issues, the said Discussion Document was only issued on 17 June 2011.

Prior to the release of the Discussion Document, draft legislation relating to the conversion of medical deductions to tax credits was released on the 2nd June 2011.

When the Discussion Document was issued on 17th June 2011, the public were invited to make written submissions to The National Treasury by 22 July 2011.

The timing of the release of the copious (41 ages) Discussion Document was most unfortunate as the dates set for hearings by The Standing Committee on Finance (to discuss the draft legislation) were held on the 21st and 22nd June 2011.

The next process on these matters was a workshop at the National Treasury in Pretoria on the 12th of August 2011 were the main focus was on how the conversion of medical deductions to tax credits would impact the most vulnerable groups of taxpayers, being those over 65 and those that form part of the “disability” groups. Pursuant to the many comments that were made at the Workshop, the National treasury noted that they were not fully aware of the substantial adverse consequences that the proposed changes could have on the aforementioned taxpayer groups.

At the report back (following comments made at the Workshop in Pretoria on 12 August 2011), it was stated by the National Treasury – verbatim – that there is a lot still under review and there is still a lot of work to be done. This comment pertained particularly to ‘out-of-pocket” medical expenses, which for taxpayers who fall within the disability group are, in our experience, always substantial.

At this point in time the only expected change in the law is that Medical Scheme Contributions will be converted to Tax credits at the rate of 30%, with effect from 1 March 2012.

In broad terms, the crisp and clear issue which gladly has arisen from the above prolonged process is that the status quo relating to the tax deductibility of medical expenses for disability groups remains.

Having addressed and been involved in tax law matters relating to disability groups for the future and making you, our clients, prospective clients and readers aware and up-to-date on the issues, we should emphasise the importance of awareness for taxpayers who fall within the disability group.

Taxpayers can (and have already obtained) obtain substantial tax refunds for the 2011 tax year as well as for prior-year’s. Objections to prior-years can be lodged within certain prescribed time limits as set in in our tax law. In most cases, objections to prior-years can be lodged against at least 3 tax assessments i.e. 2010, 2009 and 2008. Specialist tax law advice is recommended in order to maximize the amount of the tax refunds.

Tax nightmares among owner-managed businesses and SMEs are costly and time consuming, particularly relating to tax queries and disputes with the South African Revenue Services (Sars).

By simply implementing key preventative administrative steps, business owners can actively avoid or at least reduce the risk of these tax mistakes from arising.

The accuracy of the underlying accounting information and supporting documentation is directly responsible for the integrity of a taxpayer’s income tax return. In the case of SMEs, this integrity is often queried as a result of a lean accounting function and confusion in distinguishing between the financial affairs of the business owner and the business.

Sars tax auditors are first and foremost focused on testing the reliability of accounting books and records, by, for example, reviewing cash accounting records for unusually large or ad hoc payments, on the basis that these often represent private expenses which have been processed as business expenses and claimed for tax purposes.

The importance of accurate accounting information and supporting documentation is further compounded by tax regulations requiring taxpayers to maintain proof of all income and expenditure as well as maintaining business documentation in a particular format, for example, VAT invoices.

Employ a competent bookkeeper to maintain accurate accounting records and supporting documentation;

Ensure you have a consistent list of accounts to which expenses and income can be posted for accounting purposes;

Make use of control accounts, which are reconciled on a monthly basis to the external customer / supplier statements – for example, a VAT control account which is reconciled to Sars accounting statements (which are available on request);

Establish clear guidelines for the accounting treatment of business owner private expenses, to ensure that these are posted to a shareholder loan account and not to a business account;

Establish clear guidelines for the recognition of accounting revenue or expenses for income tax and VAT purposes, which Sars will approve. A good example here is the accounting for subscription income / profit arising on long-term building projects or agency businesses;

Where necessary ensure there is a good understanding important tax rulings for complex domestic businesses or businesses with considerable cross border transactions;

If the business holds inventory, ensure that there are clear procedures in place for counting and pricing regular stock-takes

This list of steps is not exhaustive, and will vary depending on the type of business. While a services business may not require a stock-take, it may require the establishment of an agreed method for recognising fee income.

Owners of small to medium business often “leave tax to the bookkeeper / accountant”, without taking ownership of their fiscal responsibilities. It is important for business owners to be aware of tax submission deadlines and to ensure that tax is paid within these prescribed deadlines. The cost of these mistakes can be high especially for elements such as the late submission and payment of second provisional income tax payments or the submission and payment of monthly PAYE.

When business cash flows are under pressure, tax payments are often the first to be “put on hold” with direct business operating expenses taking precedence. If this persists, expensive non deductible late payment penalties and interest accumulate quickly until the outstanding tax capital amount is paid, particularly as payments are generally allocated by Sars to interest and penalties first before settling the tax capital amount due.

In order to prevent the above from occurring, business owners should implement the following:

Include direct (income tax) and indirect (VAT, PAYE) into all monthly cash flow plans

Establish a separate bank account into which indirect ‘withholding’ taxes are transferred upon withholding, especially for PAYE and VAT;

Include income tax in monthly / annual business planning forecasts, to ensure that any income tax cash can be provided for and set aside in a separate bank account if necessary;

Engage an external tax adviser to carry out an annual tax ‘health-check’ on the business, to ensure that the necessary tax compliance is up to date and that any tax changes have been implemented, such as PAYE on travel allowances.

There are a number of less obvious tax regulations that SMEs operating in a close corporation or private company structure typically fail to apply. Most of these relate to fringe benefits arising from business expenses and transactions paid by the employer company, such as:

Quantification and reporting of taxable fringe benefits provided to employees or directors. An example here includes the use of company owned cars, the use of assets, low / no interest loans and the payment of employee debts. These cash-free benefits provided to employees / directors require monthly PAYE withholding tax as well as monthly / annual tax reporting to Sars. The failure to attend to these brings substantial penalties and interest to a business;

Low interest loans or even “no interest” lending advanced by a company to shareholders or related parties may attract secondary tax on companies of 10% or dividend withholding tax of 10% with effect from 1 April 2012.

Ensure all employment related expenditure is identified in the cash payments records and reported for payroll tax purposes;

Taking professional advice in advance of entering into possibly complicated or unusual transactions

Engage an external tax adviser to carry out a bi-annual PAYE / remuneration tax ‘health-check’, to ensure that all employment benefits are identified, quantified and reported for tax purposes.

“If you knew you were to die tonight, would you know what the estate duty implications would be in your estate?” Pat Blamire asks.

“Would there be enough cash or liquidity in your estate to pay the different costs that would arise?

“Would your loved ones have enough money in cash to keep on going until your estate is wound up?

Finding the answers to these questions is what estate planning is about, Blamire says.

Blamire, a financial planner with Charted Wealth Solutions in Johannesburg, was a finalist in the 2010 Financial Planner of the Year competition.

Estate planning involves the arrangement of your assets so that they may be moved – in the most efficient way possible – to the people whom you wish to inherit your assets. It also involves ensuring that no unnecessary taxes or estate duty are payable, she says.

In practice, what happens when you die is that all your assets are frozen. This includes your bank account. If you use your spouse’s bank account, this account will be frozen too, so each spouse should have his or her own bank account, Blamire says.

Although you may have appointed an executor in your will, that person will not automatically become the executor, Blamire says.

The Master of the High Court has to appoint the executor officially, and this can take anything from one week to three months, she says.

Once appointed, the executor takes control of the administration of your estate, settles any liabilities in your estate and distributes the remainder of your assets in terms of your will.

Estate planning begins with your will. The first question you must ask yourself is whether your loved ones will be able to find your original will after your death, Pat Blamire says. Searching for a will can delay the winding up of the estate.

The next thing you should consider is whether your will is up to date and reflects your current wishes on how you would like your assets to be distributed on your death, Blamire says.

Your will is a living document and should be reviewed whenever your circumstances change, she says.

Although your will does not have to be dated, dating it makes it easy to identify which is your most recent will, she says.

Make sure that your will is valid: it must be signed by two independent witnesses who do not stand to inherit from the will, Blamire says.

You should consider including special instructions in your will, such as stipulating whether you would like to be buried or cremated, she says.

You must name an executor in your will, and if your will establishes a testamentary trust, you should name the trustees of the trust, she says. Blamire says she suggests that you name as the executor your spouse or someone close to you whom you can trust.

Banks offer to draw up a will for you at no cost on the condition that they appoint themselves as the executor. In the long run, this free will may cost your heirs more, because the banks can charge an executor’s fee that is a percentage of the estate up to 3.5 percent plus VAT, as well as other fees, Blamire says.

Appointing your spouse as the executor does not mean that he or she has to wind up your estate: your spouse can appoint an agent to do so and negotiate the fee for that service, she says.

Blamire says she suggests individual wills – rather an joint will – for her married clients. The his and hers wills can be mirrors of each other.

The problem with a joint will is that when the surviving spouse dies it can take a long time to locate the original will at the Master’s office.

If the original joint will cannot be found, the surviving spouse will die intestate. The assets will be divided in terms of the Intestate Succession Act, and this may not be how you wanted your assets to be split, Blamire says.

If you have overseas assets, you may require a separate will for your offshore estate, she says. You should discuss this with the person who draws up your will.

Each person’s estate is entitled to an exemption or abatement from estate duty on assets up to R3.5 million. Estate duty of 20 percent is charged on assets that exceed this amount, with the exception of any assets you leave to your spouse, Pat Blamire says.

Legislation was changed recently to allow the estate of the second-dying spouse to use any portion of the exemption that the estate of the first-dying spouse did not utilise, Blamire says. This means that if the first-dying spouse left all his or her assets to his or her spouse, and therefore did not use any portion of the R3.5-million exemption, the exemption will roll over to the surviving spouse, and his or her estate will enjoy an exemption of R7 million on his or her death.

Rolling over the exemption has its pros and cons, Blamire says. If the surviving spouse lives for 20 years, the executor of his or her estate will have to track down the liquidation and distribution account of the first-dying spouse and prove to the South African Revenue Service that the exemption was not used in his or her estate. If you do not have the liquidation and distribution account, it will be quite a headache for your executor to prove that the exemption was not used, Blamire says.

If you have a fairly large estate and you have set up a trust during your lifetime (an inter vivos trust), rather leave the exempt amount to your trust, she says.

Blamire says the exempt amount can be invested in the name of the trust, for the benefit of the surviving spouse, and grow within the trust and not in the hands of the surviving spouse. This can save you estate duty, as the following example shows:

Roger has an estate of R7 million. Roger’s estate will not pay any estate duty if he leaves all his assets to his wife, Sue.

If Sue dies 10 years later and her estate has grown to R9 million, her estate will pay duty on R2 million (R9 million less the combined abatement of R7 million). At 20 percent, the duty will be R400 000.

But if Roger leaves R3.5 million to a trust of which Sue is a beneficiary and the remaining R3.5 million to Sue, when she dies her estate will be worth only R4.5 million (half of R9 million), and it will therefore pay estate duty on R1 million (R4.5 million less the abatement of R3.5 million). At 20 percent, the estate duty will be R200 000.

Trusts have many benefits, but you should probably not establish a trust if your only reason for doing so is to save estate duty, Pat Blamire says.

The Minister of Finance suggested in his Budget in February last year that estate duty may be done away with at some time in the future, she says.

In addition to the estate duty benefits of a trust, the advantages of a trust are:

* Assets can be protected against creditors and for the benefit of people who are unable to look after them themselves. Assets can also be protected for generations to come.

* A trust can protect the interests of beneficiaries such as minor children, a disabled child or a spouse with a degenerative disease, such as Alzheimer’s.

However, you need to be aware of the disadvantages of trusts. The main one is that if you set up a trust correctly you will no longer have control over your assets, Blamire says. The trustees collectively must decide how to manage the assets in the trust. If the original founder of the trust runs the trust as though the assets in it are his or her personal assets, the trust could be attacked, for example, by a former spouse, as a sham or an alter ego trust and it may have no legal effect, Blamire says.

The duties of the trustees are extremely onerous, she says. A higher responsibility is placed on them than on a director of a public company. Trustees are expected to act carefully, skilfully, diligently and independently, in the interests of the beneficiaries and in accordance with the trust deed. Trustees have a duty to avoid risk, invest productively and obtain expert advice, she says.

The other disadvantage of a trust is that the administration can be time-consuming and costly, she says. Proper records must be kept, tax returns submitted and in some cases trusts must be audited.

You have to be careful when nominating the beneficiaries of an inter vivos trust, Blamire says. You should have some flexibility to change the beneficiaries, because, even though you may think you have had all the children you are going to have, things can change. For example, what would happen if your sibling was killed and you adopted his or her children?

Income tax within a trust is 40 percent, so any income earned within a trust should be distributed to the beneficiaries in the year in which it was earned so that it can be taxed in the hands of the beneficiaries instead. For example, if the trust earns R90 000 in interest for the year and there are three beneficiaries, they can each be paid R30 000. Each beneficiary can use the interest exemption of R22 800 (taxpayers under 65 years of age for the 2010/11 tax year), so they will each pay tax on only R7 200.

Savings in your occupational retirement fund, retirement annuity fund and preservation fund, as well as any group life assurance, become payable on your death, but you cannot always expect the savings to be paid out as you have stipulated on a beneficiary nomination form, Pat Blamire says.

The beneficiary nomination form is only an indication to the trustees of the fund how you would like your retirement savings to be distributed, she says.

The trustees will determine how to distribute the savings according to section 37C of the Pension Funds Act. In terms of this section, the trustees have to trace your dependants, and then any persons who are financially dependent on you, say, an aged parent, and distribute your retirement savings equitably among them, Blamire says. Only if your dependants have sufficient funds, would the trustees consider anyone else you have nominated as a beneficiary.

You should bear in mind that a family member such as your daughter who lives rent-free with her boyfriend in a cottage in your garden may be able to prove dependency, Blamire says.

Your retirement fund savings can be paid out to your dependants either as an income or as a lump sum (after the income tax has been deducted).

If you have any specific wishes that you would like the trustees to take into account, record these on your beneficiary nomination form, Blamire says. For instance, if your daughter proves to be irresponsible with money, ask the trustees to allocate her a monthly income rather than pay her a lump sum, she says.

Your assets in a tax-incentivised retirement-savings fund do not attract estate duty in your estate, she adds.

Living annuity investments fall outside of the Pension Funds Act, so you can nominate the beneficiaries whom you would like to inherit your living annuity investments, Pat Blamire says. These investments can be drawn either as an income or a lump sum (after tax).

Recent legislation stipulates that it is not possible for one beneficiary to draw an income and for another to take a lump sum: all the beneficiaries must make the same choice. Blamire says she believes this was not the intention of those who drafted the legislation, and it is being redrafted.

If you want to leave any assets to your minor children, you should rather leave the assets to them in a trust so that the trustees can look after the assets until the children can do so themselves, Pat Blamire says. Children under the age of 18 cannot inherit cash from you directly, she says.

If you have not set up an inter vivos, or living, trust during your life, you can in your will stipulate that you want a testamentary trust to be established on your death, Blamire says.

Make sure that your will deals comprehensively with the establishment of the testamentary trust, she says.

Normally, a trust deed is about 10 pages long, but your will serves as the trust deed in the case of a testamentary trust, Blamire says.

Your will should spell out who the trustees will be, who the beneficiaries will be, the responsibility of the trustees and any other conditions, she says.

If you do not set up a trust for your minor children, your executor will be obliged to hand their cash inheritance to the Guardian’s Fund.

Money managed by the Guardian’s Fund is invested very conservatively, Blamire says.

Investing too conservatively can make a big difference, especially over the long term. Blamire says that R1 million invested at, for example, a return of four percent a year will grow to only R1.8 million after 15 years, whereas if it is invested at a return of eight percent a year, it will grow to R3.3 million.

If your estate will not have enough liquidity to pay off your liabilities, you will most probably have to take out life cover that will pay out when you die and cover these liabilities, Pat Blamire says.

If you have young children, you may require additional life cover, because, without your income, your surviving spouse will most probably struggle to raise your children, Blamire says.

Carefully review the beneficiaries of your life policies, she says. While a policy to support your surviving spouse and children should probably name your spouse as the beneficiary, a policy you take out to provide liquidity in your estate should most probably name your estate as the beneficiary, Blamire says.

Remember that life policies, with some exceptions – most notably ones that pay out to your spouse – are dutiable in your estate. This means you should take out more life cover than you will require to pay the liabilities in your estate, because the liabilities may include a higher amount of estate duty, Blamire says.

Married couples should split their assets between them to ensure that the surviving spouse will not be left without any cash after the other spouse has died, Pat Blamire says.

If the spouse in whose name all the assets are registered dies first, the surviving spouse may have no cash assets on which to survive while the estate is wound up, she says.

Individual taxpayers have exceeded all expectations and set a new record by submitting almost 873,000 income tax returns to the South African Revenue Service (SARS) in the first month of the 2011 tax season, an increase of 44% in taxpayer compliance over the previous year.

So far, it is said, SARS branches have assisted 290,000 taxpayers to file their returns via a branch (33.2%) while 568,000 returns (65.1%) have been submitted via eFiling. Only nearly 15,000 returns (1.7%) were submitted by post.

In addition, the SARS contact centre has fielded close to 743,000 calls during July 2011. In contrast, during July 2010, it had only received about 588,000 calls. It is pointed out that, in line with SARS’s commitment to continually improve its service to taxpayers, the contact centre has resolved 94% of the calls on first interaction.

SARS believes the significant increase in early filing reflects a growing recognition among taxpayers of the benefits of filing early and electronically. Among the benefits of early and electronic submission is the rapid payment of refunds to those who are due rebates.

SARS has confirmed that it has paid out close to ZAR2.6bn (USD382.6m) in refunds to individual taxpayers so far this tax season, with over 80% being paid into taxpayers’ bank accounts within 48 hours of submission. The average time to receive an assessment is less than 24 hours after electronic submission.

The deadlines for submitting returns in this year’s tax season are September 30, 2011 for postal submissions (paper tax returns) for provisional and non-provisional taxpayers; November 25, 2011 for taxpayers who use eFiling; and January 31, 2012, for provisional taxpayers who file via eFiling.

Unless they are in charge of the finance portfolio, most company directors are not accounting experts – and nor should they be. After all, they should have the input of an appropriately qualified and experienced Professional Accountant on which to depend. However, says Hashim Salie, chairman of the education committee at the South African Institute of Professional Accountants (SAIPA) the role of that accountant can extend somewhat further into the boardroom, particularly in light of the new Companies Act which has just come into operation.

That’s because, says Salie, the Professional Accountant (SA) is equipped with the critical embedded knowledge to help any director to comply with the broad requirements of the position.

“The key issues for any director include complying with common law and statutory duties as set out in the Companies Act as amended, as well as with any other duties imposed on that director by provisions in the memorandum or articles of association of the company they serve,” he says.

Additional responsibilities of any director include identifying and managing any conflicts of personal interests with those of the company; ensuring that any contracts entered into on behalf of the company are within the scope of the company; ensuring that liability insurance is in place and the conditions understood; and seeking independent professional advice where necessary to enable better understanding of the role and duties of a director’s position.

Continuing, Salie explains that a Professional Accountant (SA) must have basic Corporate Law knowledge attested to in their Academic Programme. “As statutes, by their nature, are dynamic and ever-changing, the Professional Accountant (SA) is duty-bound to be updated through lifelong learning programmes called Continuous Professional Development,” he says.

CPD requires that every member of SAIPA must complete a minimum of 120 hours of training over a running 3-year cycle.

“With major changes such as those ushered in with the new Companies Act, there is a very real possibility that company directors, comfortable with the existing way of doing things, may fall foul of the new requirements,” Salie notes.

Such acts of omission or negligence can have serious adverse effects for the individual and for the company they serve. “However, through CPD as well as through a succession of focused workshops and other interventions, SAIPA has taken substantial steps to provide its members with the knowledge they need to guide company directors on the appropriate implementation of the law.”

This falls squarely in the category of seeking independent advice in the execution of directorial duty, Salie says. “As far as the Professional Accountant (SA) is concerned, he or she should be able to advise directors in the substantive matters of finances,” he confirms.

As a ready example, Salie points to a key element of the director’s functions, that of approving the distribution of the company’s assets which is typically done through the declaration of dividends. “Before any director can give his or her stamp of approval of such distributions, he or she is obliged to have considered the solvency and liquidity of the company. Any failure to do such considerations may cause such directors to be held personally liable.

“To limit the risks, directors may engage with the Professional Accountant (SA) to do such solvency and liquidity tests. Risk is therefore reduced and the director can motivate his/her decision knowing that his/her advisor has Professional Indemnity Insurance cover as members of SAIPA,” he explains.

As a level 7 NQF professional, Salie says, the Professional Accountant (SA) has the required skill and knowledge to assess compliance with the business purpose test by which any director’s decisions are judged. “In short, that’s a key input that any director is well advised to seek if they want to make smarter financial decisions,” he concludes.

Below is the first edition of VAT Connect from SARS – the electronic newsletter that provides you with the latest news and information on VAT and related matters. VAT Connect replaces VAT News.

An amendment to the provisions in the Income Tax Act which govern incentives for research and development (R&D) in the private sector is likely to add impetus to private investment resulting in the creation of jobs and contributing to national growth. That’s according to a director from a leading Audit Firm, who says that while tax breaks for R&D have been in place for some time, their effectiveness is limited.

“In the present guise, Section 11D of the Income Tax Act gives rise to problems due to the lack of a concrete and precise definition of R&D. This shortcoming is addressed in the draft Taxation Laws Amendment Bill 2011,” she explains.

She says the problems with the extant legislation include unnecessary audit scrutiny of genuine value-add R&D, in terms of which taxpayers who have submitted claims have no way of knowing whether or not these will be approved. “Furthermore, the responsibility for determining eligibility for a refund fell to SARS; however, SARS does not have the technical expertise to evaluate technical R&D claims, while the Department of Science and Technology’s involvement in the approval process is insufficient.”

Additionally, she says there are areas that are unclear, especially with regards to the information and communications technology industry. “There is a need to clarify the industry-activities and related expenditure which are eligible for the allowance,” she notes. “Add to that, the current Section 11D indicates that payment for R&D services undertaken by another organisation unnecessarily gives rise to a claim that the funding mechanism amounts to a recoupment. Simply put, this makes it uneconomical for an organisation to undertake R&D services on behalf of another.”

She says National Treasury believes these issues necessitate the amendment of the current R&D legislation, a move for which she has praise. “Successful R&D can and does stimulate economies; South Africa has a dire unemployment problem and government has stated that job creation is a central objective. Clarification of this legislation should play a part in stimulating innovation, which in turn can help to add to the economy and the country’s growth.”

The proposed legislation now includes a definition for ‘research and development’ and offers two levels of qualification. If taxpayers are performing R&D they will automatically qualify for a 100% deduction of those direct R&D expenses. A further 50% deduction will apply to additional qualifying activities. These activities will be assessed by an adjudication committee pre-approval process, managed by the Minister of Science and Technology. Qualifying activities include an assessment of the scientific and innovative nature of the research and development; the extent to which the R&D will provide skills development and employment creation in South Africa; and the extent to which the R&D activities will provide synergies with other initiatives or economic activities undertaken within the country.

Notably, she says, the adjudication committee’s role will be to evaluate claims from a technical/innovation and South African development stand point, while the role of SARS will be to evaluate the eligible expenditure.

The National Treasury has indicated that the proposed legislation will be effective on or after 1 April 2012 but before 1 April 2017 and operational for expenses incurred as of 1 January 2012.

The leading Audit Firm will participate in this process as advocates for clarifying and improving legislation on behalf of its clients. “Furthermore, we urge interested parties to lend their voice to the proposed amendments; the goal is to improve the draft legislation for taxpayers, which will also deliver advantages for the country as a whole,” she concludes.

Keeping a logbook to record your business kilometers could result in a tax refund on assessment. With effect from March 1 this year, SARS increased the monthly taxable fringe benefit on motor vehicles. But it’s not necessarily all bad news.

From the beginning of March, the fringe benefit – the private use of a company car – is calculated on the cost of the vehicle to the company (now including VAT), at a rate of 3.5% per month. So if your car cost R200 000 (including VAT) you’ll be taxed on R7 000 in addition to your normal salary on a monthly basis for having the use of the car.

However, in some cases, if the car was purchased with a maintenance plan, the fringe benefit may be calculated at a reduced rate of 3.25% per month.

Other factors can also be used to reduce your final taxable fringe benefit at year-end depending on whether you, or your company, incurred the maintenance and fuel costs of the vehicle and whether accurate records were kept.

As with a travel allowance, it’s vitally important to keep accurate records of the private kilometers you travel during the tax year. If you have accurate records, you’ll be able to receive a deduction similar to that claimed with a travel allowance.

Where you, as the employee bear the full cost of insuring, maintaining and licensing the vehicle, on assessment, the taxable fringe benefit will be reduced in a ratio proportionate to the total private distance travelled compared to the total distance travelled.

If you’re responsible for the full cost of fuel, the total taxable fringe benefit can be reduced by the value of the private distance travelled by applying the rate per kilometer as used when calculating a travel allowance.

If you’re lucky enough to have been given a car to drive, with all its expenses paid for by your employer, and if you have kept accurate records of your private kilometers, you’ll still be eligible to receive a deduction on assessment.

As the monthly fringe benefit is included in your remuneration, it will be subject to employee’s tax, which will be withheld from your monthly pay and calculated on 80% of your total taxable monthly fringe benefit. As with a travel allowance, a logbook can, however, be used on assessment to reduce the total tax due based on the total private distance travelled which might even result in a refund.

In cases where you can motivate that the car provided to you is almost exclusively used for business and it can be proved that at least 80% of the distance you travel relates to business travel, your employer only has to deduct employees tax from 20% of the taxable monthly fringe benefit monthly.

But you’ll need to convince your employer that your car is mainly used for business because if Sars finds that your private travel exceeds 20% of the total kilometers travelled, your employer might have to pay interest and penalties for underpaying employees tax during a particular year of assessment.

From feedback received, the South African Revenue Service (SARS) has decided to make the following enhancements to the Transfer Duty process:

1. All transactions will be now be processed via an automated SARS risk engine and only cases selected by the risk engine will be sent for manual review.

2. In order to reduce errors made on the forms which have caused downstream problems, additional validations have been introduced into the form.

3. Supporting documents will no longer be mandatory on the submission of a transfer duty declaration. Conveyancers will only need to submit supporting documents when requested to do so by SARS through the Transfer Duty system.

4. In order to reduce the number of manual refund requests, payment will only be required once the declaration has been approved or accepted by SARS.

5. A Conveyancer will only be able to print the receipt once SARS has confirmed that payment has been received in full in its bank account.

We believe these changes should make a big difference to the service experienced. One of the biggest benefits should be a significant reduction in the turnaround time taken for most transactions.

SARS has introduced enhanced validation measures into the form to ensure that the data provided by the Conveyancer is complete and conforms to the prescribed format. The Conveyancer will also be able to rectify the form should the form not be accurately completed.

Supporting documents will no longer be mandatory on the submission of the declaration. If supporting documents are required, SARS will request the documents from the Conveyancer through eFiling.

The Conveyancer will only be able to make payment once the declaration has been accepted or approved by SARS. This will ensure a much streamlined process where the Conveyancer makes correction to the data provided, if required, and then makes payment of the correct amount.

Once SARS has confirmed receipt of payment in full in their bank account, the Conveyancer will be able to print the receipt on e-filing.

Where no payment is required, the receipt/ exemption certificate will be made available for printing on eFiling once SARS has accepted the declaration.

SME companies should brace themselves for the bi-annual PAYE tax reconciliation process which starts early in September 2011. The closing date is yet to be confirmed by SARS, but speculation is that employers will have until the end of October 2011 to complete their submissions.

“It is important that companies bear in mind that the bi-annual submission is completed for reconciliation purposes only. Payroll, HR and Finance departments should not issue the tax certificates to their employees,” said Grant Lloyd, managing director at payroll and HR software specialist Softline Pastel Payroll, part of Softline and Sage Group plc.

SARS will inform companies closer to the time if they will release a new version of the online e@syFile system. The e@syFile system must be downloaded and utilised to upload and submit electronic IRP5/IT3(a) tax certificates together with the EMP501 Reconciliation Declaration for the period 01 March 2011 to 31 August 2011.

“Even though the filing season only opens in September, companies can use the time to prepare for the compulsory electronic submissions with full employee tax details to ensure their houses are completely in order for this second bi-annual PAYE reconciliation,” said Lloyd.

Certificates without income tax reference numbers will not be rejected, but will be accepted as an incomplete submission and penalties will be raised on incomplete submissions. It is the employer’s responsibility to ensure that each employee has a valid income tax reference number to prevent incomplete tax certificates from being submitted during the bi-annual submission period.

Companies should use the preparation season to ensure that their income tax reference numbers that were returned by SARS after the 2010/2011 filing season are captured on each employee’s record.

Companies should obtain income tax reference numbers from employees that were appointed from 01 March 2011 to 31 August 2011. If these new appointments do not have income tax reference numbers yet, register them using eFiling. Before terminating an employee’s service during the period 01 March 2011 to 31 August 2011, companies should ensure they have the employee’s income tax reference number.

Employers who have automated payroll software systems will find it simple to execute the reconciliation process, as they need only capture employees’ information and their payslips.

During the reconciliation process automated payroll software ensures the electronic tax certificates are generated automatically in the required file format. This file can be imported directly into SARS e@syFile. The EMP501 Reconciliation Report to complete the PAYE, SDL and UIF reconciliation declaration on SARS e@syFile can be generated for the period 01 March 2011 to 31 August 2011 directly from the payroll software. This saves businesses considerable time and cost compared to manual calculation and capturing.

In addition to the EMP501 Reconciliation Report, Pastel Payroll offers customers the ability to import a file containing employee income tax reference numbers from SARS e@syFile. These income tax reference numbers would have been generated by SARS during or after the 2010/2011 PAYE filing season and returned to the SARS e@syFile application as part of the bulk registration process.

When the Taxation Laws Amendment Bills were announced recently, alarm bells started ringing regarding some of the unintended consequences of two of the proposed amendments.

The most surprising amendment is the immediate suspension, until December 2012, of Section 45 of the Income Tax Act, which in the past allowed for the intergroup transfer of assets in a tax neutral manner. This ability to transfer assets tax free is fundamental in any tax system to enable corporate activity. As an example, Section 45 is key to the implementation of sustainable BEE transactions, as it is the only provision of the Income Tax Act which allows for the conclusion of sustainable BEE transactions which are not share price dependant (unlike the typical share funded BEE models which were the primary cause of so many failed BEE transactions to date).

Section 45 is also used in many internal restructurings and in the acquisition of businesses. The immediate suspension may now force companies to revert to unsustainable forms of empowerment. Many companies, especially mining companies which have announced BEE transactions but await approval from the Department of Minerals Resources, will now need to go back to the drawing board or may face significant negative tax consequences. Similarly transactions already structured but awaiting approval from other regulatory bodies (be it the Reserve Bank, the DMR, the JSE, SRP, Competition Commission or others) may now have to be wholly restructured resulting in additional delays. It is likely that many acquisitions could now be put on hold until further clarity is obtained. This is expected to have a significant negative impact on investment activity in South Africa. South Africa remains one of the few developed countries in the world with neither deductibility of interest on share acquisitions nor some form of group taxation; in the absence of these features section 45 has been the only way in which the private equity industry was able to operate. Its removal may sound the death knell for that industry (one which is actively supported in many of South Africa’s trading partner jurisdictions) and one has to question whether this is a wise position for South Africa to take.

The other amendment relates to preference shares. The use of preference share funding is in many instances the only viable form of funding. Dividends on preference shares are in general not subject to income tax. The proposed amendments, effective from April 2012, will result in almost all preference share dividends now becoming taxable in the hands of the investor without a corresponding deduction to the issuer, an untenable outcome to be sure.

This will have a detrimental effect on the majority of BEE transactions, many of which are already distressed. The amendment will result in an approximate 40% increase in the cost of funding for BEE parties, leading to almost every share funded BEE transaction being increasingly unsustainable with limited or no prospect of realising any value for the BEE shareholders. Concluding a BEE transaction using Section 45 would have been a viable alternative but that has also been removed. Alternative solutions are available but result in increased complexity which, whilst manageable, results in an increased cost to the detriment of the country.

The proposed amendments will also impact corporates who have funded themselves using preference shares and will significantly increase their cost of funding and the viability of projects. The amendments contradict Government’s policy of trying to grow and stimulate the economy, increase employment and encourage transformation as it will result in the reassessment of transactions which could have created many jobs. It may now make sense to seek alternative solutions such as international funding, due to the undue constraints being placed on South African funders.

While we acknowledge the need for changes to stop the abuse of some aspects of the Income Tax Act, changes should be targeted and not a catch all that has far reaching implications for almost any type of corporate transaction, whether implemented or still under consideration. After all South Africa needs a tax system which is predictable and creates business confidence. This surprising approach by National Treasury is not conducive to business development and discourages foreign investment.

We urge those who have entered into transactions which will now be negatively impacted by these and other amendments to submit their comments to National Treasury on or before 30 June 2012.

The capital gains tax roll-over relief (and associated STC and transfer duty relief) provisions relating to the transfer of a residence from a company, close corporation or trust to a natural person are to be extended to holiday homes, effective back to the introduction of the provision on 1 October 2010, says a tax partner at a global audit, tax and advisory firm

Commenting on the recently released Draft Taxation Laws Amendment Bill, Sacks says that following intense lobbying, National Treasury had consented to the extension of the relief, facilitating owners of holiday homes the opportunity to rationalise and simplify their property holding structures.

“The extension of the relief to holiday homes means that, provided the home in question was mainly used for domestic purposes during the period 10 February 2009 to date of disposal, the transfer of such property will qualify for the extended relief,” he says.

This relief will effectively apply to disposals to resident and non-resident transferees alike.

Certain other amendments have also been proposed to the residence transfer provisions, some to alleviate practical difficulties and others to correct certain errors.

The residence transfer relief is available for disposals made until 31 December 2012. He encourages the early take up of the relief.

“This may seem a long way off, but people should be urged to commence the process as soon as possible in order to avoid a last minute rush.”

IMPORTERS and exporters face hefty penalties of up to R1m, and even jail time, if they break tax laws, according to proposed regulations.

The Customs Control Bill, recently released for a second round of comment, introduces a new, stiff penalty regime, and changes the way in which disputes between the South African Revenue Service (SARS) and taxpayers will be resolved.

“The bill contemplates allowing SARS in certain circumstances to simply issue a notice to a taxpayer alleging a breach of the law and demanding that the taxpayer pay a penalty of up to R1m within five days,” said a director at a Law Firm yesterday. “Taxpayers must pay this amount or face prosecution.”

Last year SARS issued the first draft of the Customs Control Bill and draft Customs Duty Bill almost 10 years after former finance minister Trevor Manuel said the law was “outdated” and would be revised.

An overhaul was needed mainly to bring the legislation in line with other domestic law and international conventions such as the Kyoto Protocol. It also aimed at enhancing protection of the domestic economy.

The new legislation is intended to be an improvement over the current Customs and Excise Act as it aims to be more relevant to modern trade regulations and practices.

While SARS did still provide for internal processes of appeal and dispute resolution, under the Customs Control Bill taxpayers could only apply for certain types of penalties, appeal the amount of the fine, and not the merits of their liability.

” SA does not necessarily have to prove the offence if there is no criminal prosecution,” she said. “Yet the penalties can be enforced by SARS’ legislative processes to ultimately have the same effect as a judgment debt, without SARS ever having to issue summons.”

Payment of the fine in certain instances guaranteed that taxpayers would not be prosecuted in court. While some companies might pay the fine because they did not want to risk a prison sentence or get caught up in an expensive and lengthy court battle, others would simply take their chances that SARS would be unable to prove its case, she said.

“Criminal customs cases historically have seldom actually made it to court, so the practical effect of the penalties contained in the bill depends largely on SARS’ ability to improve its prosecution capacity.”

She said there was a lack of clarity on how the new bill would be read with the recently promulgated Tax Administration Bill.

“It is possible that a taxpayer contravening the Value Added Tax Act and the Tax Administration Bill could also separately contravene the Customs Control Bill,” she said. They may attract penalties under both pieces of legislation, “and the way that disputes between SARS and taxpayers will be resolved needs to be considered in the context of the wider legal framework governing administrative justice and the constitutional rights of the taxpayer”.

Income Tax Act (58/1962): Income Tax 2011: Notice to furnish returns for the 2011 year of assessment.

Having headed the call for a Voluntary Disclosure Programme (VDP) from SARS many companies are yet to receive any proactive responses or information on the status of their submissions. This is the observation from Elriette Butler, Associate Director at BDO.

Butler says, “Over the last few months starting in November 2011 we have made several online submissions to SARS on behalf of our clients, the last form of communication received was a short automated acknowledgement of the application with a reference number. Other than the acknowledgement no other feedback has been received nor have any of the applications been finalised. This gives the impression that there is a lack of urgency when dealing with VDP matters.”

The current legislation dictates that SARS must provide the specified relief if an individual or company comes forward and makes a valid disclosure and concludes a voluntary disclosure agreement with SARS. However, the relief may be withdrawn if, subsequent to the conclusion of the agreement, it is established that the applicant failed to disclose a material matter. Additionally, there is no guarantee that SARS will not target the company in future.

“It is this uncertainly and lack of communication which has left clients feeling very uneasy with the whole programme. Clients believe that they have inadvertently exposed themselves to an audit by SARS” Butler comments.

In contrast the exchange control tax clearance programme, which was put into effect at the same time as VDP, been extremely effective with over 80% of the submissions put forward completed timeously.

“This observation leads us to believe that there is no sense of urgency from SARS side when dealing with VDP claims and we would urge SARS to make this matter a priority,” says Butler.

“Despite the delays in the VDP system BDO still encourages companies and individuals to take advantage of the open window which SARS has created. Many companies may not be aware of having defaulted in the past. The programme will allow them to start on a clean slate with a clear understanding of their tax status with SARS and is particularly important with the implementation of the Companies Act which makes directors directly liable for such tax transgressions,” Butler concludes.

29th June, 2011 – Everyone now has to have a tax reference number with no exceptions, even part time students that don’t have a full time job, making it a nightmare for casual staff to get paid and presenting companies employing large numbers of casual staff with an administration nightmare.

This is according to tax expert and Chairman of payroll software company NuQ, Ron Warren, who says that even students working for a pittance during their holidays will be required to have a tax reference number, as will casual labourers taken from the street.

The tax reference number has been made a mandatory field on the tax certificate returns made by employers, therefore employers have to obtain tax numbers from all employees, casual as well as permanent staff.

“Employees of large numbers of temporary workers are facing an administration nightmare and possible penalties should they not comply,” says Warren.

He cites the example of the census due to take place later this year which will pose a huge problem for statistics officials. “I have heard that they will be taking on 156 000 census takers for this task,” he says. “If they have to insist on applicants having a tax registration number the census will probably not be able to take place.”

Section 67 of the Income Tax Act states that everyone who at any time becomes liable for any normal tax or who becomes liable to submit any return contemplated by section 66 must, within 60 days after so becoming a taxpayer, apply to the Commissioner to be registered as a taxpayer.

It goes on to say this requirement does not apply to persons whose income is derived solely from remuneration which is subject to SITE only. In simple language, such remuneration consists of salary or wages received during a tax year which do not exceed R60 000 for that year. If only part of a year has been worked, the annual equivalent of the remuneration must not exceed R60 000.

“For example, if an employee worked for 6 months of a tax year for one employer and earned R35 000 from that employer, and earned no other remuneration during that tax year, he or she would not be earning remuneration subject to SITE only,” explains Warren. The annual equivalent of R35 000 is R70 000, which is more than the SITE earnings limit of R60 000.

He says that it is this section of the Act which gave rise to the correct understanding that persons who were SITE only taxpayers were not required to register with SARS as a taxpayer.

“When this was enacted (in the previous century) SARS was understaffed and not computerised, and could not deal with the volume of tax returns that were being made and this legislation removed a few millions of low paid employees from the tax system.”

Starting with the 2010 tax year, emphasis was placed by SARS on every employee having a tax reference number, and the tax reference number was made a mandatory field on the tax certificate returns made by employers. However, Warren says that instead of changing the Income Tax Act to state unequivocally that tax reference numbers were now compulsory for all employees, they left the Act as it was (explained at the beginning of this article).

Not surprisingly, the general public refused to believe that all employees (regardless of their earnings) were now required to have tax reference numbers. Warren says that this belief was reinforced by those low paid persons who attempted to register for tax with their local SARS offices, where they were bluntly told that they were not required to register because their earnings were below the SITE limit.

The officials at SARS who specified in their official instructions to employers that the tax certificate number was mandatory on their annual return fudged the issue by quoting section 14 of the Fourth Schedule. This provides that every employer shall “render to the Commissioner such return as the Commissioner may prescribe”. In other words, if the Commissioner prescribes that tax reference numbers are mandatory on tax certificates for every employee, that overrides the provisions of the section 67 quoted at the start of this article!

In effect, their interpretation of the law was that the Commissioner can disregard the provisions of the Income Tax Act. “That interpretation may be correct, although I have my doubts on that, but it is a poor reflection on SARS that they allowed such a situation to develop,” says Warren. “Surely they could just have changed the Act by deleting section 67(2), which exempted SITE only taxpayers from registering with SARS? To this day, two years after SARS made the tax reference number compulsory on tax certificates, this is in contradiction to section 67(2) of the Income Tax Act.”

Warren says that although the tax reference number was made mandatory on the tax certificates submitted by employers, SARS accepted tax certificates with missing tax reference numbers for the 2009 and 2010 tax years. “They probably did this because they realised that it would be physically impossible for SARS staff to manually issue the thousands of tax reference numbers that were missing.”

For the 2011 tax year, an interim tax certificate return was required for the first 6 months of the tax year (March to August). SARS promised that they would electronically issue tax reference numbers for all missing numbers on the six monthly return, in time for the final return to be made after the end of the tax year in February 2011. Warren says that they appear to have kept this promise, issuing a file at the end of March 2011 containing new numbers to each employer who had some missing tax reference numbers.

However, Warren explains that there were still some missing numbers, because some employees without a tax reference number could not be satisfactorily identified from the information provided by their employer. In such cases, the employee would have to go personally to a SARS office to try and get registered. Alternatively, the employer could try to register the employee through the e@syFile program via a new facility made available on that program.

Warren says that SARS have very sensibly decided not to enforce the mandatory requirement for tax registration numbers on tax certificates again this year. “However, if a tax registration number is missing, a warning will be given by the e@syFile program that a penalty may be raised in respect of such missing numbers,” he adds. “The employer then has the option to abort the tax certificate run and get the missing numbers, or continue with the run and face the possibility of penalties being raised. No indication has been given of the size of the penalty that will be raised!”

SARS will no longer be posting VAT returns to vendors who haven’t registered for e-filing. As of April this year, VAT vendors who are not e-filing have to visit their nearest SARS office to obtain their VAT returns.

This stance by SARS will achieve two results of which only one was intended, says a tax partner at a global audit, tax and advisory firm “The intended result that more VAT vendors register for e-filing will probably be achieved as experience shows that most taxpayers prefer to avoid visiting SARS offices unless absolutely necessary!”

However, another, unintended result will probably also be achieved, he says, that of making it more expensive for many vendors to comply with their VAT responsibilities. While it can be argued that most vendors, especially those in or near large cities, have access to the internet and can register for e-filing, not all vendors have that access, nor the ability to navigate the SARS website.

“It’s also likely that these are the vendors that find it most difficult to visit SARS for a hard copy of their return, as the nearest office is located some distance away from where they’re trading.”

Apart from the fact that many will have to incur additional costs to either acquire access to the internet or travel large distances to obtain their forms, many are likely to do neither, and therefore would be in a position where they submit their VAT returns late or not at all. This non-compliance may result in penalties and interest.

It’s understandable, even commendable, he says, that SARS wants to reduce its operational costs through limiting stationery and postage costs. The ease of use and effectiveness of administering one’s tax affairs on the e-filing system is also hard to dispute as, to date, it appears to have a fairly good track record.

“However, it’s well known that South African taxpayers are not all equally large, sophisticated or have the same access to technology, their respective SARS offices or even advisors that could assist them in navigating the South African tax system. Which makes SARS’ decision to promote e-filing in this way quite puzzling,” he concludes.

The Draft Taxation Laws Amendment Bill 2011 (the TLAB) was released for public comment on 2 June 2011. As expected, the majority of the tax proposals announced in the Minister of Finance’s 2011 Budget Speech are contained in the TLAB.

What came as a surprise, however, is the announcement of the suspension of section 45 of the Income Tax Act with effect from 3 June 2011. Section 45 permits the tax free transfer of assets within a group of companies and has become a useful tool to effect commercially driven group restructures tax efficiently.

In a media statement accompanying the release of the TLAB, National Treasury expressed the view that where the original goal of section 45 was to ensure that the tax system did not pose a barrier to intra-group transfers, section 45 has been abused and has taken a vastly different course. National Treasury feels that 45 has become a key acquisition tool with it being used in so-called “debt push-down structures”, resulting in target company assets being freely placed in a location where substantial interest deductions can be applied against operating target company income. National Treasury also expressed the view that section 45 greatly facilitates the use of excessive debt schemes and other tax aggressive funding structures.

During the period of suspension, National Treasury will re-evaluate the need for the relief offered by section 45 along with its concerns relating to excessive debt.

The suspension of section 45 will affect all intra-group transfers of assets between 3 June 2011 and 31 December 2012. It is not only future transfers of assets that will be affected by this 18 month suspension. Any transaction concluded before 3 June 2011 which is subject to a suspensive condition that is only fulfilled after 3 June 2011 will also be affected.

Although the need to protect South Africa’s tax base can be appreciated, the outright suspension of section 45 is an exaggerated approach to resolving the indicated concerns of National Treasury. Legitimate, commercially driven intra-group transactions and normal merger activity that do not involve any tax aggressive debt funding will now be inhibited. One would have expected that National Treasury would rather have attempted to expand the anti-avoidance provisions contained in section 45 to address its concerns. Furthermore, section 45 and the other corporate roll-over provisions in the Income Tax Act are all subject to the general anti-avoidance provisions contained in the Income Tax Act and the South African Revenue Service has these powers at its disposal to attack impermissible tax avoidance arrangements.

One can only hope that enough public pressure will be put on National Treasury whilst the TLAB is open for comment to re-consider this outrageous approach and that the final Taxation Laws Amendment Bill placed before Parliament contains a more sensible solution. At this stage, however, this appears unlikely.

Although section 45 has mainly been used to facilitate intra-group restructures, the Income Tax Act also contains other corporate roll-over provisions in sections 42, 44 and 47 that may be still be useful in achieving the desired group restructuring. PKF can assist in evaluating the best alternative solution to an envisaged group restructuring.

The following minimum information is required for output and input tax schedules to ensure the efficient processing of VAT refunds.

The Draft Taxation Laws Amendment Bill 2011 released by National Treasury on Thursday last week (2nd June) contains provisions that will prevent taxpayers within groups of companies from making use of the rollover relief provided for in section 45 of the Income Tax Act.

“This comes as a surprise to tax practitioners and taxpayers alike as there was no mention in the Budget Speech that the provisions of Section 45 would be substantially amended, let alone its use being barred,” says a tax partner at a global audit, tax and advisory firm. “Even more surprising is that the effective date from which section 45 can no longer be used for any asset disposal is on or after 3 June this year and before 1 January 2013.”

As the provisions are contained in a draft bill that must still pass public comment and promulgation, and may or may not be included in the final Amendment Act, uncertainty has been created in the tax community, he says.

“What creates even more uncertainty is that many taxpayers and groups will already have planned restructures and transactions involving the use of section 45 and these will now have to be reconsidered in light of the proposed amendment and its effective date.”

One of the reasons provided by National Treasury for the hiatus on the use of section 45 is the fact that taxpayers have apparently abused the provisions in order to reduce overall group taxable incomes. “Treasury indicated that the position is a suspension of section 45 as part of a larger investigation into the taxation of inter-connected areas and that more legislation can be expected in 2012.”

“Hopefully taxpayers will in future be forewarned of planned changes and when they’re proposed, they’ll be prospective and not retrospective as is the case with this planned suspension of section 45, ” he concludes.

To many people the concept of taxing a volunteer in any way or form might sound like sacrilege. Surely, as a volunteer, nothing is expected nor received in return for the time and effort in performing a particular task out of free will. Although it is true, in a general sense, that volunteers are not remunerated in cash for their time and effort, certain non-profit organisations provide non-cash benefits to assist in volunteer work, such as motor vehicles or accommodation.

The question is whether a non-cash benefit provided to a volunteer can ever be subject to tax. If the answer is yes, the question turns to the form of taxation – capital / revenue, employee’s tax, provisional tax or even the application of double tax agreements in the case of non-resident volunteers.

Where does one start? The first step to determine whether any tax implications would be to refer back to the basic principles of taxation in South Africa, in other words, for anything to be taxable in South Africa (subject to certain exemptions) it must fall within the definition of “gross income” in section 1 of the Income Tax Act (the Act). In the case of a resident, the definition of “gross income” means the total amount, in cash or otherwise, received by or accrued to a taxpayer during the relevant year of assessment, including receipts and accruals of a capital nature.

For purposes of this article and, as a first step in the enquiry, the concept of ‘amount’ is of relevance for the reason that if there is no ‘amount’ then there is no gross income to tax. In CIR v People’s Stores (Walvis Bay) (Pty) Ltd it was held that income, although expressed as ‘amount’ in the “gross income” definition, need not be actual money, but may be every form of property earned by the taxpayer, whether corporeal or incorporeal.

Although an ‘amount’ need not be actual money it was held in Stander v CIR that, in the context of gross income, a non-cash benefit must be able to have a monetary value, subjectively ascertainable. In the case of Stander the question arose as to whether a non-transferable prize of an overseas trip constituted an ‘amount’. The court held that whatever the prize might have cost the institution that gave it was in itself irrelevant – as the prize was non-transferable no monetary value could be attached to it.

By applying the Stander principle an argument could be made by a volunteer that non-cash benefits, such as the use of a motor vehicle, have no subjectively ascertainable money value and would therefore not fall within the “gross income” definition. However, in the case of The Commissioner for the South African Revenue Service v Brummeria Renaissance (Pty) Ltd and Others the court concluded that the subjective test applied in Stander is wrong and held that the test is in fact objective. In Brummeria the Supreme Court of Appeal (SCA) had to consider the taxpayers’ contention that the interest-free loans did not result in any ‘amount’ being ‘received by’ them which could be, and was, wrongly included in their “gross income”. The SCA held that the right to use the loan capital interest free has an ascertainable money value that should be included in the “gross income” of the taxpayers.

Brummeria therefore establishes the principle that the concept of ‘amount’ in the definition of “gross income” is to be interpreted widely. Furthermore, even where the receipt or accrual of a right is in a form other than money (such as the right to use a vehicle), which cannot be alienated or turned into money, it does not mean that the receipt of the right has no money value. The correct test to be applied in order to determine whether the receipt or accrual has a monetary value is an objective one and not subjective.

By applying the Brummeria principles to a non-cash benefit provided to a volunteer it can be argued that there is an objectively ascertainable ‘amount’ in the hands of a third party. For example, the provision of a vehicle free of charge would have an ascertainable market value, possibly based on what a third party would have paid under a lease or rental agreement.

In principle then it appears that tax consequences could flow from the provision of non-cash benefits to volunteers – this is however only the start of the enquiry as one would have to determine whether any capital gains tax issues arise if the amount is in fact capital in nature, or possibly of greater importance, if the amount falls under paragraph (c) of the “gross income” definition (whether capital or not) which brings into play employee’s tax consequences

SARS announces publication of prescribed list and diagnosis for disability

The Commissioner for the South African Revenue Service (SARS) announced on 20 April 2010 that the publication of the prescribed list of qualifying expenses relating to physical impairment or disability and the diagnostic criteria for of disability.

Previously a person with disabilities could only claim their total medical expenses that were not covered by their medical aid if they were 65 years and older or if the Income Tax Act No 58, 1962 regarded them as handicapped. These limitations in the law were restrictive for people with a disability who were not handicapped. For example this meant a person would have to be deaf to the point that they relied on sign language to claim all expenses whereas a person requiring a hearing aid could not claim the expense incurred in full.

Recognising this, the Income Tax Act, 1962, was amended in 2008 (a change that came into effect on 1 March 2009) so that people with disabilities can claim all expenses, medical or otherwise, that enable them to function more fully in their daily lives. These new deductions apply if the taxpayer concerned, a child or spouse of the taxpayer has a disability.

The amendment also clarified which expenses SARS would allow as a deduction. However, for the aims of the law to be fully realised, the Commissioner is required to prescribe the qualifying expenses and the criteria for diagnosing a disability. Today’s announcement provides for the list and the diagnostic criteria following extensive discussions with the representative bodies for people with disabilities, health professionals and other government departments.

Although the list of qualifying expenses is quite extensive, care has been taken to ensure that it does not exclude a legitimate expense that is not listed. Therefore, instead of a comprehensive list, it identifies broad categories of qualifying expenses and provides examples of expenditure that could be claimed.

With respect to the diagnostic criteria, disability is now viewed as an impairment to the body or mind that results in a moderate to severe limitation on a person’s ability to perform daily functions. This increases the number of people who now may claim their expenses in full.

A person may now be diagnosed as permanently or temporarily disabled. In the case of a permanent disability, the diagnosis will be valid for five years and must be confirmed by a registered health practitioner at the end of that period while temporary disability diagnosis is valid for a year.

Claims by people who are not disabled but have physical impairments will still be subject to limitations. They may claim expenses related to their impairment only when such expenses exceed 7.5% of their taxable income.

Physical impairment is distinguished from disability by the fact that the severity of its effects can be overcome by a device or be corrected through therapy.

To claim the deductions, the person with a disability must obtain a confirmation of their disability from a registered health practitioner. People who had previously been declared handicapped must also follow this procedure.

The confirmation must be done on the prescribed form (ITR-DD) available from the SARS website (www.sars.gov.za) or from any SARS office. Please note that these forms must not be submitted together with the tax return but must be produced when requested to do so by SARS for audit purposes.

Taxing Matters - Disposal of a Primary Residence from a Company or Trust to Individuals

Those taxpayers who have not taken advantage of the Receiver of Revenue’s window period in which to transfer their primary residence out of a company (which includes a close corporation) or trust without tax or penalty have been granted another opportunity.

Historically, some individuals acquired their residence in a company or trust, primarily to avoid transfer duty. Since the introduction of capital gains tax (“CGT”) and transfer duty on the disposal of shares in residential property companies and beneficial interests in trusts, the advantages of these residential property holding entities have to a large extent diminished, coupled with the fact that the primary residence exclusion from CGT is only available to individuals.

During 2002, there was a two– year window period and in 2009 a restored window period, contained in paragraph 51 of the Eighth Schedule to the Income Tax Act No. 58 of 1962 (“the Act”), whereby relief was granted to taxpayers to encourage them to transfer their residential properties out of companies or trusts with no CGT, transfer duty or secondary tax on companies (“STC”) consequences.

Paragraph 51A has now been introduced into the Eighth Schedule to the Act and caters for the disposal of a residence by a company, or trust to an individual, between 1 October 2010 and 31 December 2012, free of CGT, STC and transfer duty.

The CGT and transfer duty consequences are effectively postponed until the ultimate disposal of the residence by the individual at a future date (“rollover relief”).The most significant difference between paragraph 51 and paragraph 51A is that multi–tiered structures are now catered for in paragraph 51A.

The following requirements must be met in order for the company or trust to qualify for the rollover relief:

The individual acquiring the residence must be a connected person in relation to the company or the trust; must have ordinarily resided in the residence; and must have used the residence mainly for domestic purposes (“qualifying individual”) during the period commencing on 11 February 2009 and ending on the date of the disposal (“the qualifying period”). Without going into detail with regards to the definition of a connected person per section 1 of the Act, broadly speaking, a connected person in the context of this paragraph is¹:

any shareholder, who individually or jointly, with any other connected person, holds at least 20 per cent of the company’s equity share capital or voting rights

certain prescribed steps must be taken to wind up, liquidate or deregister the company (“terminate”); or

in the case of a trust, the founder, trustees and beneficiaries of that trust must have agreed in writing to the revocation of the trust, or an application must be submitted to a competent court for the revocation of the trust.

Unlike paragraph 51, there is no limitation/restriction on the size of the land on which the residence is situated.

Common property associated with a sectional title unit or an interest in a share block company is not excluded from paragraph 51A. The common property will be owned jointly by the sectional title unit holders.

The residence may only be disposed of to an individual. Therefore the residence may not be disposed of to a deceased estate. However, in situations where the individual passed away after acquiring the residence under an unconditional agreement, but before the residence is registered in his/her name, the rollover relief will apply.

The qualifying residence must be utilised mainly for domestic purposes. The term “mainly” is not defined, but according to case law is determined on a floor–area basis which needs to exceed 50 per cent in respect of domestic use.

Temporary absences such as vacations or business trips will be ignored when determining whether the individual ordinarily resided in the residence. However, the disposal of a holiday home will not qualify for rollover relief.

Other assets which need to be disposed of prior to the company or trust being terminated may result in tax implications for the company/trust.

The company and/or trust is deemed to have disposed of the residence at its base cost. Therefore, there are no CGT consequences upon disposal of the residence.

In the case where the company owned the residence prior to the shareholders obtaining their shareholding in the company, and 90 per cent and more of the market value of the assets of the company, during the qualifying period, is attributable to the residence, the person acquiring the residence:

must disregard the disposal of the shares held in the property company (i.e. there are no CGT consequences upon termination of the company and the consequent disposal of the shares by the shareholder); and

will be deemed to have acquired the residence for a base cost equal to the cost of the shares, as at the date of acquisition of those shares, plus the cost of any improvements effected in respect of the residence subsequent to the date of the acquisition of the shares.

In all other cases i.e. where the aforementioned requirements are not met, for example where the shareholders acquired their shares before the company acquired the residence, the person acquiring the residence:

the amount and date of incurral of any expenditure allowable in determining the base cost of the residence for CGT purposes; and

The person acquiring the residence will be deemed to be one and the same person with regards to –

the amount and date of incurral of any expenditure allowable in determining the base cost of the residence for CGT purposes; and

In order to qualify for an exemption from STC upon disposal of the residence and termination of the company, the residence must be distributed as a dividend in specie.

Therefore, should the residence be disposed of by way of a sale, any distribution of the resulting profit will not qualify for an exemption from STC.

No transfer duty shall be payable in respect of any acquisition of a residence contemplated in paragraph 51A of the Eighth Schedule to the Act.

In the case of multi-tiered structures, the residence must ultimately be disposed of to a qualifying individual on or before 31 December 2012. In addition, all persons i.e. company’s and trusts forming part of the mult-tiered structure must be terminated within six months of the respective disposals.

Therefore in the above illustration, Company A must be terminated and Trust B must be revoked within six months of their respective disposals.

The possible tax implications must be considered where the acquisition of the residence was funded by a loan extended by a shareholder/beneficiary and such loans are waived as a result of the disposal of the residence and termination of the company or trust.

Trust deeds may need to be amended where for example an individual who is related to a beneficiary of the trust but is themselves not a beneficiary, ordinarily resided in a residence, owned by such trust, and the residence is to be distributed to them.

The implications where there is more than one shareholder in a company owning the residence must be considered. There are conflicting views as to whether or not it is permissible for a company to declare a dividend to a single shareholder as opposed to all shareholders within a particular class and what the attendant tax implications may be.

Although the Act does not prescribe how the residence should be disposed of by the company or trust, for example, whether by way of a distribution or sale, it must be borne in mind that a company will not qualify for an STC or dividends tax exemption unless the residence is distributed as a dividend in specie.

Finally, although the rollover relief is beneficial for a person wanting to transfer their primary residence into their own hands to, amongst other reasons, qualify for the primary residence exclusion, it is important to note that this relief might not be beneficial to trusts or companies that own other significant assets, as the rollover relief is not applicable to the disposal of any other assets. Therefore, the consequent tax liability arising as a result of terminating the company or trust which has other high growth assets must be weighed up against the benefit of holding the residence in the name of the individual.

1. The definition of “connected person” is very broad and complex and although we have listed certain of the inclusions under the “connected person” definition, this list is not exhaustive.

The national budget released earlier this year was well received from a savings perspective, with attempts to kick start savings at lower income levels and working towards a “preservation of savings” culture. However, embedded within the presentation lurked a few surprises for the retirement industry and for investors.

Pleasing was the extension of the percentage of taxable income earnings that can be saved annually into a retirement annuity fund to 22.5%, which comes into effect as of 1 March 2012. If we want to get really serious about addressing our dire national savings rate, this is a very supportive measure. As our economy recovers, many South Africans will find themselves with renewed capacity to squirrel away those all important savings towards their retirement years, so for many and particularly for those in the lower earnings categories this represents a meaningful opportunity.

For young professionals this further tax concession should be seen as an excellent opportunity to ensure that adequate savings are being made in the early years of their careers. Of course, capital invested in those early years will benefit from more years of compounded returns, thereby providing further opportunity to build up healthy capital for the later years.

For the higher earners of society, however, of which professionals comprise a large proportion, the introduction of a maximum tax deductible contribution of R200,000 per annum will be keenly felt. Effectively anyone earning more than R888,000 per annum who would want to contribute at the 22.5% level will exceed the new maximum tax deductible contribution and will not receive tax relief on all of their contribution.

Although this approach to income transfer from the wealthier to the poorer is aligned to our broader social security system it presents a non-too-subtle message to the higher earning professionals who are largely the drivers of our economy. The bottom line is that there is simply going to be less attraction to invest to the maximum contributable amounts because of the new tax liability.

We anticipate that higher earners will continue to contribute their R200,000 per annum level in their retirement funds but that many will channel the additional savings which will effectively be “after-tax” funds into other discretionary products that are less restrictive in their investment rules than Retirement Funds.

This could mean that individual financial plans that until now may have been single product plans with a Retirement Fund as the sole product will now begin to feature second or third products.

The worry here is that investments that would previously have been invested safely into highly-regulated Retirement Funds might now be partially invested in an unregulated environment and be susceptible to irresponsible fees or strategies. On a further cautionary note purveyors of unregulated investment schemes present the promise of returns that are often ‘too good to ignore’ but always ‘too good to be true’. Sadly, professionals have over the years been a favourite target market for some of those operators, and it would be tragic if an unintended consequence of this new legislation gives rise to further losses in such schemes.

For younger investors the incentive to delay gratification and save that little bit more each month has been increased by the recent budget, which can only be a positive. However, for those higher earners it is important to remember not to use this development as a reason to rush into risky investments.

These limitations apply from 1 March 2012, which adds additional importance to financial planning for higher earners in the current year.

From the 1st of May, payments to SARS will have to be dropped off at their offices by 15h00 on the date they’re due. If they aren’t, taxpayers could face late payment penalties and interest.

In the past, payments could be dropped off after working hours. The practice even extended to weekends so that where, for example, a payment was deposited in the SARS box on a Sunday, when received by SARS on the Monday morning, it would have been dated as received on the previous Friday. This will no longer be the case.

“The long-standing practice of regarding payments deposited at a SARS office after working hours on a particular day as having been received that day is over. The change was announced in a little-publicised Government Gazette notice earlier this month,” says Bernard Sacks, Tax Partner at global audit, tax and advisory firm Mazars.

From May, payments made under the Income Tax Act or the VAT Act using a SARS drop box on a business day received after 15h00 will be deemed to have been received on the first following business day.

Disposal of a primary residence ("residence") from a company or trust to natural persons

The provisions contained in paragraph 51 of the Eighth Schedule to the Income Tax Act No. 58 of 1962 (“the Act”) catered for the disposal of a residence by a company or trust to a natural person, before 30 September 2010 whereas paragraph 51A, recently introduced into the Act, caters for such disposals between 1 October 2010 and 31 December 2012 (“the qualifying period”).

If the requirements set out in paragraph 51A are met, the disposal of the residence to the natural person will not give rise to any tax consequences. The tax consequences are effectively postponed until the ultimate disposal of the residence by the natural person at a future date (“rollover relief”).

One of the notable differences between paragraph 51 and 51A of the Act is that qualifying multi-tiered entities can now also qualify for rollover relief upon transfer of the residence to a natural person.

The following requirements must be met to qualify for the rollover relief contained in paragraph 51A:

- The natural person acquiring the residence must be a connected person in relation to the company or the trust (“qualifying natural person”), for example: a beneficiary of the trust or a shareholder (there are minimum shareholding requirements which should be met) of the company or a relative in relation to the aforementioned persons;

- The qualifying natural person must have used the residence mainly for domestic purposes, during the period commencing on 11 February 2009 and ending on the date of the disposal; and

- Within 6 months of the date of disposal certain prescribed steps must be taken to terminate the corporate existence of the company or revoke the trust.

Capital gains tax (“CGT”) implications of disposal of the residence and termination of the company or trust

Simplistically, upon disposal of the residence and termination of the company or trust:

- Any capital gain or loss upon disposal of the shares in the company or interest in the trust is disregarded;

- the company or trust will be deemed to have disposed of the residence at the base cost; and

- the base cost of, either the shares in the company plus the cost of any subsequent improvements or the base cost of the residence in the company or trust is rolled over to the qualifying natural person.

Consequently there are no CGT consequences for either the qualifying natural person or the company or trust.

Transfer duty (“TD”) and Secondary tax on companies (“STC”) implications

- No TD is payable in respect of the acquisition of the residence by the qualifying natural person.

- No STC is payable by a company provided the residence is distributed as a dividend in specie.

The rollover relief also extends to multi-tiered structures regardless of how many trusts and companies are in the chain, as long as these entities are terminated within six months of the respective disposals of the residence and the residence is ultimately acquired by the qualifying natural person within the qualifying period.

Although the rollover relief is beneficial for a person wanting to transfer their primary residence into their own hands in order to, amongst other reasons, qualify for the primary residence exclusion upon disposal of the residence in the future, it is important to note that this relief might not be beneficial to trusts or companies that own other significant assets apart from the residence as the rollover relief is not applicable to the disposal of any other assets. Therefore, the consequent tax liability arising as a result of terminating the company or trust which has other high growth assets must be weighed up against the benefit of holding the residence in the name of the natural person.

Administrative penalties for non-compliance came into effect from 1 January 2009 in terms of Section 75B of the Income Tax Act, whereby taxpayers are charged a fixed or percentage based penalty for not complying with their tax obligations.

SARS have adopted a phased approach in that Phase 1 will focus on taxpayers who have consistently failed to comply with the tax obligations for many years. Phase 2 will focus on those taxpayers who failed to change their address. Eventually all non-compliant taxpayers will face the same penalties.

This has had dire consequences for taxpayer’s who have not submitted their 2010 tax returns as numerous penalty assessments have been issued by SARS in recent months.

A taxpayer will be imposed with a fixed penalty for failure to perform the following acts or to perform the acts as and when required in terms of the Income Tax:

- by a company to appoint a public officer, appoint a place for service or delivery of notices and documents, keep the office or public officer filled, maintain a place for the service or delivery of notices, or to notify the Commissioner of any change of public officer or of the place for the service or delivery of notices;

- to submit, furnish or produce a return, or other related documents or information;

- to notify SARS of a change of address or the fact of having ceased to be an employer;

- to deliver an employee’s tax certificate to one or more employee or former employee;

- to deliver an employees’ tax certificate in contravention of Income Tax Act;

- any other non-compliance with an obligation imposed by the Income Tax Act, other than for:

- failure to report a reportable arrangement in terms of section 80O and 80R of the Income Tax Act (which failure is separately penalised in terms of section 80S);

- failure to deduct employees’ tax (for which an employer becomes personally liable in terms of paragraph 5(5) of the Fourth Schedule to the Income Tax Act); and

- failure by an employer to provide a certificate of taxable fringe benefits to an employee in terms of the Seventh Schedule to the Income Tax Act (a separate 10% penalty is imposed in terms of paragraph 17(4) of the Seventh Schedule for this).

These penalties will automatically increase by the same amount for each 30 day period (or part thereof). This penalty will recur up to 35 months or, in the case where taxpayer’s address is unknown, up to 47 months.

Listed companies and their group companies, and any company where the gross income exceeds R500 million and their group companies will be liable for penalties of at least R8 000 per month even if they have an assessed loss.

In addition to the fixed penalty the Commissioner may also impose a 10% penalty in the following cases: -

- amount of employees’ tax that an employer fails to pay as an when required under the Act;

- total amount of employees’ tax deducted or withheld, or that should have been deducted or withheld, by an employer from the remuneration of its employees, where the employer fails to submit an employees’ tax return as and when required under the Act; or

- amount of provisional tax that a provisional taxpayer fails to pay as and when required under the Act.

- Non-compliant taxpayers received an ITP34 Penalty Assessment Notice (similar to a final letter of demand) from SARS informing them of:

- The payment procedure and the procedure for requesting a remission of the penalty

- Firstly, remedy the non-compliance. This means that you must submit the outstanding tax return and/or update your address with SARS;

- Secondly, pay the penalty by the due date. This must be paid even though you have remedied your non-compliance.

Should a taxpayer not agree with the issuing of the penalty assessment notice (ITP34) and wishes to request a remission of the penalty, the taxpayer is required to submit a Request for Remission of Penalty (RFR01) which is available on e-filing, at any SARS branch or on request from the SARS Contact Centre.

An application will only be considered if the non-compliance has been remedied on or before the due date mentioned in the notice of the penalty (i.e. if the outstanding return(s) and/or address details have already been submitted/updated).

The RFR you must explain the exceptional circumstances which led to your non-compliance. The RFR will only be allowed where circumstances beyond your control resulted in your non-compliance.

Where the non-compliance is as a result of the following, the penalty will be remitted: -

- failure by SARS to provide sufficient time for an adequate response to a request for information by SARS; or

- in the case of a business, an immediate danger that the continuity or business operations and the continued employment of its employees are jeopardised; or

In the case where the duration of the non-compliance is for less than 7 days or where the non-compliance involves a monetary value of less than R2 000, the penalty may be remitted if:

In the case of a failure to register or to notify SARS of a change of address as and when required the penalty may only be remitted if: -

- notify SARS of a change of address was remedied by the person before SARS became aware of the changed address; and

the person has filed all tax returns required by the Commissioner under the Act.

The fraudulent changes to taxpayers’ bank details remain one of the biggest risks that SARS has to deal with. It is SARS’ responsibility to protect taxpayers from any fraudulent transactions on their SARS accounts emanating from within SARS.

The Department of Trade and Industry has confirmed that President Jacob Zuma has signed the Companies Amendment Act and that it will be effective from 1 May 2011.

The new powers of enforcement granted to the Companies and Intellectual Property Commission, which replaces the embattled Companies and Intellectual Property Registration Office (Cipro) via next month’s new Companies Act, is making corporate lawyers nervous.

While Cipro merely had a filing and access function, it managed to place itself at the epicentre of a fraud pandemic via the reported facilitation of scams ranging from tax fraud to out and out company hijacking.

A leading corporate lawyer from a leading law firm, said on Tuesday that if Cipro couldn’t even perform elementary functions properly “how on earth they are going to police and enforce the Act, I don’t know”.

The new Companies Act replaces the 1973 version and has been a decade in the making, though its implementation was delayed from the first of this month to May 1 due to dithering by the Department of Trade and Industry and the Presidency in signing it off. With 24 hours to go before its scheduled April implementation, it emerged Minister Rob Davies was out of the country and had not yet signed the regulations that accompanied the Act. And President Jacob Zuma’s office had not even received all of the relevant documents to be signed by him either.

That may indeed happen, but he says “Cipro and the DTI have a long way to go before they get their act together, especially on the new process of enforcement”.

In a shift to a new “enlightened shareholder value model”, the new Act makes significant changes to the law as it attempts to promote “new” small business, usher in more shareholder activism and better protection for stakeholders, like employees and trade unions, and improve business rescue practices.

Another key change is the establishment of a Takeover Regulatory Panel (TRP), which will have more powers and functions than the largely toothless Securities Regulation Panel (SRP). As the SRP did not have enforcement powers it needed to go to court each time to get provisions enforced.

The Act also creates a Companies Tribunal and a Financial Reporting Standards Committee. Social and Ethics Committees will also need to be set up by most bigger companies. – I-Net Bridge

Introduction of the Dynamic Value-Added Tax Vendor Declaration Form (VAT201)

Over the past three years, the South African Revenue Service (SARS) has been modernising and simplifying tax processes in line with international best practice.

One of the aspects of compliance that SARS wishes to address is the declaration and payment of Value-Added Tax (VAT).

As announced last year, SARS will be making changes to the VAT201 form aimed not only at improving its systems but also at addressing SARS efficiency regarding risk assessment and tax compliance. Several improvements will be introduced during this year as SARS progresses on its journey to modernise and improve its service offering to vendors.

- Vendors who make electronic submissions and payments will be required to request their VAT201 forms electronically for them to be made available on their eFiling profile

- The new VAT201 form which is in landscape format has the same fields as the previous VAT201 form with the following additional fields:

A Payment Reference Number (PRN) which will be pre-populated by SARS will replace the previous “reference number”.

Please Note: The new VAT201 form has been pre-populated with the old “reference number”, this is to afford the banks the opportunity to adjust their systems accordingly to accommodate the new PRN. All future VAT201 forms will have a pre-populated PRN.

- Vendors need to note that from 11 April 2011 all VAT submissions are required to be on the new VAT201 form, including any submissions for periods prior to March 2011

- Vendors who request and submit their VAT201 forms and payments electronically will be able to do so from 11 April 2011. Should a vendor fail to timeously request a VAT201 form and the form is due for submission, the vendor will be in default of its VAT obligation and penalties and interest will be imposed

- Copies of VAT201 forms printed from eFiling and used for manual submission will not be accepted. Photo-copied forms will also not be accepted.

During the past two years SARS has implemented procedures and processes that provide taxpayers with an accurate record of payments and are less susceptible to fraud and inaccuracies. In an effort to further strengthen its procedures and processes the following rules now apply with regard to cheque payments as of 1 May 2011:

- SARS will no longer accept any cheque payment(s) which exceeds the total amount of R100 000 in respect of VAT at any SARS office or via post

- Vendors who have a turnover exceeding R30 million in any 12 month period must submit VAT returns in an electronic format and make VAT payments electronically.

When completing the VAT201 form, vendors will be required to fill in mandatory demographic information under Contact Details on the form.

• First Name: Fill in the name of the person responsible for completing the form

• Surname: Fill in the surname of the person responsible for completing the form

• Capacity: Fill in the capacity of the person responsible for completing the form

• Bus Tel No: Fill in the business telephone number of the person responsible for completing the form

• Fax No: Fill in the fax number of the person responsible for completing the form

• Cell No: Fill in the cellular telephone number of the person responsible for completing the form

• Contact Email: Fill in the email address of the person responsible for completing the form

The VAT201 form contains a new Payment Reference Number (PRN). This number will be pre-populated by SARS. The vendor must use this PRN when making VAT and Diesel payments to SARS in order to link the actual payment to the payment declared on the VAT201 form.

Please note that the unique PRN number on the VAT 201 form provided by SARS must be used when making payments. Each monthly VAT201 form that is requested from SARS will have its own unique PRN which will be used to track individual payments and queries for that month only. Vendors are therefore advised not to make photo-copies of VAT201 forms. This number should only be used once for that specific month’s submission and payment.

After completing the VAT201 form, the person completing the form (the declarant) will be required to sign the declaration.

For further information or assistance visit a SARS branch, or call the SARS Contact Centre on 0800 00 7277.

Section 11D is a relatively unknown research and development (R&D) incentive that was introduced into the Income Tax Act on 2 November 2006. The incentive is supported fully by the Department of Science and Technology and has already resulted in substantial tax savings to those taxpayers who have participated. The tax saving comes in the form of a super deduction of an additional 50% on qualifying expenditure as well as an accelerated wear and tear allowance on qualifying equipment.

Section 11D sets out certain criteria which must be met before any investigation into the potential qualification of a taxpayer’s activities is launched:

- The taxpayer must be carrying on a trade and, where the R&D activities lead to a ‘result’, the result must be used in the production of income;

- The expenditure must be actually incurred by that taxpayer directly in respect of R&D activities;

For the taxpayer’s activities to be classified as qualifying Research and Development activities, the activities must be of a scientific or technological nature and be undertaken for purposes of:

(d) Knowledge essential to the use of such invention, design or computer program.

For an invention to be registerable in terms of the Patents Act, it must be novel, involve an inventive step and be capable of use or application in trade or agriculture. A registerable functional design is any design applied to any article, whether for the pattern or the shape or the configuration thereof, or for any two or more of those purposes, and by whatever means it is applied, having features which are necessitated by the function. Having the mere purpose of devising, developing or creating an invention or design is sufficient to qualify a taxpayer for the allowance and actual registration of the intellectual property is not required.

The Copyright Act defines a computer program as a set of instructions fixed or stored in any manner and which, when used directly or indirectly in a computer, directs its operation to bring about a result. It is worth noting that novelty is not required when it comes to computer programs. However, in terms of section 11D(5) of the Act, no deduction will be allowed in respect of any cost or expenditure relating to ‘management or internal business processes’. Due to a lack of guidance by the courts, this exclusion is highly contentious and taxpayers and the South African Revenue Service are often at odds as to exactly what constitutes ‘management or internal business processes’ .

Insofar as expenditure is concerned, the requirement is that it must relate directly to the R&D activities. Generally speaking, the bulk of qualifying expenditure relates to the salaries of staff engaged in R&D activities as well as any consumables used during the R&D process. It is worth noting that a taxpayer who engages a third party to do qualifying research on that taxpayer’s behalf may under certain instances still be entitled to qualify for the additional 50% deduction.

Certain types of expenditure and certain activities are however expressly excluded from the working of section 11D and it is therefore advised that you consult your tax advisor to assist in you in correctly quantifying your allowance.

It happens that from time to time a taxpayer has to decide how to treat a transaction for tax purposes. These decisions are influenced by the circumstances of a transaction and the information at hand, which often includes advice from a top tax advisor.

As the law develops, these decisions may prove to have been wrong, at which stage taxpayers will do what they can to manage the risk. As things stand at present, they should seriously consider the Voluntary Disclosure Programme (VDP), urges a head of tax dispute resolution at major law firm.

He draws attention to a recently-concluded tax case involving NWK, the agricultural marketing group. In the wake of this case, SARS issued a note pointing out it was aware that “a number of other taxpayers have entered into simulated transactions, including compulsorily convertible loans similar to the one at issue in the NWK case, with the effect of artificially reducing their tax liabilities”.

He says NWK’s ruling and SARS’ note have sparked concern among borrowers and lenders that their perceived “fail-safe” structures could be at risk.

He warns that the facts of the NWK case are very specific and its direct application would be limited. Very few “compulsorily convertible loans” would be similar.

There is nonetheless good reason for concern. “Lenders and borrowers should ascertain whether their arrangements are substantially similar to NWK’s and, if so, the parties should certainly take note and turn to the VDP.”

Many taxpayers, their lawyers and tax advisors are familiar with terms such as “substance over form” and, its stable-mate, “simulated (or sham) transactions”. The distinction between the two is that the former applies to a bona fide transaction constructed in accordance with the substance rather than the form used to describe it. Simulated or sham transactions involve dishonesty.

The importance of the NWK case for other taxpayers may lie in the line drawn by a Judge as to when a transaction is simulated and when it is not.

She said: “If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation.”

His maintains that while this statement is superficially sound, it should not escape criticism.

“For instance, the judge’s contention that ‘an object that allows the evasion of tax … will be regarded as simulated’ makes it unclear whether all simulated transactions will be regarded as tax evasion. Could it only apply to the non-payment of tax due to an unlawful or illegal act?

“The judge also held that NWK’s transaction was a simulation, which does not necessarily mean that NWK was involved in tax evasion. Rather, it seems that the Judge used tax evasion as a high-water mark, which is in-line with the rest of her judgment.”

He says that the judgment is not all doom and gloom for taxpayers, because Judge Lewis did remark: “It is trite that a taxpayer may organise his financial affairs in such a way as to pay the least tax permissible. There is nothing wrong with arrangements that are tax effective.”

The judgement, He unsurprisingly concludes, obviously highlights a grey area in the extensive body of tax legislation.

“Thus, when does a taxpayer fall foul of the legislation and when not? When does the intention to achieve a tax benefit outweigh the commercial motivation? The answer, as is almost invariably the case, lies in considering the special circumstances of each case.”

He indicates that the NWK case contains a number of tax nuances that could distinguish it from other structured finance arrangements. He recommends that taxpayers peruse such nuances, preferable with the aid of their tax advisers.

A significant change resulting from the recent budget speech announcement by the Minister of Finance, Pravin Gordhan, is the manner in which the value of company cars will be determined. The budget speech also addressed travel allowances and the importance of keeping a detailed logbook.

“In the new tax year the value will be the cost of the car, excluding finance and interest charges. This means that VAT and any maintenance plan purchased is included in the original cost and company car values will have to be re-calculated from 1 March 2011,” says a managing director a Payroll Group.

The fringe benefit value of a company car is calculated at 3.5% if the vehicle was not subject to a maintenance plan at the time it was acquired by the employer and at 3.25% if there was a maintenance plan. The fringe benefit that is calculated must be reduced by any payment made to the employer by the employee other than the cost of licences, insurance, maintenance and fuel, which can no longer be deducted during the year, only upon assessment.

He said SARS has now moved to ensure that use of company cars and claiming of travel costs by employees using a company vehicle is more accurately represented by implementing the new requirement.

“While the car tax benefit used to be taxed at 100%, the onus is now on employers to apply either an 80% or a 20% tax rate when including the new fringe benefit value of a company car into an employee’s remuneration for the calculation of PAYE in the payroll.

“This means that the responsibility rests with the employer to indicate what percentage of the mileage the car will travel will be for business purposes,” he says.

If 80% of the total kilometres travelled are for business purposes, then the employer is permitted to subject only 20% of the allowance to the employee’s tax.

Only one taxable percentage may be used during the year of assessment. Should an employer decide to change the percentage during the year from 20% to 80%, the Fringe Benefit amounts for previous periods must be recalculated.

Most companies would like to know when to apply the 20% or 80% rule. He suggests that companies refer to the previous year of assessment to get an indication of the total kilometres travelled per employee and identify the percentage of business kilometres that was travelled, to assist with the calculation in the new tax year.

B = Percentage Factor (depending on the maintenance contract, which is either 3.5% or 3.25%).

D = Amount paid by the employee to the employer towards the use of the vehicle.

Scenario A – If business travel is equal or greater than 80% of the total kilometres travelled:

Employee A receives the use of a motor vehicle with a value of R 120 000.00 (Incl. VAT) and business travel is equal to or more than 80% of total kilometres travelled. The vehicle value did not include a maintenance plan at the time of purchase.

Calculation: (R 120 000.00 x 3.5%) x 20% = R 840.00 (Taxable fringe benefit value for the use of the motor vehicle)

Employee B receives the use of a motor vehicle with a value of R 120 000.00 (Incl. VAT) and business travel is equal to or more than 80% of total kilometres travelled. The vehicle value included a service plan at the time of purchase.

Calculation: (R 120 000.00 x 3.25%) x 20% = R 780.00 (Taxable fringe benefit value for the use of the motor vehicle)

Scenario B – If business travel is less than 80% of the total kilometres travelled:

Employee C receives the use of a motor vehicle with a value of R 120 000.00 (Incl. VAT) and business travel is less than 80% of total kilometres travelled. The vehicle value did not include a service plan at the time of purchase.

Calculation: (R 120 000.00 X 3.5%) x 80% = R 3 360.00 (Taxable fringe benefit value for the use of motor vehicle)

Employee D receives the use of a motor vehicle with a value of R 120 000.00 (Incl. VAT) and business travel is less than 80% of total kilometres travelled. The vehicle value included a service plan at the time of purchase.

Calculation: (R 120 000.00 X 3.25%) x 80% = R 3 120.00 (Taxable fringe benefit value for the use of motor vehicle)

For a number of years I have been irked (and, to be honest, somewhat envious) at the fact that Bruce Cameron, who writes the Personal Finance section of various Independent Newspapers’ titles, has won financial journalism awards year after year writing on seemingly little else but retirement annuities and unit trusts.

Yet I’m beginning to understand the narrowness of Cameron’s focus at times, having been guilty of the same thing. Driven by queries received from readers, this week’s column may seem to be re-hashing an old topic, but it looks like many people out there still don’t understand the difference, from a tax perspective, between “resignation” and “retirement” – especially as far as their retirement funds are concerned.

In the “olden days” (meaning my parents’ and grandparents’ generation), you would resign from your job if your intention was to take up employment elsewhere. In those days people joined a company straight from school or university, worked their way through the ranks, and retired at 65 with a gold watch and a pension.

Resignation was therefore rare, and usually only happened when conditions in your existing company were absolutely unbearable, you relocated to another town and was unable to secure an internal transfer, or (in the case of women) decided to give up your career in order to become a full-time mom.

Retirement was something you did when you were no longer able to work – either because your health did not allow it, because you became disabled, or because you had reached the statutory retirement age laid down by your company. However, things started becoming complicated as people became more “job-mobile”, lived longer, retired earlier, and enjoyed multiple careers.

A couple of weeks ago I wrote about a colleague who, although he has spent virtually all of his adult life as an ordained Methodist minister, has enjoyed multiple careers including local church pastor, academic professor, head of our church’s Education for Ministry and Mission Unit, did a short stint at the Methodist Seminary here in Pietermaritzburg, and has now returned to pastoral ministry commencing with a three-year stint in the UK.

During his illustrious career, he has officially “retired” twice – the first time it was from the University of Kwazulu-Natal (UKZN) at the age of 60, and the second time was when he turned 65 which is the mandatory retirement age for clergy serving in the Methodist Church of Southern Africa (MCSA).

So what does all of this have to do with tax? The fact is that one needs to understand the difference between “retirement” and “resignation” as the tax authorities see it, since the difference in the amount of tax paid is vast – especially when it comes to lump-sum payments from one’s retirement funds.

As far as Sars is concerned, “retirement” is when you leave the employ of your company, normally with the intention of not working again. This can happen any time from your 55th birthday onwards or at any age if your health or a disability dictates that you are no longer able to work. However, the fact that you may decide to enter a new career after your “retirement” does not in itself invalidate the fact that you have retired, provided that you meet the criteria. It is the event that prompted your retirement from your previous employer (i.e. over 55, ill-health, or disability) that prompts the criteria for retirement.

In the abovementioned example, my colleague had officially retired from UKZN, which meant that he became entitled to receive any pension benefits due to him in terms of the retirement funds in place at the university. He continued to serve the MCSA as a minister for the next five years, and then went through the same retirement process again (this time in terms of the rules of the MCSA’s retirement fund). Each of these “retirements” constitutes a valid retirement in terms of the Sars requirements. Yet he continues to work as a Methodist minister in the UK. So retirement by no means imposes an obligation to stop working!

In the case of a disability, one may validly take early retirement if the disability in question disqualifies the person from the particular occupation at the time they became disabled. A congregant of mine in a previous church was paralysed from the waist down in a tragic motorcycle accident, which meant that he could no longer do the physical work he was employed in at the time of his accident. However, this does not disqualify him from seeking alternate employment (for example, administration work). His retirement from his previous employment will still be a valid retirement as far as Sars is concerned.

Adding to the complication is the advent of the retirement annuity (RA) fund. With an RA, you can “retire” from the fund any time after your 55th birthday – irrespective of whether or not you stop work. In other words, even though you only intend to retire from formal employment at 65 (or whatever your company’s mandatory retirement age is), you can still “retire” from your RA from 55 onwards.

In fact, your employer need not even know that you have drawn your retirement benefits from your RA, except, of course, if your payroll department has been taking your contributions into account for purposes of calculating your employees’ tax deductions each month.

On the other hand, resigning from one’s employment is a different matter, especially if one decides to take their accumulated pension in cash. In this case, there is no external event beyond the individual’s control (reaching a certain age, suffering ill-health, or becoming disabled) that prompts the person to leave their employ.

Given that the ideal is that one preserves their accumulated pension funds until normal retirement age, Sars imposes fairly punitive tax rates aimed at discouraging resigning employees from taking the cash; failing which, such taxation is aimed at enabling Sars to recover the tax foregone by means of the relief granted on the contributions to such retirement savings.

Being retrenched adds a whole different slant on the whole retirement fund issue, especially since one who is retrenched has normally not planned for such an event (unlike disability, which is covered by insurance, whether linked to the pension fund or not; or retirement, whereby one knows with reasonable certainty when they are likely to retire).

Retrenchment occurs when, through no fault of the employee concerned, their position becomes redundant or surplus to the company’s requirements – usually because of poor economic conditions, technological obsolescence, etc. that impacts the employer. Sars therefore has specific provisions relating to retrenchment.

Complicated, huh? No wonder people get confused as to whether they have ‘retired’ or ‘resigned’, since the action prompting the departure is the same – especially once you have turned 55.

Employers are also confused at times – the employee may believe that they are taking a voluntary retrenchment package; the payroll department may conclude that the employee has resigned; whilst the pension fund may conclude that the employee has taken early retirement. A mere slip-up with the IRP5 codes by any of the three parties can result in stroke-inducing tax bills from Sars, followed by months of objections trying to sort out the whole mess.

The new rules that will come into effect from 1 March 2012, as announced in Finance Minister Pravin Gordhan’s recent Budget, will also have a major impact on the tax treatment of retirement fund payouts.

Accordingly, over the next couple of weeks I will provide some examples illustrating the tax impact of a particular scenario, distinguishing between what happens when the person resigns, retires, or is retrenched, and also examine some planning aspects that a healthy 58 year old needs to consider, especially if their intention is to carry on working in some or other new career direction.

Introduction of the Dynamic Value-Added Tax Vendor Declaration Form (VAT201)

As announced last year, SARS will be making changes to the VAT201 form aimed not only at improving its systems but also at addressing SARS’s efficiency regarding risk assessment and tax compliance. This letter outlines the first of several improvements that will be introduced during this year as SARS progresses on its journey to modernise and improve its service offering to vendors. Click on the PDF below to read more.

Over the past 24 months, tax practitioners and businesses have experienced problems registering for VAT. In some instances, this has prevented businesses from starting operations and from submitting contracts or tenders.

“Business activities should be conducted in a legal manner and in compliance with applicable rules and regulations. The need to be compliant, however, should not hinder the creation or success of businesses,” says a tax partner at a global audit, tax and advisory firm.

“It appears that SARS is concerned that businesses register for VAT only to claim input tax credits without the certainty that they’ll pay VAT back in the near future, which creates a cashflow drain on the fiscus,” he says.

A newsletter issued by SARS lists requirements such as details or copies of invoices issued, tenders already awarded and signed lease contracts as acceptable proof that trade is being conducted. SARS no longer accepts cash and sales forecasts, or business plans as proof of expected turnover.

“This causes a problem for start-up businesses, especially when the business involves a fairly long and costly set-up phase, as is the case with many manufacturers and more particularly, property developers. It puts them at a cashflow disadvantage because they’ve incurred VAT on start-up expenses, but can’t recover any of this from SARS.”

Many developers finance a property through a new venture and then incur costs to meet municipal requirements before the first erf is sold; and in the current economic circumstances, this may take some time. “A taxpayer wishing to register under these circumstances will need nerves of steel and time to spare, as getting a VAT number could be a lengthy process and may involve following up with SARS’s more executive personnel.”

He asks whether SARS, in trying to reduce the risk of VAT vendors being a cash drain on the fiscus, has taken into account its own VAT law or the impact this will have on business?

For example, Section 23(3(d) of the VAT Act indicates that businesses already carrying on trade activities as well as businesses that ‘can reasonably be expected to result in taxable supplies being made for a consideration only after a period of time…’ may register for VAT . Regardless of this, SARS’s current onerous requirement for proof of trade does not cater for businesses that will only produce income in the future.

“These problems and concerns have been taken to SARS in various forms by a number of lobby groups but to date, the problem is yet to be solved,” he concludes.

Did you know that studies have shown that if you drive more than 20,000 kilometres in a year, it now makes more financial and tax sense to drive a company car than claim a travel allowance on your own car?

Why not assist your employees to be more productive and at the same time save tax on their salaries? If you give your employees their tools of trade such as a cell phone or an ADSL line at home to work away from the office, there is no fringe benefit to the employee and you can build the cost into your employees’ packages, save them tax and claim the VAT on the business expenses.

At a time of ever increasing costs, let us help you to structure your and your employees’ salaries to pay the least tax and take home a bigger salary.

We offer a cost efficient outsourced payroll function that will save you time to work on your business and will ensure that you are compliant with the excessive compliance requirements. Why expose your business to unnecessary tax risks when we can help you look after your employees and ensure your peace of mind?

South Africans are used to accumulating Voyager Miles in their private capacity for airline tickets paid for by their employers. It happens all the time; a company swipes its credit card and the emplolyee’s personal Voyager Mile bank goes ka-ching. Does this make you liable for tax?

Fringe benefits become taxable if granted as a reward for services rendered (or still to be rendered). The Income Tax Act has specific provisions in the 7th Schedule for calculating the value of non-cash benefits for tax purposes.

“Any fringe benefit must be included when calculating how much employees’ tax an employer has to withhold,” says a Remuneration and Benefits Manager at a global audit, tax and advisory firm.

What happens if the fringe benefit calculation is wrong? Who is accountable to the South African Revenue Service (SARS) – the innocent employee or the non-compliant employer?

If the value of a fringe benefit is overstated, the result is a larger tax bill for the employee. But if it is understated, the employer could incur penalties and the employee would still be liable for the outstanding tax. So how does this affect the treatment of Voyager Miles accumulated in your private capacity from a business trip?

When you buy a ticket and your employer reimburses you, ownership of the Voyager Miles lies with your employer. So are you the employee getting a perk?

“The important question is whether the miles have a monetary value. If so, the value of the perk can be calculated, based on the amount of miles traded in for a flight, using the actual cost of that flight,” he says.

The Vacation Exchanges case, heard in the High Court in 2009, provides some answers. RCI, the trading name of a timeshare management company and the employer in this case, had a practice of allowing employees to use timeshare weeks not taken up by fee-paying members. They felt that giving staff the benefit of a holiday unit was no loss (or gain) to them as a company, so they assigned a nil valuation to the benefit for the employees’ tax.

SARS disagreed. They said the ‘free’ accommodation cost RCI money – the value they would have derived from renting it out. Therefore, it was part of an employee’s gross income, as per the 7th Schedule of the Income Tax Act.

“Failing to comply with SARS on this issue could result in a penalty equal to 10% of the cash equivalent of the value of the taxable benefit. Alternatively, they could impose a penalty of 10% of the understated cash equivalent. It is also important to note that employees are not without responsibility – the onus is on them to ensure that a truthful disclosure is made.”

In terms of the 7th Schedule, SARS currently has one of two options available to them. They can either seek the outstanding tax from the individual employees with their personal tax assessments or educate the company on the law and walk away from the situation.

In May last year, an amendment to the Income Tax Act was proposed that would give SARS the power to claim an underpayment of tax directly from the employer and not go the more difficult route of assessing individual employees. If successful, the draft amendment will come into effect from all tax years ending after 1 January 2011.

“So the next time you take a business trip, knowing that your private Voyager Mile bank is growing, think about the following: when it comes to fringe benefits tax, you can either pay now, or PAY later,” he concludes.

The discontinuation of the Standard Income Tax on Employees (SITE) being phased out over two years from 1 March 2011 will remove existing tax advantages for pensioners earning R60,000 or less per annum.

This is according to Ron Warren, tax expert and chairman of payroll software company NuQ, who says that SITE tax, which was introduced by SARS about 20 years ago, was aimed at removing the large number of low paid persons from the SARS records.

“If all remuneration (including pensions and retirement annuities) received by a person from each source was below the SITE limit of R60 000 per annum, they were not required to put in a tax return and were removed from the SARS register,” he explains.

Now that everything at SARS is computerised, Warren says that SARS want everybody back on their register, and to tax everybody on their total income resulting in pensioners losing their tax advantages.

“In the past, if a retired person had three pensions/annuities from say 3 different insurance companies, and each pension/annuity was less than R60 000 a year, they were effectively regarded as three separate persons, and paid tax on each pension/annuity separately,” he explains.

“This meant that they received the primary tax rebate three times, which reduced the total tax they paid considerably (the primary rebate at present is R10 260, plus an additional R5 675 = R15 935 if you are 65 or older).”

Therefore, Warren says that a person over 65 with multiple sources of income, all less than R60 000 per annum, had a great tax advantage, in that the tax payable will be at least R15 935 X 2 = R31 870 less (if the income was received from 3 sources) than they would pay if their income was totalled and tax calculated on the total. “It is this tax advantage SARS now wants to remove, so that everybody will be taxed on the same basis in future,” he adds.

However, to soften the blow to such people (mostly old people), Warren says that the legislation provides a phasing-in process over the next two tax years. In the 2011/2012 tax year, they will calculate such persons’ taxes both the old way and the new way.

The excess of the new over the old tax will then be reduced by two thirds. In the 2012/2013 tax year, that excess will be reduced by one-third. From then on (i.e from 1 March 2013), there will be no reduction, and such people will be taxed the same as everybody else.

Warren says that this will have no effect on payrolls for the next two years. “Companies will continue calculating SITE up to the end of February 2013 and from March 2013, they will no longer have to calculate SITE, which will be extremely easy to do.”

He adds that affected employees or recipients of pensions/annuities had better start saving money for the extra tax they will have to pay on assessment.

SARS will have a bit of extra work to do to change the way in which taxpayers affected will have their tax calculated, however Warren says that this will not be difficult.

Impact the Budget Speech and Income Tax amendments will have on your Payroll

Karen Schmikl, Legislation Manager at VIP Payroll, provides some insight on the affect that the budget speech and Income Tax Act amendments will have on your payroll from March 2011. “Adjustments were made to the income tax brackets and rebates, providing relief to individuals. A third rebate was added for individuals who are 75 years and older, which will go a long way in providing relief to the elderly,” says Schmikl.

The individual and special trusts tax will be calculated as follow as from March 2011:

There is some good news on the horizon for pensioners. “A primary tax rebate has been pegged at R10 755 with individuals qualifying for a secondary rebate at the age of 65 and older of R 6 012. A tertiary rebate is allowed for persons 75 and older of R 2 000. The tax threshold for persons under 65 is now R59 750, with the threshold for persons aged 65 to 74 being R93 150, and persons 75 and older being R104 261,” says Schmikl. Taxation of personal service providers on the payroll remains unchanged, with Personal Service Provider companies being taxed at 33% and Personal Service Provider trusts being taxed at 40%.

As far as medical aid taxation is concerned, “The cap amount used in the calculation of the tax deductible value for medical aid has been increased to R720 for the main member and first dependant, with a further R440 for each additional dependant thereafter, allowing for a slightly greater medical aid benefit on payroll,” explains Schmikl.

One of the hot topics at the moment is related to travel allowances and company cars. “The change to the rates table will be to the advantage of individuals using their private vehicles for business purposes and also to individuals making use of company cars. The rates table is used to determine a rate per kilometre for vehicles, which is used in the calculation of travel allowances, reimbursed kilometre limits and company car allowed expense claims. Rates must be derived from the following table:

The amendments to paragraph 7 of the Seventh Schedule to the Income Tax Act resulted in substantial changes to the calculation of the use of motor vehicle fringe benefit, which will require employers to revalue the use of motor vehicle fringe benefit values in March 2011. “The determined car value now includes VAT and must also include the value of any maintenance plan, if the vehicle was subject to a maintenance plan when the employer acquired the vehicle. An annual depreciation rate of 15% on the determined value is still allowed but the fringe benefit value is now calculated at 3.5% of the determined value. If the determined value includes a maintenance plan, the fringe benefit value is then calculated at 3.25% of the determined value,” explains Schmikl.

“The taxable value of the fringe benefit is calculated at 80% (previously 100%) and can be reduced to 20% if the employee uses the car at least 80% for business. The risk should however not be taken to apply the 20% taxation option if the employer is not assured that the vehicle is used at least 80% for business,” Schmikl warns.

It is required that employees keep a logbook in order to claim for private fuel and all maintenance expenses on assessment, as all the claims are based on ratios of private and business kilometres. “In the past employees received relief on the payroll which is no longer available. Claims on assessment to reduce the fringe benefit value are based on ratios of private and business kilometres and include costs relating to license, insurance and maintenance if the full cost is carried by the employee and the reduction of the fringe benefit value if the full cost of private fuel is carried.”

The taxable value of the travel allowance is still calculated at 80%, but according to amendments made to paragraph (cA) of the definition of remuneration in the Fourth Schedule to the Income Tax Act employers now have the option to tax the allowance at 20%. “As with company cars, the taxable value of the travel allowance may be reduced to 20% if the employee uses the for at least 80% for business. It must however be strictly monitored to adhere to the rule,” Schmikl urges.

- The official rate of interest used to determine the benefit on a low interest loan has been linked to the Reserve Bank repurchase rate plus one percent, which currently results in 6.5%

- Employees were entitled to a cumulative R30 000 tax free benefit on lump sums paid in respect of termination of service. These lump sums will now be taxed in the same way as fund lump sums, where a cumulative tax free benefit of R315 000 is allowed. Employers must still apply for directives to determine the tax payable.

- Employer owned insurance policies may result in taxation of the company contributions to funds such as deferred compensation schemes and income replacement policies. Employers are urged to clarify the changes with their insurance firms.

- A subsistence allowance of R88 per day (for incidental expenses) and R286 per day (for meals and incidentals) respectively can be paid if the employee is required to spend at least one night away from his/her usual place of residence in RSA. Values per country when travelling outside RSA are available from SARS website.

- Overall, the changes are positive and will benefit employees in various ways. There are however quite a few factors that need to be included and amended in payroll in order to be 100% compliant as from 1 March 2011,” concludes Schmikl.

03 March 2011

2011 Budget Speech: Finance Minister Pravin Gordhan - 23 February 2011

Pretoria, 14 February 2011 – The South African Revenue Service (SARS) wishes to inform taxpayers that the “pay now, argue later” principle has been clarified with effect from 1 February 2011.

The principle that taxpayers are required to pay taxes that are the subject of a dispute with SARS is a long-standing one that has been affirmed by the highest court in South Africa.

While taxpayers have always had the right to request that the application of this principle be waived, the factors to be considered in adjudicating such requests have not been clear. In addition, the payment of interest on refunds should an objection be conceded has not been legislated.

Areas of uncertainty have now been addressed by the Taxation Second Laws Amendment Act, 2009.

- make it clear that a disputed tax debt may be collected despite an objection to the assessment in terms of which it is raised;

- provide guidance on the factors to be considered in deciding whether to agree to a taxpayer’s request to suspend payment of a disputed debt; and

- establish rules for the payment of interest should an amount be collected and later refunded because an objection has been conceded.

Examples of the factors to be considered in deciding on a taxpayer’s request to suspend payment of a disputed debt are—

- whether the taxpayer is able to provide adequate security for the payment of the amount involved;

- whether payment of the amount involved would result in irreparable financial hardship to the taxpayer; and

The interest paid in terms of the amendments will be paid at the same rate that SARS normally charges on outstanding debt (currently 9.5%), which is four percentage points higher than the rate paid on refunds of overpaid provisional tax.

The amendments came into effect on 1 February 2011. Existing SARS decisions to suspend payment of a disputed amount remain valid until the date given in the decisions or 31 July 2011, whichever is the earlier.

South African Revenue Services (SARS) has personal taxpayers with outstanding returns and penalties firmly in its sights with the introduction of the ITA88 “Agent Appointment” notification that will appoint companies to electronically collect outstanding penalties from employees and pay the amounts over to SARS.

There are many taxpayers with long outstanding tax returns who now owe administrative penalties for failure to submit personal income tax returns.

A managing director of a payroll and HR software specialist, said the ITA88 will enable SARS to monthly appoint, via its e@syFile software system, the employers of defaulting taxpayers to deduct the overdue amounts incurred through late or non-submission of penalties.

On receipt of the ITA88 Agent Appointment notice, the employer is obligated to deduct the stipulated amount from the salaries or wages of the respective employees. The employer will then have to pay the amount over to SARS by the due date as indicated on the ITA88 form. If the employer is unable to execute the request, the employer must provide feedback to SARS via e@syFile, by contacting the SARS contact centre or by visiting a SARS branch.

“Companies with automated payroll software will be able to easily manage the collection and payment process. With an automated payroll solution, companies can simply import a file from the e@syFile system into the automated payroll system to load the ITA88 deductions per employee against the defaulting employee’s salary,” he said

This will allow companies to monitor the short and long term affordability of an employee to pay the outstanding monetary amount.

From a short term affordability point of view, the employer indicates that the taxpayer (employee) won’t be able to afford the full amount requested and the employer is permitted to reject the ITA88 appointment. All active ITA88 transactions against the specific taxpayer (employee) will be cancelled and replaced by a new ITA88 transaction allowing three equal monthly instalments.

In addition, employers need to ensure that the employees listed in the Agent Appointment Notice are still in the company’s employ.

The information that is captured on the payroll system can be exported into the e@syFile system eliminating manual recapturing on the e@syFile system. The comments that were made on the payroll system will now reflect on the e@syFile system.

Ettiene Retief, a tax and corporate law specialist at FTR Tax and Corporate Administration, who also runs tax, payroll, accounting and legislative (ITA88) seminars for Softline Pastel, said there are many individuals who have outstanding tax returns over two, three and more years.

“Raising the penalties was pretty much ineffectual as the tax was not being collected. The ITA88 form is the result of certain individuals having forced SARS’s hand by ignoring the process for too long. Now the appointment of employers as agents will result in outstanding tax being efficiently collected and it will encourage defaulters to get their tax affairs in order.

“SARS now also offers a range of services designed to help taxpayers get their returns done quickly and easily with the minimum of fuss. Efficient tax collection is in everyone’s best interests and the ITA88 system will be beneficial to the country as a whole.”

According to the draft regulations to the Consumer Protection Act, 2008 (the Act), from 31 March 2011, suppliers of goods and services will not be permitted to conclude a fixed term agreement to supply goods and/or services to a consumer for a period exceeding 24 months from the date on which the consumer signs the agreement.

The Act, which is scheduled to come into full effect on 31 March 2011, also provides that a consumer may cancel a fixed term agreement at any time on 20 business days notice to the supplier. This spells the end of the common practice of locking consumers into one-sided agreements from which they are unable to escape!

However, if the consumer cancels a fixed term agreement and the supplier has supplied any goods or services or granted the consumer any discounts in contemplation of the agreement enduring for its full term, the draft regulations provide that the supplier may charge the consumer a cancellation penalty of up to 10% of the amount which the consumer would have had to pay for the remainder of the period of the agreement.

Suppliers will have to constantly monitor the expiry dates of each of their fixed term agreements as the Act provides that, at least 40 business days before the expiry of a fixed term agreement, the supplier must notify the consumer of the expiry date and the option to either renew or terminate the agreement with effect from such date. The supplier must simultaneously notify the consumer of any material changes to the fixed term agreement which it proposes should apply on renewal.

If the consumer does not elect to terminate or renew the fixed term agreement, after the expiry date, the agreement will continue on a month-to-month basis on the terms which the supplier proposed would apply if the consumer had renewed the agreement.

The supplier on the other hand may only cancel a fixed term agreement if the consumer commits a material breach of the agreement and does not remedy the breach within 20 business days after being requested by the supplier to do so.

Businesses will be relieved to know that these provisions of the Act do not apply to franchise agreements or fixed term agreements between juristic persons. In addition, they only apply to transactions which take place in the ordinary course of business in return for payment. So for example, if a landlord concludes a lease agreement with a natural person for a fixed period of time, but not in the course of the usual business carried on by the landlord, that lease will not be subject to these provisions of the Act.

Suppliers may wish to avoid the onerous provisions relating to fixed term supply agreements by concluding agreements for indefinite periods of time. However, suppliers must be aware that they will not be able to enforce agreements which contain unfair or unreasonable contract terms. Amongst other things, the draft regulations provide that an agreement which allows a supplier a right to terminate it without giving the consumer the same right will be deemed to be unfair and unreasonable.

The draft regulations to the Act were published in the Government Gazette on 29 November 2010 and the public has been invited to submit their comments on the draft regulations to the Minister of Trade and Industry on or before the 31 January 2011.

The deadline for the submission of electronic income tax returns for provisional taxpayers who are in good standing with the South African Revenue Service (SARS) is Monday, January 31.

- To avoid penalties, submit your 2009/10 return timeously, on or before January 31. Failure to submit your return by the due date will result in SARS imposing penalties. These penalties range from R250 to R16 000 a month, depending on the type of taxpayer (an individual, a trust or a company) and the taxable income of the taxpayer in the preceding tax year.

- If you are a provisional taxpayer who submits your return via eFiling but you were not in good standing with SARS as at November 26, 2010 (that is, you had outstanding returns other than your 2009/10 return), you were obliged to submit your 2009/10 return to SARS by that date. If this applies to you, submit your return immediately.

- Once SARS assesses you for the 2009/10 tax year, your “basic amount” for the purposes of calculating your 2010/11 provisional tax liability will change. Ensure that you use the correct “basic amount” in order to avoid penalties for under-paying or under-estimating your provisional tax.

- An important change to the tax return for the 2009/10 tax year is that if you are married in community of property, it is compulsory to disclose your spouse’s details on your tax return. Remember to declare 100 percent of your investment income earned (even if you are married in community of property). SARS will do the necessary apportionment.

- A further change is that if you are a “handicapped person” and wish to claim a deduction for your medical expenses, you are required to re-confirm your disability status by completing a specific form (Form ITR-DD – Confirmation of Diagnosis of Disability). This form must be signed by a duly registered medical practitioner and submitted to SARS.

- If you earned remuneration of less than R120 000 for the full 2009/10 tax year, you may elect not to submit a tax return provided:

- Ensure that you complete all the mandatory fields. SARS will reject your return (and it will be noted as outstanding on SARS’s system) if these fields are not completed. This means that you may be liable for penalties for the late submission of the return.

- Ensure that you complete your return correctly and that you disclose all the income you earned during the tax year. Even if a tax consultant completes your return, SARS will hold you responsible for omissions or incorrect information.

- Your return will be pre-populated with any information that SARS obtained from third parties (for example, from your IRP5 certificates). It is your responsibility to verify this pre-populated information. If it is not correct, you may change it, and SARS may require you to submit supporting documentation to explain any changes.

- Retain records relating to your tax return for at least five years from the date of submission of your return. SARS may request you to provide certain supporting documentation before or after issuing you with your tax assessment.

- Use SARS’s online tax calculator to calculate the tax due by you or refundable to you

Draft legislation would allow SARS to go public about individual taxpayers’ affairs

The South African Revenue Service (SARS) would no longer be bound by the secrecy provisions of income tax laws and would be able to go public about individual taxpayers’ affairs, according to draft legislation in the pipeline.

“The proposed laws will give SARS the power to respond to false allegations made by taxpayers to the media,” SARS spokesman Adrian Lackay said.

Earlier this week, businessman Dave King went public on Talk Radio 702 about his tax affairs, claiming he had reached a settlement agreement with SARS for R636m.

“We are not changing the law because Mr King spoke about his tax affairs on 702,” Mr Lackay said yesterday. He said that for some time there had been “mischievous taxpayers” abusing the secrecy provisions to suit their agenda.

The proposed revision of the secrecy clause in the Income Tax Act would be effected by an amendment contained in the Tax Administration Bill.

“There are certain conditions and restrictions contained in the amendment under which SARS would be expected to take steps. It is not a blanket provision,” Mr Lackay said.

The amendment gives SARS the power to respond to a “false” statement made by a taxpayer, provided 24 hours’ notice was given to the taxpayer.

Mr King, who was appointed executive chairman of Micromega Holdings earlier this week, also alleged in 2008 that he had reached a R300m settlement with SARS. However, it was subsequently found that the document was a forgery, and additional charges of fraud had been laid against Mr King and others.

A tax executive, at a corporate law advisers firm, said a balance would have to be struck between a taxpayer’s right to privacy and SARS’s right to reply.

In March 2010, the author wrote an article entitled “Tax Law and Medical Science – The Twain Have Met!”.

The said article related to the new rules introduced by Parliament, which became effective from 1 March 2009, for the tax deduction of medical expenses and in particular the deletion of the “old” definition of “handicapped person” and replacement of a new definition of “disability”.

In order for the definition to apply and thus entitle the taxpayer to deduct all “qualifying medical expenses”, one requirement is that a duly registered medical practitioner is required to complete a form prescribed by the Commissioner. There is considerable confusion and doubt among taxpayers and the medical fraternity as to who can and how the form should be completed. A discussion on these complex issues and others relating thereto is beyond the scope of this article. Suffice it to say that specialist tax law advice is recommended.

The reason for the title of that article was that since duly registered medical practitioners are required to complete a prescribed SARS form, tax and medical science are inextricably linked. Ironically, the issuance of the prescribed form has substantially raised awareness as to the ability for taxpayers to deduct all their “qualifying medical expenses” and seek specialist tax law advice in order to do so. The “new” definition of “disability” is not considerably different to the “handicapped person” definition. As a result of taxpayers now seeking specialist tax law advice in this area, the majority of those taxpayers are now, in the writers experience, obtaining substantial tax refunds as a result of successful objections made for prior years (dating as far back as 2005). A small “sugar coated pill”.

Another key area of our tax law where tax and medical issues are interlinked is “special trusts”. When considering the tax consequences of “special trusts” It is of critical importance to understand that there are two “types” of special trusts. For ease of reference, the two types of special trusts in this article are referred to as paragraph (a) special trusts and paragraph (b) special trusts.

Section 1 of the Income Tax Act No. 58 of 1962, as amended (the “Act”) contains the two paragraphs in the definition of a special trust. Broadly, paragraph (a) special trusts of the Act define trusts as they relate to certain medical conditions and other matters (for further information on this visit www.bendelsconsulting.co.za – “Press Box” in which there is an article entitled “How “special” are your trusts?”).

Paragraph (b) special trusts of the Act are broadly trusts created in terms of a will (or testamentary trusts) for the benefit of relatives (the beneficiaries) of the deceased. Such trusts cease to be “special trusts” when the youngest of the beneficiaries turns 21.

Special trusts enjoy certain tax benefits when compared to “normal” trusts”. Normal trusts are taxed at a flat rate of tax of 40% and 50% of capital gains are included. Special trusts are taxed as natural persons (although they do not obtain the tax rebate or interest exemption).

For example, if a special trust (both paragraph (a) and (b) special trusts) has taxable income of R552 000 for the 2011 tax year (none of that taxable income relates to capital gains) the trust will enjoy a tax benefit of R60 070. Tax at 40% on R552 000 taxable income is R220 800 and tax on the special trust is R160 730. Thus R60 070 is the maximum tax benefit such special trust will enjoy as any additional income in the special trust will also be taxed at 40%, being the same rate as a normal trust.

But, as mentioned above, it is of critical importance (and unfortunately taxpayers have been ill advised on this) to understand that there are the two types of trusts – the paragraph (a) special trust and paragraph (b) special trust. The fundamental reason for this is that these trusts do not enjoy all the same tax benefits. Most importantly, a paragraph (b) special trust does not obtain any favourable capital gains tax treatment when compared to a normal trust – they are taxed in the same way in the Eighth Schedule of the Act. In other words, capital gains in a paragraph (b) special trust are taxed at 20%.

Since growth assets trusts are normally placed in trust, the absence of any capital gains tax benefits for a paragraph (b) special trust means that the maximum tax saving of such a trust would appear to be limited to the R60 070, as enumerated above. When purely considered in tax terms, it is questionable whether it is worthwhile for taxpayers (and their beneficiaries) to incur the costs and administrative burden associated with such trusts.

In stark contrast, however, a paragraph (a) special trust is taxed on capital gains at 10% and obtains several exemptions contained in the Eighth Schedule. Paragraph (b) trusts obtain no such exemptions. The 10% tax saving on capital gains and other tax savings (e.g. residential accommodation exemption) for paragraph (a) special trusts makes tax planning in this area of tax law compelling. But, because detailed knowledge of medical issues are required and complex tax law matters are involved, tax planning in this area is not for the faint at heart. Intensive specialist tax care is recommended.

It is incumbent on, the writer, to enrich the readers and thus would be failing in his duties to readers if he did not confirm the submission relating to the fundamental capital gains tax differences for paragraph (a) special trusts and paragraph (b) special trusts. Simply put – in the Eighth Schedule a “special trust” is clearly defined as a trust contemplated in paragraph (a) of section 1. The rest follows from that definition i.e. the fact that a paragraph (b) special trust is not included (the rationale for such exclusion is considered to be sound).

The writer continues to recommend paragraph (a) special trusts to clients and prospective clients. Bendels Consulting is a niche tax practice which specialises exclusively on tax and medical related issues. Based on the writers medical research and experience, there are several thousand taxpayers (and their families) who would benefit substantially from a properly created paragraph (a) special trust.

Trusts are often used by estate planners in planning for administrative and tax efficiency after the planner’s demise – and correctly so. However, a much overlooked vehicle is the ‘special trust’, which has all of the advantages of a ‘regular’ trust but with significant added tax benefits.

A ‘special trust’ is a regular trust for all purposes other than the way it is taxed. The term ‘special trust’ is defined in section 1 of the Income Tax Act and are a vehicle to house the assets of a person with a serious mental or physical disability. But it is less widely known that there is another part to the definition of a ‘special trust’- namely a trust set up in terms of the will of a deceased person, solely for the benefit of ‘relatives’, the youngest of whom is under the age of 21 on the last day of February of the relevant tax year. The definition of ‘relative’ in the Income Tax Act includes anyone related to the person or his or her spouse to the third degree of consanguinity i.e. it includes great-grandchildren and nephews and nieces.

A special trust enjoys all of the benefits with regard to separation of assets and ease of administration that are afforded a ‘regular’ trust, however, instead of being taxed at the flat rate of 40 % on its taxable income a special trust is taxed on the same favourable sliding scale that applies to the taxation of individuals. It also enjoys the advantageous treatment afforded to individuals with regard to the rate of taxation on capital gains, which are taxed at a maximum effective rate of 10 % as opposed to 20 % in the case of a ‘regular’ trust.

It is implied by the definition of ‘special trust’ that such a trust could only enjoy the added tax benefits until the youngest beneficiary turns 21. Thereafter the trust will be taxed on the same basis as a regular trust. Nevertheless, the tax benefits that could accrue during the period in which the trust is taxed as a ‘special trust’ can be enormous.

Take for instance the situation where a father, in his will, directs that on his death a trust be established for the benefit of (only) his children. He dies when the youngest of the children is 4 years of age. Such a trust would qualify as a ‘special trust’ in terms of the definition above. He bequeaths R10 million in cash to the trust. The trust uses the R10 million to purchase a portfolio of shares. If the shares yield an 8 % compound capital growth rate per annum, when the youngest child is 20 years old the portfolio will be worth R34.26 million. If the trust were to sell the shares in that year and retain the gains, the savings in capital gains tax would amount to more than R2.42 million, when compared to the tax that would have been payable had the trust been a regular trust. This is besides the savings in income tax over the period on dividends from foreign shares in the portfolio.

After the trust no longer qualifies to be taxed as a ‘special trust’, it does not have to be terminated – it can continue in existence as a ‘regular’ trust, without the special tax treatment outlined above.

My advice is that serious consideration should be given to the use of a ‘special trust’ when doing any estate planning exercise. As the majority of laypersons are not versed in issues relating to the taxation of trusts, this is especially the case for those in the financial planning arena, where considering the appropriateness of a ‘special trust’ should be standard item on the due diligence checklist.