Crunching the numbers: Budget 2017

A-04It is an astounding exercise to go through the numbers behind the annual national budget presented recently and to start to understand what it is that the various tax changes are aimed at achieving.

On 22 February 2017, Finance Minister Pravin Gordhan presented South Africa’s biggest budget yet, providing for budgeted Government expenditure over the 2017/2018 fiscal year of R1.6 trillion (or R1,563,300,000,000!) Of this, by far the most significant portion will be spent towards social services to be delivered in the form of education, healthcare, social protection (grants), and local development and infrastructure: R884bn, or 56.5%, to be exact. A further R198.7 billion is being allocated to defence and public safety, with agriculture and economic affairs receiving R241.6 bn. General administration (departments such as Treasury, Foreign Affairs and the various legislative organs) is to receive R70.7bn of the 2017 budget, while it is further notable that little over 10% is allocated to servicing Government debt.

On the income side, taxes remain Government’s primary source of revenue, and budgeted revenue in tax collections are estimated to be collected as follows:

Description

 

ZAR bn

 

%

 

Personal income tax

 

482.1

 

38.1

 

Corporate income tax

 

218.7

 

17.3

 

VAT

 

312.8

 

24.7

 

Customs and excise

 

96.1

 

7.6

 

Fuel levies

 

70.9

 

5.6

 

Other

 

84.9

 

6.7

 

Total

 

1,265.5

 

100

 

Direct income taxes, as have been the trend over the recent past, continues to be the major contributor to the Government purse at more than 55% and borne by those individuals economically active.

It was widely reported in the run-up to the budget speech that a shortfall in tax revenue of approximately R28bn would need to be provided for, and that the Minister would need to be creative in meeting this challenge and where he would raise taxes to cover this, especially considering that increased taxes inevitably acts as impediment to economic growth (estimated to reach 2.2% by 2019). The bulk of this additional R28bn to be collected will be received from the raising of the personal income tax and trust tax rate ceiling to 45% (R16.5bn), while the increased dividends tax rate raised from 15% to 20% is expected to raise a further R6.8bn.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Beware of capital gains tax when you emigrate

A-02While many people immigrate to South Africa, we also see many of our clients emigrating from South Africa. And while formal migration-status is not necessarily linked to tax residency, the time of tax migration often coincides with formal emigration linked to passport or visum status. Many are surprised to learn (often after the fact) that emigration for tax residency purposes gives rise to tax consequences in South Africa, and specifically to capital gains tax (“CGT”) consequences in the form of so-called “exit charges”.

In essence, section 9H of the Income Tax Act, 58 of 1962, determines that when a person ceases to be tax resident in South Africa, that person is deemed to have disposed of all his or her assets on the day that the individual emigrates for income tax purposes. In other words, in calculating their income tax exposure, individuals emigrating for tax purposes are regarded as having sold all of their assets at market value on the day before that on which they leave the country. As a result, a capital gain is realised on this deemed disposal that is subject to CGT at the prevailing tax rates. Currently, 40% of capital gains so realised by individuals are included in their annual taxable income, which amount may be subject to tax at rates of as high as 45%.

The policy justification for taxing individuals upon emigration is that taxes are to be levied on all capital growth achieved on assets owned by South African residents while they were tax resident. Once an individual will have emigrated, limited mechanisms would exist whereby capital gains may only be realised upon eventual actual sale of assets subsequently once the individuals are no longer tax resident in South Africa. (It is for this reason that South African immovable property is excluded from the “exit charges” regime; section 35A of the Income Tax Act provides for a withholding tax mechanism whereby CGT may be recovered from non-residents when they sell South African immovable property.)

While one may have sympathy for the policy justification for the levying of “exit charges”, it must be recognised that any deemed disposal of assets necessarily creates a cash flow conundrum for the individuals affected, quite often proving prohibitive for wealthy individuals seeking to emigrate. It is quite possible that assets of individuals emigrating may consist mainly of illiquid assets such as share investments. Upon emigration, these very assets may need to be actually disposed of in order to raise sufficient cash resources to be able to pay the resultant CGT that would have been payable on a deemed disposal of those assets at emigration.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Salary sacrifice schemes: Latest judgment by the supreme court of appeal

A4bSalary sacrifice schemes are popular in practice. Typically, they involve employers paying a decreased salary to their employees, with an added fringe benefit to make up for the lost ‘cost to company’ sacrificed by the employee to obtain the benefit. For example, an employee may prefer to enter into a salary sacrifice with his/her employer in exchange for being allowed to use an employer provided motor vehicle or accommodation.

From both the employer and employee’s perspective, the income tax and PAYE consequences linked thereto are very often unchanged. The decreased salary paid by the employer is deductible for income tax purposes as well as such expenditure incurred to provide the benefit to the employee, whilst the employee is subject to income tax on both the decreased cash amount received as a salary as well as the fringe benefit provided by the employer. The employer is also liable to withhold PAYE as calculated on the total remuneration paid to the employee (which would include both the decreased salary amount as well as the fringe benefit provided). (See the Seventh Schedule to the Income Tax Act, 58 of 1962.)

The salary sacrifice scheme of Anglo Platinum Management Services (Pty) Ltd recently came under scrutiny. After having lost in the Tax Court, Anglo Platinum appealed to the Supreme Court of Appeal (Anglo Platinum Management Services (Pty) Ltd v CSARS [2015] ZASCA 180 (30/11/2015)). In essence, the appeal involved a salary sacrifice scheme implemented by Anglo Platinum whereby it would purchase motor vehicles – selected by its employees – for use by its employees, in exchange for the employees agreeing to a salary sacrifice equal to the value of the benefit. The vehicles would remain the property of Anglo Platinum until enough has been sacrificed by the respective employees to equate to the purchase amount of the vehicles plus interest calculated thereon.

During this period, Anglo Platinum withheld PAYE on both the salaries paid to its employees, as well as the value of the fringe benefit derived by the employees in using Anglo Platinum’s motor vehicles. This is hardly contentious, and SARS did not dispute this treatment. What was in dispute however was whether there really was a salary sacrifice, and whether PAYE should not also have been withheld on the sacrificed amount (and the employees therefore taxed on this amount too). SARS argued that the scheme, although valid, was incorrectly implemented. In essence, so the argument went, the employees were still receiving their full salaries, and amounts withheld from their salaries were in essence payments made to the employer to facilitate funding for the acquisition of the vehicles. SARS cited two main indications in support of this, being that the employees were ostensibly responsible for insurance payments on the vehicles, and that notional accounts with payments, interest and related vehicle expenses were kept: employees would be responsible to pay any shortfall amounts on these accounts, and similarly be entitled to access any credits available on excess amounts withheld.

The Supreme Court of Appeal upheld Anglo Platinum’s appeal, largely based on the evidence of Anglo Platinum’s Mr Broodryk who testified on behalf of the taxpayer and who devised and implemented the scheme. It is clear that the court placed great emphasis on the implementation of the scheme to objectively consider whether the scheme in implementation reflected a true salary sacrifice by employees.

The legal matters in the case are not contentious. At issue is the implementation which is what so often goes awry where tax related advice is concerned. Our clients should take note of this: it is not good enough to have a positive tax opinion as regards a proposed structure or transaction. It is necessary, if not essential, to involve your tax experts in implementation too, be it in salary sacrifice matter, or any other transaction. Had Anglo Platinum not heeded this principle, the judgment by the Supreme Court of Appeal may very well have gone in SARS’ favour.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Provisional Tax Rules

A3bSince the provisional tax season has arrived, it is important to remember the rules regarding your estimates. The provisional tax payment must be received by SARS on or before the due date, 28 February 2017. Failure to do so could result in penalties and interest imposed by SARS.

Important rules regarding provisional tax

Provisional tax is a method of paying tax due, to ensure the taxpayer does not pay large amounts on assessment, as the tax liability is spread over the relevant year of assessment. It requires the taxpayers to pay at least two amounts in advance, during the year of assessment, which are based on estimated taxable income. A third payment is optional after the end of the tax year, but before the issuing of the assessment final liability is worked out upon assessment and the payments will be off-set against the liability for normal tax for the applicable year of assessment.

  1. Provisional tax payments are calculated on estimated taxable income, which includes taxable capital gains for the particular year of assessment.
  2. It is imperative that if you have earned a capital gain during the current year that you declare it for provisional tax purposes.
  3. In the event that you do not advise us of a capital gain that should be included in provisional tax, an understatement penalty may very well be levied by SARS.

There are certain penalties for underpayment of provisional tax, which will be levied by SARS.

  1. If your actual taxable income is more than R1 million a penalty will be levied if the second period estimate is less than 80% of actual taxable income.
  2. If your actual taxable income is equal or less than R1 million a penalty will be levied should the second period estimate of taxable income for the year of assessment deviate from the basic amount applicable to that period.
  3. A penalty of up to 20% of the underpayment may be charged by SARS.
  4. Interest will be charged on all late payments.

Should your payment not reach the South African Revenue Service on or before the due date, a penalty of 10% will be levied on outstanding amounts and/or SARS will consider your estimated income for the 2nd provisional tax payment to be zero and will apply the relevant penalties.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Non-executive directors’ remuneration: VAT and PAYE

A2bTwo significant rulings by SARS, both relating to non-executive directors’ remuneration, were published by SARS during February 2017. The rulings, Binding General Rulings 40 and 41, concerned the VAT and PAYE treatment respectively to be afforded to remuneration paid to non-executive directors. The significance of rulings generally is that it creates a binding effect upon SARS to interpret and apply tax laws in accordance therewith. It therefore goes a long way in creating certainty for the public in how to approach certain matters and to be sure that their treatment accords with the SARS interpretation of the law too – in this case as relates the tax treatment of non-executive directors’ remuneration.

The rulings both start from the premise that the term “non-executive director” is not defined in the Income Tax or VAT Acts. However, the rulings borrow from the King III Report in determining that the role of a non-executive director would typically include:

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

There is therefore a clear distinction from the active, more operations driven role that an executive director would take on.

As a result of the independent nature of their roles, non-executive directors are in terms of the rulings not considered to be “employees” for PAYE purposes. Therefore, amounts paid to them as remuneration will no longer be subject to PAYE being required to be withheld by the companies paying for these directors’ services. Moreover, the limitation on deductions of expenditure for income tax purposes that apply to “ordinary” employees will not apply to amounts received in consideration of services rendered by non-executive directors. The motivation for this determination is that non-executive directors are not employees in the sense that they are subject to the supervision and control of the company whom they serve, and the services are not required to be rendered at the premises of the company. Non-executive directors therefore carry on their roles as such independently of the companies by whom they are so engaged.

From a VAT perspective, and on the same basis as the above, such an independent trade conducted would however require non-executive directors to register for VAT going forward though, since they are conducting an enterprise separately and independently of the company paying for that services, and which services will therefore not amount to “employment”. The position is unlikely to affect the net financial effect of either the company paying for the services of the non-executive director or the director itself though: the director will increase its fees by 14% to account for the VAT effect, whereas the company (likely already VAT registered) will be able to claim the increase back as an input tax credit from SARS. From a compliance perspective though this is extremely burdensome, especially in the context where SARS is already extremely reluctant to register taxpayers for VAT.

Both rulings are applicable with effect from 1 June 2017. From a VAT perspective especially this is to be noted as VAT registrations would need to have been applied for and approved with effect from 1 June 2017 already. The VAT application process will have to be initiated therefore by implicated individuals as a matter of urgency, as this can take several weeks to complete.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Interest free loans and trusts

A1bThe recent introduction of section 7C to the Income Tax Act[1] brought the taxation of trusts, and the funding thereof specifically, under the spotlight again. Briefly, section 7C seeks to levy donations tax on loans owing by trusts to connected parties (typically beneficiaries or the companies they control). To the extent that interest is not charged, a donation is deemed to be made by the creditor annually amounting to the difference between the interest actually charged (if at all), and interest that would have been charged had a rate of prime – 2.5% applied.

What many lose focus of is that interest free (or low interest) loans have income tax consequences too, over and above the potential donations tax consequence arising by virtue of section 7C. Section 7 of the Income Tax Act is specifically relevant. This section aims to ensure that taxpayers are not able to donate assets away and which would rid themselves of a taxable income stream.

In broad terms, section 7 deems any income that accrues to a trust or beneficiary to be the income of the donor if the income accrues from an asset previously the subject of a “donation, settlement or other disposition”. In other words, where a person donates a property to a trust, the rental income generated will not be taxed in the hands of the beneficiary or the trust, but in the hands of the donor. Section 7 therefore acts as an anti-avoidance provision to ensure that taxpayers do not “shift” tax onto persons subject to less tax through donating income producing assets out of their own estates.

It is interesting to now consider what an “other disposition” would amount to. Various cases have confirmed that an interest free loan would be treated as such and that, to the extent that interest is not charged, this would amount to a continuing donation.[2] The implication thereof is this: assume the funder of a discretionary trust sells a property to that trust on interest free loan account. Any rental earned would ordinarily have been taxed in the hands of the trust or the beneficiary, depending on whether distributions will have been made. However, since section 7 will apply to the extent that no interest was charged on the loan account, a portion of the rental income will now be taxable in the hands of the trust funder.

The take-away is that donations to trusts have income tax implications for the donor too, over and above a donations tax consequence. This will also be the case where interest free loans are involved.

[1] 58 of 1962

[2] Honiball and Olivier, The Taxation of Trusts (2009) at p. 84 and following

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Misuse of assessed losses

A4bAn assessed loss for income tax purposes is a potentially valuable asset:  it represents past losses made by a taxpayer which is able of being carried forward to subsequent tax years against which future taxable profits are able of being set off.  The set-off of historic losses – in the form of an assessed loss – against existing taxable income has the obvious benefit of resulting in a reduced income tax charge against current and/or future taxable income generated from trade.

It is therefore quite common that such an assessed loss is assigned a determinable value (as a so-called ‘deferred tax asset’) as a secondary benefit when a company with an assessed loss is sold.  However, it may happen that a potential purchaser of the shares in a company does so with the sole or main purpose to acquire the underlying assessed loss, and not necessarily the other assets that the company may own.  For example, if a natural person were to incorporate his or her profitable business, it would be preferable to make use of a dormant company with a historic assessed loss, rather than incorporating a new company or make use of a shelf company.  The established assessed loss can then be used to negate the income tax consequences that would otherwise have arisen from the business.

Section 103(2) of the Income Tax Act, 58 of 1962 (‘Income Tax Act’) has been designed to counter exactly this form of abuse if the utilization of an assessed loss is the sole or main purpose of a specific transaction.  The provision applies whenever the South African Revenue Service (‘SARS’) is satisfied that any agreement affecting, or any change in the shareholding in, any company has been effected solely or mainly for purposes of utilizing an assessed loss of a company in order to avoid an income tax liability.  Should these prerequisites be met, SARS has the power to disallow the setoff of any such assessed loss against any such income generated by the company.

Section 103(2) moreover does not only apply to taxable trading profits, but also where an assessed loss is used to negate capital gains tax exposure, or even where capital losses (as opposed to assessed income tax losses) are at stake.  The provision also applies to trusts with assessed losses as much as it does to companies.

Finally, it is worth noting that section 103(2) may be used in the alternative to the general anti-avoidance rules (the so-called GAAR) contained in sections 80A to 80L of the Income Tax Act, and vice versa.  It is arguable rather that the provisions of section 103(2) would be more difficult for the taxpayer to escape from, as (unlike the GAAR) it is not a prerequisite of this anti-avoidance measure that an element of ‘abnormality’ linked to the transaction in question also need to be illustrated for section 103(2) to apply.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Goods and services acquired by VAT vendors on credit

A3b

It is an established principle that registered VAT vendors may claim a deduction for input tax on goods or services acquired for use in the course of making taxable supplies as part of carrying on an enterprise.[1] For example, a VAT vendor purchases trading stock from another vendor for the purpose of sale to its clients subsequently. Once those goods are purchased by the VAT vendor, even if on credit, input tax may generally be claimed on the goods purchased.

Where the VAT vendor above buys the goods on credit, the input tax claimed may effectively be reversed if payment to the creditor is not forthcoming timeously. In terms of section 22(3) of the VAT Act, where the consideration for the purchase of goods have not been paid by the VAT vendor to its supplier within 12 months of it buying the goods, a portion of the input tax claimed must be effectively reversed and paid over to SARS as output VAT. In other words, where a VAT vendor has claimed input tax, but has not yet settled the amount due to the person providing it with those goods or services in respect of which the input tax is claimed, the input tax claim will be effectively cancelled.

Although it may appear to be a trivial matter to most, the question does become relevant where goods or services are supplied between related persons or entities, such as group companies for instance. When “payment” is made for purposes of the VAT Act has recently been considered in the case of XYZ Company (Pty) Ltd v CSARS.[2] In that case a VAT supply was made between a holding company and its subsidiary, with the amount owing subsequently being moved from the debtors’ book to the loan account which the subsidiary company had in place with the holding company. SARS contended that the purchase price remaining outstanding on loan account has not yet been paid by the subsidiary, and therefore the input tax claimed by the subsidiary had to be accounted for as output tax after 12 months of the supply taking place.

The Tax Court however differed and attributed a wide meaning to the word “paid”. It held that the action of transferring the debt due from the debtors’ book to the loan account of the parties amounted to the payment of the debt arising from the supply. The holding company acquired a new right with new terms, being those linked to the newly created loan account and which differed from the trade debt, even though the counter-party was unchanged. Payment, in a wide sense, is not limited to cash flow only, but also include an exchange and creation of new rights and obligations.

While the judgment deals specifically with the context of section 22(3), a consideration whether amounts have been “paid” or not are not limited to this provision only and the effect thereof may extend wider to other provisions of the VAT Act too, the provisions of section 16(3) – which deal with input tax claimed on second hand goods acquired – being a pertinent example.

[1] Section 17(1) of the VAT Act, 89 of 1991

[2] Case No.: VAT 1247, 5 September 2016 (Cape Town)

 

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Estate planning for young adults

A2bIt is very important for you to plan your estate, which could include a living will, a last will and a living trust. This can help families prepare for difficult times when you are no longer around to assist or advise them. Our lives get busier and more complicated by the day, so estate planning for young and old becomes increasingly important. Young people should consider preparing certain estate planning documents, and in particular financial powers of attorney and living wills.

 At the age of 18 a young man or woman officially becomes an adult in the eyes of the world. This means that you are entitled to make important financial, legal or health decisions about your lives. But what if something happens and you are unable to make these decisions at a critical time? Such situations can range from a small inconvenience to a life-threatening crisis, but if your estate is in order, it can speak on your behalf. Consider the following:

Financial power of attorney

A financial power of attorney allows you to appoint someone you trust, like another family member, to make financial decisions on your behalf. This document can be activated when you are incapacitated or right after it has been signed, and it will remain effective until you can resume charge of your own decisions again.

A financial durable power of attorney will allow the appointed person to handle important legal and financial matters on behalf of the grantor. In the case of a business or financial situation which involves the young adult, such as a passport or car registration renewal, it is convenient for the power of attorney to act on his/her behalf if they cannot tend to the problem. This arrangement may come in very handy when there is a legal situation which requires quick action and the young adult is unable to attend. Families with a disabled family member can also benefit from the security of a power of attorney.

Living will

A living will enables you to state specific medical wishes if you are alive, but unable to communicate them. Artificial life support in the case of a coma or terminal illness is an issue often discussed in such a document. Preferences regarding administering of pain medication, artificial nutrition and other treatments can be dictated in this document.

The Terry Shaivo case shows what can happen if this document is not in place. The legal battle between her husband, family and state of Florida lasted for years before she was granted her wish and taken off life support.

Health care power of attorney

With this type of power of attorney, you give someone else the power to make health decisions on your behalf. These decisions regarding serious health and emotional crises will be made based on instructions which you have given to your power of attorney beforehand. Sometimes a living will is combined with a health care power of attorney, because both of these can be revoked, i.e. it can be cancelled at any time by destroying it, communicating your wishes to your doctor, writing a letter regarding the cancellation or by creating a new living will and health care power of attorney, indicating that the new will revokes all the previous ones.

Start the conversation

Every family’s legal needs are different, so perhaps you should take the first step in being prepared for the worst. Remember that every time your family composition changes, like when a child is born, you need to adapt your will to include them. Start the process and be prepared.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Application for a loan

A1bEntrepreneurs of small enterprises may find it difficult to obtain funding to start their business. You can try the bank, but that can be a real challenge. If you know where to look, new avenues can open up which might be worth pursuing. Stephen Sheinbaum, founder and CEO of Merchant Cash & Capital, believes that there are quite a number of financing alternatives available still, despite the tight economy. If you have been turned down by the traditional financial institutions, don’t lose heart – although the interest rates may be slightly higher, there are still options available to you. The following tips, with the steps to realise them, may come in handy when you need funding.

 Alternative Financing Options:

  1. Begin at the beginning

Start at the bank when you need your first loan. You will have to know your business’s projected figures, assets and strong points, and have a business plan. Without these you are unlikely to be successful at securing funding.

  1. Borrow against expected income

If the bank gives you a cold shoulder, consider obtaining money for orders received but not yet delivered; this provides a degree of security to the lender. If you have won a big contract, it will strengthen your case, as you will be able to make good on your promise of paying back the money.

  1. Cash-in on accounts receivable

Should you have a customer who owes you a large sum, you may be able to borrow money against the owed amount. You will, however, have to prove that your debtor has a good payment history. The financial institution (or factor) will then lend you the money based on the creditworthiness of the debtor. This is called “factor financing”, and it happens much faster than an ordinary loan.

  1. Lend me your peers

You could also apply online to a group of investors who have pooled their resources in order to get better interest rates from your loan than from a financial institution. The interest rate will rocket as the credit risk increases. This is called peer-to-peer lending.

  1. Projected sales

Merchant cash advance could be a possibility as these companies, like Sheinbaum’s, provide funding based on your expected sales. When your sales start generating real income, you pay back a percentage of the income generated by the use of your customers’ credit and debit card purchases during the cash advance’s term. Bank statements and merchant processing statements may be required to proof your ability to repay the loan.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)