VAT on Short-Term Lettings and Commissions
Are you acting as agent or principal—and what would be the pragmatic approach? There are very few people across the world who haven’t heard of Airbnb. Started in San Francisco in 2008, this multi-billion-dollar NASDAQ-listed company that employs around 7,000 people has revolutionised the short-term letting industry. Over four million property owners around the world use the platform to let their properties. And yet, their business model is actually quite simple. A property owner makes their property available for letting. Airbnb makes their platform available to list the property and collects the fee for the accommodation on the owner’s behalf. For this service, Airbnb charges a commission. However, while the emergence of Airbnb has provided intense competition for the existing players in the industry, this doesn’t mean that the local agency model is dead. In fact, many people still prefer the personal touch when it comes to entrusting their property for letting. With this in mind, I was approached for a one-off opinion for a client that was a registered VAT vendor engaged in the business of letting out accommodation on behalf of various owners. Given that the client did not own the properties concerned and was merely acting as agent, they wanted to know how to correctly account for VAT on the various transactions going through their books. These transactions were effectively as follows: The agency would charge their client (the property owner) an amount based on the going rate per night for accommodation. They would also charge the owner a commission for letting out such accommodation. Since they had collected the charge for the accommodation on the owner’s behalf, they would deduct their commission from these funds and pay the balance (net of commission) to the owner. If the agency was not registered as a VAT vendor, a simple example would be as follows: Cost of accommodation: R5 000.00 Less: Commission: (R1 250.00) Amount payable to owner: R3 750.00 However, the fact that the agency was registered as a vendor for VAT purposes means that VAT must be charged on all taxable supplies. This leads to the question of what constitutes a ‘supply’ in this particular case. By way of background, the agency’s clients were mainly corporate entities who sourced accommodation from a variety of sources (including hotels), and the agency would be required to add VAT to all of their supplies. However, neither the Value-Added Tax Act 1991 nor the various SARS VAT Interpretation Notes provide a clear directive. One could therefore argue that the letting of the accommodation is not a taxable supply made by the agency, since they are merely acting as an agent on behalf of the property owner. Based on this strict interpretation, a conclusion could be drawn that the accommodation portion should not in fact include VAT. However, it is a common practice in this particular industry that accommodation charges are deemed to include VAT, and a corporate customer would want to be in a position to claim this VAT charged as an input. If the accommodation had in fact been owned by the agency, the matter would be cut and dried—they would be required to charge VAT. It is the fact that the property concerned was not owned by the agency that has given rise to the ambiguity. In the absence of clarity in terms of legislation and SARS publications, I have therefore based my opinion on prevailing practice as applied by agents who manage commercial premises. In such cases, although the managing agent concerned is not the owner of the premises in question, their invoices normally include VAT. As for the commission that the agency charges, it is clearly a supply since it relates to the rendering of a service by the agency. VAT at the standard rate must therefore be charged on the commission. An example of the accounting entries would therefore be as follows (assuming a commission rate of 25%): 1. Dr. Accommodation client (debtor) R1 000.00 Cr. Owner (creditor) R869.57 Cr. VAT control (output VAT) R130.43 Raising the accommodation charge against the agency’s client on the owner’s behalf 2. Dr. Bank R1 000.00 Cr. Accommodation client (debtor) R1 000.00 The accommodation client settles their account 3. Dr. Owner (creditor) R250.00 Cr. Commission income R217.39 Cr. VAT control (output VAT) R32.61 Raising the commission charge against the owner (R869.57 x 25%, plus VAT at 15%) 4. Dr. Owner (creditor) R619.57 Cr. Bank R619.57 Payment of the amount due to the owner (R869.57 less R250.00) The agency would issue a tax invoice to the client for the accommodation, and a separate tax invoice to the owner for the commission amount. In this case, the owner is receiving R1 000.00, less the R130.43 VAT portion, less the R250.00 (R217.39 + VAT) charged as commission. If the owner wanted to come out with a net R750.00, then the accommodation in this example would have to be priced at R1 000.00 plus VAT. WRITTEN BY STEVEN JONES Steven Jones is a registered SARS tax practitioner. While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
Pension funds and emigration
Investing in an offshore retirement fund is one way of growing your wealth in a stable economy over the longer term, or even gaining residency in a foreign country. However, for South Africans, this scenario presents as many challenges as it does opportunities, and should only be considered after consulting with a financial advisor and tax expert. When you invest offshore directly, whether in a retirement fund or another funding vehicle, the tax aspects can be tricky to understand, and several factors must be considered. If you fall foul of the domicile-specific tax rules, you could end up losing a large portion of your investment when you retire and start to withdraw funds, or during the inheritance process after your passing and if it’s not set up properly, your investment could also expose you to more taxation. With regards to pension funds in South Africa, there are three basic scenarios, and two of them preclude moving one’s contributions into an offshore component to enable financial emigration or offshore retirement. Scenario 1 Membership in an employer-sponsored retirement fund. In some circumstances, an employer will create a free-standing fund and then appoint a board of trustees to make fund-related decisions. The board of trustees makes a variety of decisions, including hiring a fund administrator, an investment and retirement fund consultant, and an asset manager. These types of funds have fund-specific rules, and anyone who joins the fund (via employment) must follow them, including the limited portfolios in which you can invest. The underlying investment portfolios might have some offshore exposure that offers some form of financial security. Scenario 2 Membership in a personal umbrella retirement fund. In the second scenario, where contributions are made in someone’s personal capacity into an umbrella fund, it is typically the fund’s trustees that determine where the contributions are invested. Scenario 3 Retirement saving in an offshore fund. The third scenario is where someone saves for retirement in an offshore fund—and this is an appealing option when it comes to retirement savings, as it allows for actual variety. Normally, as a South African-domiciled investor, even if your portfolio is properly diversified, you are most likely committed to rand-based funds which come with an inherent risk. However, when investing in an offshore retirement fund, the annuity could sit completely offshore and might be a vehicle that enables financial emigration. Generally, although not always, international retirement plans enable financial freedom by giving members the freedom to buy and sell assets within the structure, without triggering related capital gains tax. Another way to fund an international retirement plan is to use funds that are already taxed and cleared, and are being held in an offshore bank account or direct investment vehicle. Such plans have tax benefits for members, but these are by no means the sole advantage. Portfolio diversification is a key benefit, as is the security that comes with investing in jurisdictions that are both politically and economically stable, as well as being well-regulated and having measures in place to combat fraud and money laundering. However, many factors should be taken into consideration before taking the plunge including fund options and structures, domicile-specific interest rates and taxes, rules around withdrawals and estate planning, and overall risk. The closer you are to retirement, the lower the risk you should be exposing yourself and your investments to. Ultimately the biggest decision to make is the selection of a qualified, experienced advisor to guide you through the technicalities and tax implications when investing offshore. WRITTEN BY SIPHAMANDLA BUTHELEZI Siphamandla Buthelezi is a financial specialist. While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.
Tax implications for marriages in community of property
The default marriage regime has some complicated tax consequences. When couples are caught up in wedding and honeymoon planning, visiting their attorney often takes a backseat. Many couples don’t realise that different marital laws affect how their assets are managed during marriage, divided if it ends, and how they’re taxed. The different legal frameworks determine if a marriage has a community of property between the partners. This idea dates back to when a married couple’s belongings were combined into one estate, usually managed by the husband. The concept of marital power was removed in 1984 through the declaration of the Matrimonial Property Act, and various other pieces of legislation have since been enacted to recognise same-sex unions and marriages according to traditional and/or religious rights. However, while a couple has the option of entering into a legal agreement aimed at keeping their respective estates separate, known as an antenuptial contract or ANC, in most cases—in the absence of such a contract—the default marriage regime is that of community of property. The focus of this article is therefore on the tax aspects that affect marriages in community of property. When a couple is contemplating marriage, often the last thing that they want to consider is that their marriage might end. However, the harsh reality is that all marriages do come to an end at some point—whether by divorce, annulment, or the death of one of the partners. COP marriages and your tax return SARS made some updates to the 2023 personal income tax return. While most reporting requirements stay the same, the way SARS verifies the information is what’s drawing the most attention. When filling out your tax return’s personal details, there’s a drop-down box to choose your marital status: unmarried (including single, divorced, or widowed), married outside of community of property, or married in community of property. If you are married in community of property, a separate section for spouse details is opened, in which SARS requires your spouse’s initials and their ID number. However, providing these details is more than a simple box-ticking exercise. These include investment income (interest and dividends, both local and foreign), rental income, and capital gains and losses. If you’re married in community of property, you’re taxed on half of your own and half of your spouse’s interest, dividends, rental income, and capital gains. How SARS deals with COP marriages Over the past few years, SARS has moved towards greater reliance on third-party data to pre-populate personal tax returns. As of the 2022/23 tax year, returns are now pre-populated with employment income (IRP5 / IT3(a) certificates), investment income, medical scheme information, and retirement annuity fund contributions. If you have previously submitted a return in which you have indicated that you are married in community of property, and SARS has confirmed a match with the information held by the Department of Home Affairs, any investment income data that has been uploaded to SARS will automatically appear on both yours and your spouse’s tax returns. For any investment income that has not pulled through from a third-party upload, as well as for any rental income and capital gains or losses, you will need to capture the full amount of income received by both spouses in both of your tax returns. SARS will automatically divide this income on a 50/50 basis. This will be reflected on the notices of assessment (ITA34) issued to both you and your spouse once the returns have been submitted. Your returns do not need to be submitted simultaneously to achieve this split. Exclusions from the communal estate Some income types, by law, aren’t included in the community of property. For instance, if someone inherits property or investments, and the deceased’s will specifically states it’s outside the communal estate, then it’s excluded. The tax return has a provision for indicating these exclusions. In the investment income section, there’s a box beside each item where you can mark an ‘X’ if that amount should be kept out of the communal estate (for those married in community of property). Marking this box ensures the exclusion and the full tax applies only to the spouse named on the investment. To prevent confusion and mistakes, it’s suggested that the spouse not receiving the income also marks this box on their return. Other income streams that are automatically excluded from the communal estate are: Salary income: Salaries have been taxed separately since the tax tables were harmonised in the early 1990s. This applies irrespective of one’s marital status. Business income: Income from a business, other than rental income, is taxed in the hands of the recipient. In the case of a partnership, each partner must declare the total income earned from the business, tick the box marked ‘Are you in a partnership?’, and enter the percentage interest held. Other considerations If you and your spouse are separated and such separation is likely to be permanent, you would need to submit an RRA01 form to SARS or lodge an objection against your return. If you and your spouse are divorced and you had omitted to amend your marital status from married in community of property to not married. You can submit a request for correction via e-filing. SARS will issue an amended assessment but is likely to request an upload of your divorce decree—particularly if the divorce was recent and the Home Affairs records have not yet been updated. WRITTEN BY STEVEN JONES Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks. While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes. Powered by SucceedGroup
Testamentary trusts still have their place
How you can protect your assets from predators – including SARS Trusts have received a lot of bad press over the past few years, what with SARS taking a dim view of the use of trusts as a means of avoiding tax. A 2008 case involving a property trust, where the beneficiaries were changed in the hope of avoiding the payment of transfer duty, is but one example of SARS’ increased vigilance when it comes to trusts. In this particular case the loophole was closed, and the court found that transfer duty was in fact payable. So does this mean that trusts are dead? Not at all, provided that you use them for their proper purpose—protection of assets for beneficiaries—and not some kind of ‘tax eraser’. A question received from one of our readers has highlighted the need for a greater understanding of the more traditional role of trust structures. The person who sent in this question wants to put a commercial property into a testamentary trust, and is concerned about the potential transfer duty and Capital Gains Tax (CGT) consequences of such a decision. But firstly, a quick explanation of testamentary trusts. Known also as will trusts or trusts mortis causa, they are trust structures that come into being as a consequence of death, and the founding instrument is a clause contained in a person’s will. Such a clause would normally direct that any assets bequeathed to a particular beneficiary are to be held in trust for a finite or indefinite period. These trust clauses are usually encountered where the testator wishes to protect certain beneficiaries—usually minor children—who may inherit in terms of the will before they are of an age where they can exercise prudence in managing the assets inherited. A typical clause would, for example, direct that any bequests to minor children would be held in trust until the child reaches a certain age. However, the same degree of thought needs to go into the formation of a testamentary trust as you would do for a trust that you set up in your lifetime—especially since you will no longer be around to change your mind or clarify your intentions. A clause giving effect to a testamentary trust should therefore identify at least the following elements: The assets held. These include specific bequests in terms of the will, but can also include unspecified assets forming either a fixed percentage of the estate, or a portion remaining after all other bequests (known as the ‘residue’). The beneficiaries. These are normally named in the will, or referred to by relationship (e.g. the unborn child of a person named). The trustees. Someone needs to administer this trust after you are gone. Distribution conditions. These include how the capital asset and/or any income is to be distributed; to whom such distributions are to be made; and under what conditions (e.g. income distributed to minor children for education purposes only). Provision for termination. Many will trusts provide, for example, that the trust is to be wound up and all assets distributed to beneficiaries upon reaching a certain age. Formalities. These would include the number of trustees, discretion concerning the distribution of assets and income, requirements for audit, substitution of beneficiaries, etc. Since the formation of a testamentary trust involves the transfer of assets from a deceased estate to the trust, a number of tax consequences arise. Firstly, there is the question of transfer duty where immovable property is concerned. Fortunately, Section 9(1)(e)(i) of the Transfer Duty Act provides that no transfer duty is payable by an heir to immovable property transferred to them from a deceased estate, provided that they have received such property by testamentary succession. This means that a third party who purchases a property from a deceased estate does not enjoy such exemption, and is therefore liable for the transfer duty. However, in light of the aforementioned 2008 court case whereby the change of trust beneficiaries gives rise to a transfer duty liability, what would happen in a case where a will trust is set up for multiple beneficiaries, and one of those beneficiaries subsequently dies? For example, the reader’s question referred to above asks what would happen if the person’s wife and two children are beneficiaries of the will trust, and the wife subsequently dies. This situation is different to that covered in the court case referred to above. In that particular case, the trust was effectively ‘sold’ by virtue of a whole-scale change in both trustees and beneficiaries. A consideration was also payable, which led the court to conclude that the transaction resembled the sale of the property for a consideration, thereby rendering the transaction dutiable. While the Transfer Duty Act does not specifically cover the situation of the death of one of the beneficiaries as in this example, it is submitted that such an event does not represent the “purchase of the property for a consideration” by the remaining beneficiaries, and would therefore not give rise to a transfer duty liability. This brings us to the second part of the question, being that related to CGT. When a person dies, they are deemed to have disposed of all of their assets, and a potential liability for CGT may result. However, the property that is regarded as the deceased’s ‘primary residence’ will qualify for an exemption of the first R2 million of any gains made thereon. The deceased would also qualify for the following CGT exemptions (according to the SARS website): most ‘personal use’ assets (e.g. car, furniture, personal effects, jewellery, etc.); retirement benefits; payments in respect of original long-term insurance policies (which would include life cover, funeral cover, and endowment policies); and an overall exemption on the first R300 000 of capital gains in the year of death (this replaces the normal R40 000 annual exclusion). In the case of the surviving spouse (being a beneficiary of the testamentary trust), subsequently dying, the fact that she is no longer a beneficiary does not have any CGT impact on the
Avoid the long-term implications of skipping a bond repayment
Are you feeling the financial pinch? You’re not alone. Many South Africans are finding it increasingly difficult to meet their credit obligations. The cost of living is on the rise, disposable incomes are shrinking, and servicing debt has become a significant challenge. Homeowners are feeling the strain too, with financial institutions noting a surge in foreclosures. As the economic outlook appears to be in a state of flux, more consumers are struggling to honour their bond repayments and servicing their debt. In such times of financial stress, the thought of defaulting on a bond payment may sneak into the minds of homeowners. This is a decision that should not be taken lightly, given the long-term implications of a bond repayment default. On the surface, missing a single repayment on your home loan might seem like a minor setback, but the repercussions can be surprisingly costly over time. This becomes apparent when one considers the additional payments that a homeowner is compelled to make as a result of a missed repayment. Consider this scenario. Let’s say you have a bond on your property and you’ve committed to a certain repayment period. If you were to skip a single payment without making arrangements to pay it off, especially early in the repayment term, you could end up extending that repayment period significantly. This extension can result in a substantial increase in the overall repayment amount. The reality of skipping a bond payment is that instead of adhering to the original repayment plan, you now have to grapple with a markedly higher debt burden. It’s an additional financial obligation that can be avoided simply by making regular payments. In the long run, missing a repayment, irrespective of the circumstances, can prove to be an expensive affair. So, what should you do if you find yourself unable to fulfil your obligation to pay your home loan instalment in a particular month? The first step is to engage with your financial institution. Make arrangements to pay off the instalment as soon as possible. The flexibility and understanding demonstrated by many financial institutions can be a lifeline during tough economic times. However, it’s crucial to remember that skipping an instalment should only be a last resort and should be contemplated in the most extreme of cases. The potential financial consequences, as highlighted above, are too significant to ignore and can have a profound effect on a consumer’s bond repayment structure. The essential question shouldn’t be whether you should skip your bond repayment, but rather, how can you manage your debt more effectively?The answer is straightforward: seek expert advice. Engage with professionals who understand the intricacies of financial management and home loans. They can provide invaluable insights into managing your debt effectively and help navigate the complexities of bond repayments. Financial challenges are a part of life, but there are ways to navigate them without jeopardising your long-term financial stability. Skipping a bond payment might seem like a quick solution, but the long-term implications can be costly. By seeking expert advice and making informed decisions, you can manage your financial commitments effectively and secure your future. While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as legal advice.