Ensure a Transfer Duty with No Surprises Part 3
I have recently been inundated by elderly parents wishing to transfer their immovable property to their children before they pass away. I reminded the parents that if the children are not liable to pay for the property, the transaction may be deemed to be a donation by the South African Revenue Services (SARS), and they would be liable for donations tax. As stated in Part 1 of this article, transfer duty is levied for the benefit of the National Revenue Fund on the value of a property acquired by any person by way of a transaction or in any other way. A donation of immovable property falls within this definition and the transaction will therefore attract transfer duty. To illustrate that this would be a costly affair, consider the following example: should the property be valued at R2 million, the transfer duty payable would be R41 625. SARS would furthermore require donations tax to be paid on the value of the property, less the annual exemption of R1 million at 20% i.e. R380 000. The parents would be ill-advised to do so and should rather bequeath the property to their children in their wills due to an exemption on paying transfer duty contained in the Transfer Duty Act 40 of 1949 (hereinafter referred to as the “Act”). Section 9(1)(e) of the Act states that an heir or legatee who acquires the property of the deceased, whether by intestate or testamentary succession or because of the re-distribution of the assets of a deceased estate, is exempt from the paying of duty. As the bequest is testamentary in nature and not a donation there will be no donations tax payable. The conveyancing fee for the transfer of the property is an estate cost/disbursement and is not for the account of the beneficiary. This is one of a myriad of exemptions in the Act. No duty is payable in respect of the acquisition of property by the government, provincial administration, and a municipality. Similarly, a public benefit organisation is defined in the Income Tax Act 58 of 1962. This includes any institution, board or body which is exempt from tax in terms of Section 10(1)(cA)(i) of the aforesaid Act and which has its sole or principal object carrying on any public benefit activity contemplated by the Act. If a property is acquired for the purpose of a public hospital, for example, there will be no transfer duty levied. An exemption from paying transfer duty is also applicable in the following circumstances: If a divorce occurs and one spouse becomes the sole owner of a property that was originally registered in the name of the other spouse. If a surviving spouse becomes the sole owner of a property that was originally registered in the name of the deceased spouse, and the property is transferred to them as a result of death. If one spouse had already acquired a property before getting married, and they later get married in community of property, the other spouse automatically acquires an undivided half-share in that property by operation of law. Any company in terms of both an amalgamation transaction and an asset-for-share transaction as set out in Sections 44 and 42 of the Income Tax Act of 1962. In the event of a testamentary trust where trust property is transferred by the administrator/trustee as stipulated by the will. Where the acquisition of the property, which is for purposes of the Value-Added-Tax Act 1991, is a taxable supply of goods to the person acquiring such property. This is why developers can advertise that there is no transfer duty payable on the advertised price of the unit, as an exemption applies. If a person who owns a share in a share block company decides to convert their right to use a specific unit of immovable property into full ownership of that unit, as allowed by the Share Blocks Control Act 59 of 1980. Keep in mind that acquiring a property may trigger numerous duties and affect both the purchaser and the seller. To avoid any surprises in this regard, one should seek sound advice from a legal or tax practitioner. WRITTEN BY GRANT HILL 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.
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
How SARS catches tax-dodgers
SARS auditors employ methods that most people wouldn’t have even considered. How does the South African Revenue Service (SARS) catch those who do not contribute their fair share to state coffers? Here are some tests that SARS auditors perform to see if you are being somewhat economical with the truth. Comparing VAT returns to your income tax return When you submit your IT14 company tax return, you are required to make certain disclosures including your company’s turnover. But according to Mark Twain, if you tell the truth, you don’t have to remember anything. If you are cooking the books, at least try to remember to make sure that your turnover per your VAT return tallies up with the turnover disclosed in your financial statements. Because many tax dodgers are dumb as well, SARS catches many a tax reprobate by doing this simple cross-check. Whichever way you try to fiddle with the numbers, SARS has got you. If the turnover in the VAT returns is short, you will get nailed for under-declaring your VAT. If it is the income statement figure that is light, then you haven’t declared all your sales for income tax purposes. In both cases, you will land in hot water. Checking your tax returns against other records Did you know that the details in the Deeds Office and the National Vehicle Registry are a matter of public record? SARS does and they catch many a tax evader through a couple of simple checks. For instance, if you have a Porsche and a Sandton penthouse registered in your name, and you have declared income of R40 000 per month, you may have some explaining to do. Working out that the car and the house will be setting you back the best part of R100 000 per month in repayments is not rocket science, particularly if these items have been purchased recently and the titleholder is a bank, or a mortgage is registered against the property. And don’t try to claim that you have inherited something when you haven’t wills are also public documents, and for a SARS auditor to pay a visit to the offices of the Master of the Supreme Court is no problem. Observing your lifestyle Do you play golf, go on holiday at a posh resort, or dine in fancy restaurants? Guess what SARS employees do as well. Contrary to popular belief, people who work for SARS do have a life outside of work, and they enjoy the finer things in life just as much as the rest of us do. And it’s amazing how much people reveal about themselves after a few beers or one or two bottles of wine particularly when it comes to some smart scheme they have cooked up to “put one over the taxman” (or so they think). “The walls have ears”, and so do SARS employees. However, even if you don’t shoot off at the mouth, the fact that you are able to afford such niceties must say something about your income levels. A quick glance at your most recent tax return will reveal how honest you have been in declaring what you earn. Using some common sense One of the oldest tricks in the book is to fiddle with the cost of your car, or inflate the number of kilometres travelled. But as we revealed in the previous paragraph, SARS employees do sometimes venture out into the big wide world. They also watch TopGear, and they know how much various cars cost. And although even entry-level cars will set you back a pretty penny nowadays, don’t think you are being clever by listing that VW Polo Vivo at R500 000. They also sit in the same traffic that you do each morning. They know what the approximate distance is between Johannesburg and Pretoria. They also have a fairly good idea of which jobs involve extensive travel, and which ones don’t. Such snippets of information are stored in the collective memory banks of SARS audit teams, ready to be recalled when they look at your return. And how about fiddling with that odometer reading? Think again there are ways of checking this as well. When you renew your licence each year, you are required to declare the odometer reading on the form. While this measure is primarily to stop people from putting their cars through the ‘fountain of youth’ when the time comes to sell, it is also a useful thing for SARS to check and compare to what you have declared on your return. There have also been a number of instances where SARS has called for service records. Alternatively, they simply call you up and request that you make your vehicle available for inspection on a given day. As far as your logbook is concerned, SARS not only requires extensive details of your trips (i.e. they no longer just accept ‘client visit’ they’re now after names and addresses), but their auditors are a whizz on Google Maps. You also may have some explaining to do if you’re Joburg-based and have travelled to Durban on ‘business’ two days after the schools have broken up for the December holidays. If you genuinely do make a business trip of this nature, it’s a good idea to have some supporting documents confirming this. Following the paper trail A couple of years ago, SARS changed the requirements for a valid tax invoice, to be issued whenever VAT is charged. For those invoices exceeding R5 000, you are now required to include not only your own address and VAT number on the invoice but that of your customer as well. The reason for this is to create a paper trail for SARS auditors to follow. When they conduct an audit at your business premises, they also note down some VAT numbers from your invoices. Upon their return to the office, these numbers are checked on their systems. Many a fictitious VAT number has been uncovered in this manner, while this method also
VAT treatment of irrecoverable debts
What happens to the VAT that was paid over to SARS? Vendors often provide goods or services to clients on credit. In the current economic climate, clients are more likely to acquire goods or services on credit and may thereafter be unable to settle these debts. Other factors, for example disputes, may also result in vendors being unable or unwilling to make payment of debts. This results in the vendor having to write off this debt as ‘bad’ or irrecoverable. In this article we take a closer look at the VAT implications of bad debts. Legislative provisions The Value-Added Tax (VAT) Act 89 of 1991 generally requires a vendor to register and account for VAT on the invoice basis. This means that the vendor is required to account for output tax on the supply of goods or services in the tax period where the time of supply is deemed to take place. The general ‘time of supply rule’ envisaged in Section 9(1), requires the vendor to account for output tax at the earlier of an invoice being issued or receipt of payment. In instances where goods or services are provided on credit, output tax will be accounted for in the tax period during which the invoice is issued. Under these circumstances, the vendor is required to pay output tax to SARS before it receives the actual payment from the recipient. In order to allow for instances where no payment is eventually received by the vendor for the supply, Section 22 makes provision for a reversal of output tax previously paid on a debt that becomes irrecoverable. Section 22(1) provides that where a vendor has made a taxable supply for consideration in money; and has furnished a return in respect of the tax period for which the output tax on the supply was payable and has properly accounted for the output tax; and has written off so much of the said consideration as has become irrecoverable, the vendor may make a deduction of that portion of the VAT charged in relation to that supply as bears to the full amount of such VAT the same ratio as the amount of consideration so written off as irrecoverable bears to the total consideration for the supply. The amount calculated under Section 22(1) may be deducted as input tax in terms of Section 16(3)(a)(v). However, before this deduction can be made, there are certain requirements that must be met. What does this mean? In simple terms, a vendor is effectively a collecting agent of the tax for SARS. This was confirmed by the Constitutional Court in the case of Metcash Trading Ltd v Commissioner of SARS and Another [(CCT3/00) [2000] ZACC 21; 2001 (1) SA 1109 (CC), 2001 (1) BCLR 1 (C)], where the Court referred to vendors as ‘involuntary’ tax-collectors. The VAT Act therefore gives consideration to the fact that a vendor had to account for (collect and pay over) VAT to SARS on a taxable supply made by it, but may never receive the payment (cash) for such supply from the recipient. However, in order to claim the input tax on bad debts, there are three requirements that must be met by the vendor: A taxable supply was made at standard rates (i.e. not exempt or zero-rated); The output tax on such supply must have been accounted for and paid over to SARS as part of a VAT return; and The debt, or a portion thereof, must be written off as irrecoverable. The third requirement must be carefully considered before making a deduction, that is: when is a debt considered as being written off?; and what if the debt is a mixture of taxable (0% and 15%) and exempt supplies? When is a debt considered as written off? The VAT Act does not provide any guidance on when the consideration would be regarded as being written off as irrecoverable, but SARS has previously stated in its VAT 404 Guide for Vendors (2015 edition) that a debt is considered irrecoverable when: The vendor has done all the necessary accounting entries in its accounting system to record that the amount is written off; and Must have ceased any recovery action taken by himself and have decided to either not take any further action or have handed the debt over to an attorney or debt collector. This no longer appears in the latest version of the VAT 404 guide but is still applicable, as in our experience SARS still applies this approach. It is noted that the Inland Revenue, New Zealand adopts a similar approach, as it views ‘written off’ being when the debt is written off in the accounting and record-keeping systems maintained by the vendor. Based on the above, it is important to ensure that an actual write-off of the debt has taken place. An input tax deduction will not be allowed based on a provision that has been raised even if this is required in terms of the relevant accounting standards. No deduction is allowed for doubtful debts, as this is an accounting provision and not a debt written off. The writing-off of a debt must be based on an objective test evidencing that there is no reasonable likelihood that the debt will be paid. Factors that can be taken into account include how long the debt is outstanding, efforts taken to collect the debt; and the debtor’s financial position. All of the above will provide a vendor with sufficient evidence to support an input tax deduction in respect of irrecoverable debts. We therefore recommend that in support of this approach, a vendor has a formal policy setting out its write-off process. Methodology for write-offs of ‘combined’ supplies The complication that arises with applying the provisions of Section 22 is in instances where a debt comprises a mixture of standard rated, zero rated and/or exempt supplies. Section 22 unfortunately does not prescribe a methodology for allocation of the outstanding debt to different types of supplies, nor does it require the vendor
Transfer duty – No surprises – Part 2
The Transfer Duty Act 40/1949 (“the Act”) states that transfer duty (duty) is to be levied on any property acquired by any person by way of a transaction. The Act is clear as to whom and by when the duty is to be paid. It states that the duty shall be payable by the person who acquires the property within six months of such acquisition. Should that person fail to pay the duty within the aforesaid period he/she shall be liable to a penalty at a rate of 10% per annum on the amount of the unpaid duty. It must be mentioned that the penalty is calculated for each completed month after the expiry of the six months. It is important to therefore look at the definition of acquisition as set out in the Act. The date of acquisition is the date the transaction was entered into irrespective if the transaction was conditional or not. The date of acceptance by the seller of an Offer to Purchase will constitute the date of acquisition and will be reflected in the transfer duty receipt issued by SARS. It has been argued that should a Deed of Sale be subject to a suspensive condition the contract will only be perfected on the date of fulfilment of the suspensive condition which should then be viewed as the date of acquisition. Considering the definition hereinbefore it is improbable that this argument will be accepted by SARS. A prudent conveyancer would advise the purchaser to pay the transfer duty within the six-month period. How does SARS determine the value on which duty shall be payable? In the event consideration is payable, for example, the purchase price, then duty will be calculated on that consideration. If no consideration is payable, for example, a donation of a property, then transfer duty shall be paid on the declared value of the property. As to the declared value, the Act defines this as the amount declared by the person who is acquiring the property. However, if SARS is of the opinion that the declared value or the consideration payable is less than the fair value of the property, it may determine the fair value of that property. Fair value is defined as the fair market value of the property as of the date of the acquisition of the property. In determining the fair value SARS shall have regard, according to the circumstances of the case, to the municipal valuation of the property and any sworn valuation furnished by the person acquiring the property. In practice when a conveyancer applies for an assessment and SARS wishes to determine whether the consideration or declared value is in line with the fair market value, they request that the municipal valuation and occasionally two independent estate agents’ valuations be provided to them. Transfer duty is then paid on either the fair value or the consideration or the declared value, whichever is the highest. SARS wants its pound of flesh. One should keep in mind that SARS has the right to add certain payments to the consideration payable for the acquisition of the property and assess duty on the combined amount, for example; a) any commission or fees paid by the person acquiring the property, for example, if the purchaser of a property is contractually bound to pay the estate agents commission; b) if the property has been acquired by the exercising of an option to purchase, any consideration paid by the purchaser to the seller in respect of the said option; c) any consideration paid whatsoever in respect of the property other than rent payable by the purchaser. It is therefore inadvisable to state in a contract that the purchaser, over and above the purchase price, is paying an additional amount for certain movables as SARS might view this as part of the consideration and assess duty on the combined amount. A person acquiring a property should therefore be mindful of the above and when in doubt obtain legal advice. This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Your retirement ‘gift’ to SARS
In last month’s issue of Tax Breaks, we dealt with the tax treatment of retirement lump sums when one resigns or is dismissed (prior to reaching normal retirement age). However, when you actually retire from a retirement fund, the rules are a bit different – and SARS gives you a bit more of a break. Definition of retirement In the ‘good old days,’ retirement meant that you had reached a certain stage where you stopped working, had a shindig at which you were presented with your gold watch, went on pension, and spent the rest of your days trying (unsuccessfully) to perfect your golf swing. However, everyday words always seem to mean something different when it comes to tax, and the concept of retirement is no different. From a tax point of view, the term ‘retirement’ refers not to the time when you decide (or circumstances force you) to stop working, but rather the event that triggers your retirement from a retirement benefit fund. The difference between ‘retirement’ and ‘withdrawal’ is that should you elect to receive your entire fund or part thereof as a lump sum, such lump sum is taxed at more favourable rates if your exit from the fund qualifies as a retirement. You can therefore ‘retire’ from a fund in the following circumstances: Any time from your 55th birthday onwards; or At any age, provided that such retirement is due to disability or ill-health. In most cases you will only be entitled to retire if such disability or ill-health is of a permanent or long-term nature. Note that retiring doesn’t mean that you will never be entitled to work again. With modern healthcare and more active lifestyles, many people are being retained as consultants – or even starting completely new careers. Even in the case of ill-health or disability retirements, there are many cases where the person’s disability or health status nonetheless enables them to work in areas that are less physically strenuous than the job from which they were medically boarded. Taxation of lump-sum benefits upon retirement Using similar scenarios as in last month’s article, except for the fact that the person has retired rather than withdrawn from their fund, the tax calculation is as per the table below. Transfer of benefits to another retirement fund If you have reached retirement age but you plan to continue working, you need to have both a tax consultant and an investment advisor run the numbers for you, especially if you don’t need to start drawing a pension immediately. Depending on your personal circumstances and tax position, it may be more advantageous for you to withdraw from your employer’s fund and transfer the benefits to another fund, or consider making your fund “paid up” (provided that the rules allow for this) rather than to take a retirement benefit. However, make sure that you take all of the possible implications into account, especially if you are entitled to receive certain post-retirement benefits (such as subsidised medical aid or the enjoyment of staff discount benefits that may be extended to retired employees as well). The last thing you want is to resign rather than retire in order to save a little bit of tax, but then end up with no post-retirement medical cover! Pensions / annuities In the case of your retirement from a pension or retirement annuity fund, your lump sum is usually limited to one-third of the total amount invested. The balance must be utilised to purchase an annuity (pension). Such annuity is fully taxable, just like your salary used to be (except that you no longer have a car allowance or other tax-preferential perks). This is different to voluntary purchase annuities, where part of the annuity represents the return of capital (with only the income portion therefore subject to tax). Lump sums received upon retrenchment With effect from 1 March 2011, severance benefits received will be treated on the same basis as a retirement lump sum, thus qualifying for the preferential tax treatment. However, if you are retrenched prior to your 55th birthday, you will not be able to retire from your retirement fund-which means that any lump sums paid out from your retirement fund will still be treated as a withdrawal (unless your severance has been for reasons of ill-health, in which case the normal retirement lump sum tax tables are applicable). In practice, your employer and your retirement fund are separate legal entities, and you should therefore be receiving two IRP5 certificates. The biggest tax risk is that since (for example) your employer’s payroll department will be dealing with your severance, while a fund manager could be handling the retirement fund, it’s possible that either (or both) entities might not know the full circumstances of your severance, and end up putting the wrong lump sum codes on the directive application. It is therefore critical that you receive appropriate tax advice once you have received notification of your severance package and available retirement fund lump sum, but before any tax directives are applied for. Once the directive has been and the IRP5 certificates have been issued, rectifying any errors is both difficult and time-consuming – in the case of one of my own clients, it took two years to sort things out with the employer and get the excess tax refunded by SARS. Receipt of previous retirement benefits The tax tables applicable to retirement fund lump sums received upon retirement are ‘once-in-a-lifetime’ scales. As will be seen more clearly from the calculation example above, this means that while a first-time taxable retirement lump sum of R500 000 would be exempt from tax, a subsequent lump sum of R200 000 would be subject to tax at 18%, being the rate applicable to the next band. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information
Home office expenses: Do I qualify?
Tax practitioners have been inundated with queries from clients on the possible relief offered by the South African Revenue Service (“SARS”) on the possibility of deducting from their taxable income home office expenses due to the shift in working policies by many employers. SARS recently hosted a webinar on the matter (the summary of which is available on the SARS website). Below, we explore the most pertinent matters. When will I be able to claim home office expenses? If you are an employee who works from home and have set aside a room to be occupied for the purpose of “trade” (i.e. work activities), you may be allowed to deduct certain home office expenses for tax purposes calculated on a pro-rata basis. What are the requirements for claiming home office expenses? Section 23(b) of the Income Tax Act states that a tax deduction for home office expenses is only allowed when the following criteria are met: If the room is regularly and exclusively used for the purposes of the taxpayer’s trade and is specifically equipped for that purpose. The home office must be set up solely for the purpose of working. If the employee’s remuneration is only salary, the duties are mainly performed in this part of the home, meaning the employee must perform more than 50% of their duties in the home office. Where more than 50% of the employee’s remuneration consists of commission or variable payments based on work performance, and more than 50% of those duties are performed outside of an office provided by your employer. What constitutes home office expenditure? Typically, the type of home office expenditure referred to in section 23(b) is as follows: Rent of the premises; Cost of repairs to the premises; and Expenses in connection with the premises. In addition to these expenses, other typical home office expenditure that may qualify for deduction in terms of section 23(m) include: Phones; Internet; Stationery; Rates and taxes; Cleaning; Office equipment; and Wear-and-tear. How do I calculate home office expenses? The tax deduction is calculated for the area of the home utilised for trade e.g. employment purposes. Home office expenses relating to the premises are calculated on a pro-rated basis (square metres of the home office space versus total square meters of your home). What is the method of calculating home office expenses? Should you qualify for a deduction in respect of home office expenses, the amount must be calculated on the following basis: A / B x total costs, where: A = the area in m² of the area specifically equipped and used regularly and exclusively for trade B = the total area in m² of the residence (including any outbuildings and the area used for trade in the residence) Total costs = the costs incurred in the acquisition and upkeep of the property (excluding expenses of a capital nature). Where will I claim home office expenses on my Income Tax Return (ITR12)? Should you qualify for a deduction in respect of a home office, enter the amount calculated next to the source code 4028 (Home Office Expenses) in the “Other Deduction” field on your Income Tax Return. I want to complete the home office expenses but it does not reflect on the form wizard questionnaire. When completing the form wizard on the Income Tax return (ITR12), answer the question “Did you incur any expenditure that you wish to claim as a deduction that was not addressed by the previous questions?” (Select ‘Y’ or ‘N’). If yes, the section for ‘Other Deductions’ will be added to the return. If you require any assistance with claiming your home office expenses this tax season, or have any further questions about your tax returns, get in touch with our team of expert tax specialists to assist you. This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Analysing tax exemption for dividends
Dividends are a valuable part of many shareholders’ income, but even though they are exempt from regular income tax, it does not mean that they are completely exempt from tax. A dividend can be defined as any local or foreign dividend paid by a resident company of South Africa or a foreign country, provided that the foreign dividend is paid as a listed share and to the extent that the foreign dividend does not consist of an asset in specie. Dividends that South African tax residents receive are generally exempt from income tax. However, the mere fact that these dividends are exempt from income tax does not necessarily mean that they are not subject to tax. Dividends tax is imposed at a rate of 20% on all dividends that are declared and paid. The beneficial owner of a dividend, typically the shareholder, is liable for dividends tax in most cases. However, should the dividend in question consist of an asset in specie, the liability falls on the company paying the dividend and not on the beneficial owner. There are instances in which dividends tax will not be levied, specifically where the beneficial owner of the dividend is either a South African resident company, a South African retirement fund, or any other prescribed exempt person. Dividends tax operates as a withholding tax. The company that declares the taxable dividend must withhold and pay an amount directly over to SARS on behalf of the recipient taxpayer. Where a regulated intermediary pays a dividend, it is responsible for withholding the applicable dividends tax. The Income Tax Act, No. 58 of 1962 (the Act) caters for several instances in which a dividend declaring company is freed from the obligation to withhold dividends tax. The dividend declaring company would not have to withhold the dividends tax from the payment of a dividend provided that the dividends are declared to identified persons. These instances include the following: Where the person to whom the payment is made has, before the dividend payment, submitted to the dividend declaring company in the prescribed form that the dividend is exempt from dividends tax in terms of section 64F of the Act; A written undertaking by the beneficial owner in the prescribed form in which the declaring company is informed that the beneficial owner changed or the circumstances affecting the exemption applicable to the beneficial owner changed; Where the beneficial owner forms part of the same group of companies as the dividend declaring company; and Where the payment is made to an intermediary. Irrespective of the instances in which a dividend declaring company is freed from the obligation to withhold dividends tax, it is important to note that withholding tax is more likely than not to be reduced should a double taxation agreement find application. If you want to find out more about dividends tax and how it may affect you, do not hesitate to contact one of our expert advisers for further assistance. This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
Is it time for SARS to end arbitrary tax and VAT inquiries?
The Tax Administration Act provides for the audit and verification of taxpayers’ tax returns for all taxes administered by the Commissioner for the South African Revenue Service (SARS). In many instances, such requests for information are general, boiler-plate letters received by taxpayers, not indicating specifically what additional information SARS requires in the circumstances and which supporting documents must be provided. In recent times, in respect of both income tax and value-added tax, SARS has taken an arbitrary approach in issuing additional assessments based on information provided by taxpayers in response to the inadequate (or vague at best) requests for information. Income tax Many taxpayers (who are natural persons) have recently received a request from SARS in which they list the bank accounts that are registered in the name of the taxpayer, as well as a summary of the total number of credits (deposits) made into these respective bank accounts. SARS then requests the taxpayer to explain why those credit amounts should not all be included in the taxpayer’s taxable income. This is a highly arbitrary approach followed by SARS in accepting that all deposits made into a taxpayer’s bank account constitutes income. There can, of course, be multiple other reasons for such deposits, including donations between spouses, receipt of gifts, loan funding received, prize winnings, transfers between the taxpayer’s own accounts, transfers out of bond accounts into current accounts, et cetera. This approach displays a lack of understanding regarding commercial realities and places the taxpayer on the back foot: having to discharge the onus of amounts that should not be classified as income. Value-Added Tax Arguably, no VAT vendor in South Africa has escaped frustration from the administration of the VAT system, particularly as it relates to the verification of VAT returns. A practice that has recently emerged is that if one or two pieces of supporting documents provided to SARS does not meet the requirements of a valid tax invoice, SARS immediately, and without further inquiry, disallows all input VAT claimed by a taxpayer during the relevant tax period. This is a highly invasive approach in which SARS accepts that none of the goods and services received by a vendor during that period is valid, or that they lack supporting documents. Unless SARS is specific in their requests, a taxpayer cannot identify the information that should be provided to them. The blanket disallowance of all input VAT is an irrational practice that should be addressed at the appropriate level. The examples above merely illustrate some of the arbitrary practices that taxpayers have recently been confronted with – as such, taxpayers are advised to carefully navigate the dispute resolution process, since providing SARS with incorrect information, or making incorrect statements in their correspondence with the revenue authority, may lead to severe prejudice as a result of these unacceptable practices. This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)