integritas-#418353-v1-integritax january 2013 issue number …

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JANUARY 2013 – ISSUE 160

CONTENTS

COMPANIES

2146. Definition of a share

INTERNATIONAL TAX

2151. Pension income under the United

States/ South Africa tax treaty

2152. Changes to definition of

‘resident’

2153. Treatment of foreign exchange gains

and losses

DEDUCTIONS

2147. Timing of deductions

TAX ADMINISTRATION ACT

2154. The Act takes effect

DIVIDENDS TAX

2148. Dividends deemed to be interest

TRADING STOCK

2155. Held and not disposed of

DONATIONS

2149. Executory contracts

VALUE-ADDED TAX

2156. Submission date

2157. Potential pitfalls

GENERAL

2150. Interpretation of Statutes

SARS NEWS

2158. Interpretation notes, media releases

and other documents

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COMPANIES

2146. Definition of a share

(Published January 2013)

The Taxation Laws Amendment Act No 24 of 2011 added the definition of 'share' to

section 1 of the Income Tax Act, No 58 of 1962 (the Act). With effect from 1 April 2012, a

'share' was therefore defined as "in relation to any company, any share or similar equity

interest in that company".

The reason for the introduction according to the South African Revenue Service (SARS) was

"to clarify that the term 'share' includes 'similar' equity interests (mainly to better account for

a variety of foreign ownership interests)".

The draft Taxation Laws Amendment Bill, No 34 of 2012, proposes an amendment to the

definition of a 'share'.

According to SARS, the reason for the proposed change is twofold. Firstly, the previous

definition is circular and self-referential in that it refers to a 'share'. Secondly, the previous

definition technically includes non-profit entities, which in economic terms makes no sense.

With effect from 1 January 2013 a share will be defined as follows:

"'share' means, in relation to any company, any unit into which the proprietary interest

in that company is divided;"

According to SARS, this definition is also more aligned with the Companies Act, No 71 of

2008 (Companies Act).

It is also proposed that the definition of 'equity share' be amended. Currently an equity share

is defined as "any share in a company, excluding any share that neither as respects dividends

nor as respects returns of capital, carries any right to participate beyond a specified amount in

a distribution".

The new definition is to read as follows:

"'equity share' means any share in a company unless:

(a) the amount of any dividend or foreign dividend in respect of that share is

based on or determined with reference to the time value of money;

(b) the issuer of that share is obliged to redeem that share in whole or in part; or

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(c) that share may at the option of the holder be redeemed in whole or in part."

SARS says that the reason for the amendment is that the current definition of equity share is

not aligned with the Companies Act. SARS also says that the new definition will clearly link

the definition of equity share to common commercial practices that separate ordinary shares

from preference shares.

The new definition also fits in with SARS's proposed amendments to the anti-avoidance

provisions dealing with the re-characterisation of certain instruments as either debt or equity

where attempts are made to disguise their true nature.

Cliffe Dekker Hofmeyr

ITA: Section 1 definitions of ‘equity share’ and ‘share’

DEDUCTIONS

2147. Timing of deductions


When conducting an audit, the SARS does not only focus on whether or not an expense ranks

for deduction in accordance with the Act but also focuses on the timing of the deduction.

Where a deduction is found by the SARS to have been taken prematurely by a taxpayer, the

SARS may seek to levy additional tax, penalties and interest.

Bonus accruals, audit fee accruals and liabilities for contributions by employers to benefit

funds are just some of the common examples of where taxpayers, in practice, may claim a

deduction in the tax computation prematurely.

Broadly speaking, bonuses and audit fees are deductible in terms of section 11(a) of the

Income Tax Act, No 58 of 1962 (the Act), read with section 23(g). In order for an

expenditure or loss to rank for deduction against income in terms of section 11(a), an amount

must have been ‘actually incurred’ by the taxpayer during the year of assessment. Where the

legal obligation in respect of a liability is, at the end of the year, uncertain, in the sense that

the obligation is conditional in any way on the occurrence of a future uncertain event, the

liability will not be regarded as having been ‘actually incurred’ during the year and should be

added back on the tax computation.

Bonus accruals that are raised at the end of a financial year but which are only paid

subsequent to year end are often conditional on the employee remaining within the taxpayer’s

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employ for the intervening period post year end. This condition is frequently overlooked by

taxpayers with the result that the full bonus accrual is claimed as a deduction in the year of

assessment in which that accrual is raised for accounting purposes.

Similarly, audit fee accruals raised at the end of a financial year are often not added back on

the tax computation on the basis that they are considered to be an ‘accrual’ and not a

‘provision’ from an accounting perspective and are therefore overlooked. If, however, the

services to which the audit fee liability relates are only performed after year-end, the audit fee

should be added back on the tax computation.

The deductibility of contributions by employers to pension, provident and benefit funds is not

governed by section 11(a) of the Act, but is in fact catered for by section 11(l) of the Act. An

important distinction between section 11(a) and section 11(l), is that while section 11(a)

requires an amount to have been ‘actually incurred’, section 11(l) requires the amount to have

been ‘contributed’ to the pension, provident or benefit fund. Consequently, liabilities raised

for contributions by employers to these funds which have not been paid at year end, should

technically be added back on the tax computation on the basis that the employer has not

“contributed” the amount to the fund in terms of section 11(l) of the Act.

As noted above, the SARS are inclined to detect these timing errors during an audit, and

while the add back is merely a timing difference, it can lead to unnecessary additional tax,

penalties and interest.

Ernst & Young

ITA: Sections 11(a), 11(l) and 23(g)

DIVIDENDS TAX

2148. Dividends deemed to be interest


Dividends tax has been with us for over six months now and we are soon to experience the

re-introduction of a withholding tax on interest. As the practical application of the law

relating to these taxes comes under scrutiny, new issues emerge.

One such issue is the treatment of instruments that are of a particular legal form but that are

treated under tax law as having a substance that differs from that form. Section 8E of the

Income Tax Act, No 58 of 1962 (the Act) is an example. This section establishes conditions

under which a share (an equity instrument) may be classified as a hybrid equity instrument

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(effectively, a debt instrument). It then provides that any dividend accrued to or received by

any person in respect of a share during any year of assessment during which the share is a

hybrid equity instrument must be deemed in relation to that person to be an amount of interest

accrued to that person.

The dividend tax provisions define a dividend by reference to the definition of “dividend” in

section 1 of the Act and require companies that pay a dividend that is not otherwise exempt to

withhold dividends tax at the prescribed rate on the amount of the dividend. The person liable

for the tax is the beneficial owner of the dividend.

Double tax agreement

A double tax agreement (DTA) governs the right of the respective states to tax income

derived by residents of the one state from sources within the jurisdiction of the other state.

The provisions of a DTA, once proclaimed into law, have the effect of modifying the

domestic law to the extent that they are in conflict with the domestic law. They too contain

definitions of what constitutes a dividend, on the one hand, and what constitutes interest, on

the other.

Currently, if an instrument is regarded as a hybrid equity instrument, the dividend in the

hands of the shareholder will be regarded as interest, and will fall outside the scope of the

dividends tax legislation. The amount will also be exempt from normal tax. The provisions of

a DTA are not presently relevant because there is no double taxation or risk of double

taxation of the amount that accrues to the non-resident.

Final tax

But, the landscape will change when the withholding tax on interest is implemented. Under

these provisions, a final tax will be imposed on interest derived by any person. The definition

of “interest” for this purpose includes amounts distributed in respect of a hybrid equity

instrument. A non-resident holder of such an instrument faces the prospect of double

taxation, and the DTA will govern the tax treatment of the amount distributed.

In most DTAs the state of source has the right to tax dividend and interest income derived by

residents of the other state. However, the amount of tax that may be imposed in the state of

source may be limited. The limitation may differ depending on the circumstances. Typically a

lower rate of withholding is imposed on dividends paid where the shareholder holds a

substantial portion of the equity in the company paying the dividend. If the shareholder also

holds ordinary shares (in addition to hybrid equity instruments), it may be in his interests to

seek relief under the DTA and insist on distributions in relation to the hybrid equity

instruments being taxed as a dividend.

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For companies paying a dividend on a hybrid equity instrument, the appropriate treatment is

critical to their compliance with the requirements of the Act.

Terms have to be examined

The terms of the DTA have to be examined. Although most of the DTAs concluded by South

Africa are based on the OECD Model Convention on the Taxation of Income and Capital,

each negotiation could result in the wording of the model convention being adjusted to suit

the requirements of the respective negotiating states. Definitions of what constitutes a

dividend or interest may vary from one DTA to the next.

There are 56 DTAs concluded by South Africa where the definition of “interest” does not

include amounts that are deemed to be interest under the domestic law. In effect, the DTA

does not recognise distributions in respect of hybrid equity instruments as interest, but rather

as a dividend. The OECD makes the point that the definition recommended in its Model

Convention is intended to be exhaustive and deliberately avoids reference to domestic law to

ensure legal certainty. The OECD leaves it open to contracting states to extend the definition

in a DTA by reference to the domestic law should they so desire.

It is therefore considered that, where the DTA does not extend the definition of interest to

include amounts that are not interest but are treated as interest under the domestic law, a

dividend paid on a hybrid equity instrument may be regarded as a dividend for dividends tax

purposes and not as interest subject to the interest withholding tax.

The remaining 14 DTAs can be summarised thus:

Three DTAs (Zambia, Zimbabwe and Malawi) do not define what constitutes a

dividend or what constitutes interest, and no decision is required – the domestic rules

apply and the amount paid in respect of a hybrid equity instrument is classified as an

amount of interest.

In six DTAs (Germany, Greece, Italy, Kuwait, Lesotho and The Seychelles) the

definition of “interest” includes amounts that are treated as amounts of interest under

the domestic law. The definition of dividend does not exclude these amounts from

being treated also as dividends. However, the DTAs are silent whether the dividend

definition or the interest definition is to be applied. In the circumstances that the states

have seen fit to extend the definition of interest to include deemed interest, it is

considered that the domestic definition of interest should prevail and the distributions

in respect of hybrid equity instruments must be taxed as amounts of interest.

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In five DTAs (France, Ireland, New Zealand, UK and USA), an amount payable in

respect of a hybrid equity instrument is capable of interpretation under the DTA as

either interest or dividend, but the DTA contains a tie-breaker clause, which states

that an amount that meets the requirements of a dividend shall not be classified as

interest for the purposes of the DTA. Distributions to residents of these states in

respect of hybrid equity instruments must be taxed as dividends.

When the withholding tax on interest comes into effect, in order to comply with the

requirements of the Act, the issuer of a hybrid equity instrument will have to identify whether

the dividend payable in respect of that instrument is to be regarded as a dividend or as

interest. This will likely be an election that will be made by the non-resident shareholder,

who will probably elect the status by reference to the likely cash flow implications of the

withholding taxes. Based on the decision, the non-resident will make the necessary

declaration to the issuer to secure that the lowest available rate of withholding tax should

apply.

It is unclear whether SARS has identified this issue and whether there will be processes in

place to deal with applications for DTA relief where the DTA classification is in conflict with

the domestic classification.

There may also be issues relating to payments to non-residents of amounts of interest that are

regarded as dividends under the domestic law.

pwc

ITA: Section 1 definition of dividend and section 8E

DONATIONS

2149. Executory contracts


Liability for donations tax does not arise unless what has transpired is a legally valid

donation.

Controversy in this regard usually arises in relation to an executory contract of donation, that

is to say, a contract of donation in terms of which delivery of the donated property is to take

place in the future, because of the statutory requirements as to the formalities required for

such a contract.

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The requisite statutory formalities

Section 5(1) of the General Laws Amendment Act No, 50 of 1956 provides in this regard that

–

‘[N]o executory contract of donation entered into after the commencement of this Act shall be

valid unless the terms thereof are embodied in a written document signed by the donor or by

a person acting on his written authority granted by him in the presence of two witnesses.’

Where the donated property is immovable property, section 2(1) of the Alienation of Land

Act 68 of 1981 is also applicable. This provision states that –

‘No alienation of land after the commencement of this section shall ... be of any force or

effect unless it is contained in a deed of alienation signed by the parties thereto or by their

agents acting on their written authority.’

Where an executory contract of donation does not comply with the former provision (and,

where the property in question is immovable property, where it does not in addition comply

with the latter provision), it is of no legal force or effect and no liability for donations tax will

arise unless the donation is indeed carried into effect.

There are many circumstances in which an executory donation that did not comply with these

provisions may not be carried into effect. For example, the donor may change his mind. Or he

may die and his executor may (indeed, he should) refuse to deliver the donated property to

the donee since there is no obligation that is legally binding on the estate.

Lacunae in the terms of an executory contract of donation

Where the drafter of a written executory contract of donation is careless or inexpert, it may

happen that the document is silent on a material issue.

The question then arises as to whether there is a valid and binding contract, given that section

5(1) of the General Laws Amendment Act, quoted above, requires of an executory contract of

donation that ‘the terms thereof are embodied in a written document’.

In Scholtz v Scholtz 2012 (5) SA 230 (SCA) the intending donor had donated his half-share of

certain immovable property to the donee. The property in question was encumbered by a

substantial mortgage and the written deed of donation was silent as to whether the property

was being donated free of the bond (in other words, on terms whereby the donor was to pay

off the bond) or whether the property was being donated in its encumbered form (such that

payment of the balance of the mortgage would become the obligation of the donee).

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In the Western Cape High Court, Le Grange J had held that the agreement of donation was

invalid for failure to comply with the statutory requirements.

Apparently missing terms can be supplied by interpretation or by a tacit term

The Supreme Court of Appeal overturned that judgment, and laid down important dicta on

the legal implications where a contract of donation is silent in regard to a material term.

In particular, the court ruled (at para [11]) that a ‘missing term’ in such a contract may be

found via a proper interpretation of the express terms of the agreement; alternatively, the

missing term may be tacitly incorporated into the agreement. In both of these circumstances,

the apparent lacuna is remedied and the contract will be valid.

The court said in this regard (at para [11]) that –

‘in the event of ambiguity, the process of interpretation is not restricted to the wording of the

document. So, for example, reference may be had to the context or the factual matrix of the

contract which include both the background and surrounding circumstances’.

The court said (at para [12]) that tacit terms of a contract –

‘are by definition not to be found through interpretation of the express terms. They are by

definition neither recorded nor expressly agreed upon by the parties. They often pertain to

matters which the parties did not even consider. They emanate from the common intention of

the parties, as inferred by the court from the express terms of the contract and the

surrounding circumstances’.

The court referred with approval to dicta in Wilkins v Voges 1994 (3) SA 130 (A) where

Nienaber J said (at 143-144) that –

‘A tacit term in a written contract, be it actual or imputed, can be the corollary of the express

terms – reading, as it were, between the lines – or it can be the product of the express terms

read in conjunction with evidence of admissible surrounding circumstances. Either way, a

tacit term, once found to exist, is simply read or blended into the contract: as such it is

“contained” in the written deed.’

Consequently, a tacit term, since it is an integral part of the contract, is taken into account in

determining whether the contract in question complies with the requirements of the

Alienation of Land Act.

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It seems clear from the decision of the Supreme Court of Appeal in Scholtz v Scholtz, noted

above, that a tacit term is also taken into account in determining whether a contract of

donation complies with section 5(1) of the General Laws Amendment Act, quoted above.

In the circumstances of Scholtz v Scholtz, therefore, the court held that the executory contract

of donation in question was not invalidated by the absence of an express term as to whether

the donor or the donee was to be liable for the balance of the bond over the donated property,

for this lacuna was capable of being filled, either by an interpretation of the express terms of

the contract or by a tacit term.

pwc

General Law Amendment Act: Section 5(1)

Alienation of Land Act: Section 2(1)

GENERAL

2150. Interpretation of Statutes


Many disputes between SARS and the taxpayer turn on the interpretation of fiscal legislation

or the interpretation of common-law principles articulated by the courts in earlier cases.

Most recently, in TML Consultancy CC v CSARS [2012] 74 SATC 371, where judgment was

given on 22 June 2012, the central issue was whether the close corporation in issue was

disqualified from being taxed as a “small business corporation” in terms of section 12E(4) of

the Income Tax Act No.58 of 1962 because it had earned its income from “personal

services”, namely, consulting.

The Tax Court held that, in this context, consulting bore the narrow meaning of “the offering

of advice by a professional or qualified person” and that the taxpayer in this case, as a close

corporation, held no qualification as a professional, and neither did its sole member.

In CSARS v NWK Ltd [2011] 73 SATC 55 the Supreme Court of Appeal held that one of the

common-law criteria that stamped a transaction as being simulated was that it lacked

“commercial sense”, and in CSARS v Founders Hill (Pty) Ltd [2011] 73 SATC 183 the

Supreme Court of Appeal held that the proceeds of the sale of an asset by a realisation

company would be capital only in exceptional circumstances.

The principles of statutory interpretation

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Every aspiring tax practitioner is required to study the principles that govern the

interpretation of statutes in general and fiscal statutes in particular. Generations of students

have learned the mantra that the golden rule of interpretation is to determine and give effect

to “the intention of the legislature”, and that this is to be derived from the ordinary

grammatical meaning of the language of the legislation unless this would lead to absurdity

that could not have been intended.

Yet a moment’s reflection reveals the difficulties with this principle.

In a legislature consisting of perhaps hundreds of members, how is a common “intention” to

be derived? And, in any event, is it not so that fiscal legislation is drafted, not by

parliamentarians, but by experts at Treasury at the behest of SARS? And that draft legislation

is often redrafted by parliamentary committees and is then subject to public debate, after

which it may be further revised and amended before it is finally enacted into law?

How then is it possible to distill from this process “the intention of the legislature”?

A new locus classicus on the principles of statutory interpretation

On these and other troubling issues regarding the interpretation of legislation, the recent

decision of the Supreme Court of Appeal in Natal Joint Municipal Pension Fund v Endumeni

Municipality 2012 (4) SA 593 (SCA), in which judgment was given on 16 March this year, is

destined to be the new locus classicus.

In summary, Wallis JA, giving the judgment of the court, said that –

Over the last century there have been significant developments in the law relating to

the interpretation of documents, both in this country and elsewhere.

The process of interpretation is objective, not subjective.

A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike

results or that undermines the apparent purpose of the document.

Judges must be alert to, and guard against, the temptation to substitute what they

regard as reasonable, sensible or businesslike for the words actually used. To do so in

regard to a statute or statutory instrument is to cross the divide between interpretation

and legislation.

From the outset it is necessary to consider the context and the language together, with

neither predominating over the other. This is the approach that courts in South Africa

should now follow, without the need to cite authorities from an earlier era that are not

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necessarily consistent and which frequently reflect an approach to interpretation that

is no longer appropriate.

An expression such as “the intention of the legislature” is to be avoided, because it is

a misnomer in so far as it connotes that interpretation involves an enquiry into the

mind of the legislature.

The enquiry is restricted to ascertaining the meaning of the language of the provision

itself. There is no basis upon which to discern the meaning that the members of

parliament or other legislative body attributed to a particular legislative provision in a

situation or context of which they may only dimly, if at all, have been aware.

Accordingly, to characterise the task of interpretation as a search for such an

ephemeral and possibly chimerical meaning is unrealistic and misleading.

The sole benefit of expressions such as “the intention of the legislature” is to serve as

a warning to courts that the task they are engaged on is discerning the meaning of

words used by others, not one of imposing their own views as to what it would have

been sensible for those others to say.

In resolving these problems, the apparent purpose of the provision and the context in

which it occurs will be important guides to the correct interpretation. An

interpretation will not be given that leads to impractical, unbusinesslike or oppressive

consequences, or that will stultify the broader operation of the legislation or contract

under consideration.

These principles are consistent with the dictum of the Constitutional Court in Bato Star

Fishing (Pty) Ltd v Minister of Environmental Affairs 2004 (4) SA 490 (CC) that “the

emerging trend in statutory construction is to have regard to the context in which the words

occur, even where the words to be construed are clear and unambiguous”.

A monumental issue of interpretation lies ahead in relation to the new GAAR

The principles clearly laid down in the Natal Municipal Pension Fund decision and outlined

above will be of great benefit when our courts finally confront the most difficult fiscal

interpretation issue ever faced in this country – that of giving a coherent and commercially

pragmatic interpretation to Part IIA of the Income Tax Act which has replaced the now-

repealed section 103 of the Act as the general anti-avoidance rule.

To date, there has not been a single reported judicial decision on the interpretation of any

aspect of the new Part IIA, which is replete with difficult and contentious words and

concepts, such as –

a lack of commercial substance;

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the misuse or abuse of provisions of this Act;

a significant effect on business risks, legal substance or effect that is inconsistent with

legal form;

the making of compensating adjustments to ensure the consistent treatment of all

parties.

pwc

ITA: Section 12E and Part IIA

INTERNATIONAL TAX

2151. Pension income under the United States/South Africa tax treaty


Non-resident beneficiaries of a deceased’s South African sourced pension income may still

be required to submit an income tax return, even where South Africa’s taxing rights are

limited under a relevant Double Tax Agreement (DTA).

The general principle under South African tax law is that non-residents are taxed on income

from, or deemed to be from, a local source unless South Africa’s taxing rights have been

limited under any relevant DTA. With regard to pension income derived by any person

(including non-residents who may have rendered services in South Africa), the deemed

source rules under section 9(2)(i) of the Income Tax Act, No 58 of 1962 (the Act) would

likely result in at least a portion of that income falling within the South African tax net.

The scenario becomes more complex where the South African sourced pension is received by

a beneficiary of the deceased from a local fund administrator, but that beneficiary has never

set foot in South Africa or rendered any services here. The question arises whether the local

fund administrator is required to withhold monthly PAYE on that amount and whether the

recipient of the pension income is obliged to obtain a tax deduction directive from the South

African Revenue Service (SARS). Further, what role would a DTA play in the

aforementioned scenario, more specifically the United States/South Africa DTA (US Treaty)?

Article 18 of the US Treaty deals with the taxation of private pensions and annuities as well

as the tax treatment of contributions to pension plans. The benefit of the US Treaty is that

where it is read in conjunction with the US Treaty Technical Explanation (USTE), it sets out

clearly the mode of application of Article 18. The USTE states that, under Article 18(1) of the

US Treaty, pension distributions (and other similar remuneration) in consideration of past

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employment from sources within one Contracting State (in this case South Africa) and

beneficially owned by a resident of the other Contracting State (in this case the US), may be

taxed by the Source State (in this case South Africa) to a limited extent. The residence state

(in this case the US) may also tax the distribution.

Under Article 18(1)(b) of the US Treaty, where South Africa is the source Contracting State,

the USTE states that a pro rata amount of a pension distribution corresponding to the amount

of the gross pension distributions from South African sources will be subject to tax in relation

to a beneficiary that is a US resident. However, the aforementioned pro rata rule only applies

if the beneficial owner

has been employed in South Africa for a period or periods aggregating two years or

more during the 10 year period immediately preceding the date on which the pension

first became due; and

was employed in South Africa for a period or period aggregating 10 years or more.

In relation to a beneficiary of the deceased’s pension, it would in most cases not be difficult

to argue that neither of the abovementioned requirements will be met, either in relation to

period of service in South Africa and/or the fact that the beneficiary never rendered services

in South Africa at all. This means that in most cases dealing with the receipt by a non-

resident beneficiary of a deceased’s South African sourced pension income, the sole taxing

rights will be given to the US.

Given the fact that the US would likely be allocated full taxing rights on the South African

sourced pension income, it follows that no normal tax liability arises for the non-resident

beneficiary. Stated differently, the Fourth Schedule to the Act requires PAYE to be deducted

in respect of the employees' normal tax liability – if no normal tax liability exists or is

sterilised by the application of a DTA, then no deduction is required by the local fund

administrator. Further, as there is no obligation to deduct PAYE by operation of law, there

would similarly be no obligation to obtain a tax deduction directive from SARS confirming

this.

However, even where there is no need to obtain a tax deduction directive or deduct PAYE for

that matter, there may still be an obligation on the non-resident beneficiary to submit a tax

return on an annual basis. This is on the basis that the non-resident’s pension income would

still constitute 'gross income' and more importantly, 'remuneration' for purposes of the Fourth

Schedule even though no tax liability exists in South Africa (it is only the taxing provision

that is sterilised by the DTA).

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To the extent that a non-resident beneficiary receives 'gross income', which is below the

required threshold of R120, 000 per annum, no obligation arises to submit an annual tax

return. However, where the non-resident beneficiary receives 'gross income' in excess of

R120, 000 per annum, then he would be obliged to submit an annual tax return and would

need to claim an exemption from South African tax in respect of the pension income.

Cliffe Dekker Hofmeyr

SA-USA DTA

2152. Changes to definition of ‘resident’


Two new changes have been proposed in the draft Taxation Laws Amendment Bill, No 34 of

2012 (Bill) in relation to the definition of the term ‘resident’ in section 1 of the Income Tax

Act, No 58 of 1962 (the Act). The changes are aimed at, amongst others, facilitating the

Government’s initiative to establish South Africa as the gateway into Africa by eliminating

the potential triggering of a dual residence status for a foreign operating subsidiary and thus,

triggering potential double taxation of that entity and allowing South African based fund

managers of foreign investment funds to operate competitively in the international investment

business.

The first change is directed at excluding from the definition of the term “resident”, active

controlled foreign companies (CFCs) in high-tax jurisdictions that are effectively managed in

South Africa. The second change is directed at providing relief to foreign investment funds

which are effectively managed in South Africa. In both cases, certain caveats are proposed in

relation to the “place of effective management” test in the definition of the term “resident”.

Relief for CFCs in high tax jurisdictions

A foreign incorporated company may find itself having a dual residence status in cases where

it is effectively managed from South Africa but incorporated in a foreign jurisdiction. The

foreign company may be subject to double taxation and in some cases the corporate tax

payable in the foreign jurisdiction may be higher than in South Africa resulting in little or no

additional revenue for the South African fiscus when foreign tax rebates are applied. To

eliminate the potential double residency risk, the Bill proposes eliminating the “place of

effective management” test in the definition of “resident” where a company -

is incorporated, established or formed in a foreign country;

has a “foreign business establishment” as defined in section 9D(1);

has its place of effective management in South Africa;

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would, but for the company having its place of effective management in South Africa,

be a controlled foreign company; and

the aggregate of all tax payable by the company to a government of any foreign

country, in respect of any tax year is at least 75% of the amount of normal tax that

would have been payable by that company, if it had been a resident of South Africa.

The effect of this proposed change is that foreign companies which meet the abovementioned

requirements need not concern themselves with questions as to whether the South African

management activities will trigger a basis for taxation in South Africa based on residency.

The proposed effective date for this change is 1 January 2013 and it will apply in respect of

years of assessment commencing on or after that date.

South African fund manager of foreign investment funds

Foreign investors are attracted by South Africa’s sophisticated financial services industry and

therefore sometimes utilise South African based fund managers to manage their Africa region

investment funds. The downside of having an active South African based fund manager

actively managing foreign investments into Africa is that the activities of the fund manager

could potentially result in the foreign fund being regarded as a tax resident of South Africa on

the basis of the “place of effective management” test. This risk generally results in South

African fund managers being given limited mandates in relation to making decisions on

portfolio investments.

The second proposed change to the definition of the term “resident” is aimed at removing the

potential risk of foreign investment funds falling within the South African tax net when they

engage a South African based fund manager.

In order to qualify under the carve-out from the place of effective management test, the

foreign investment fund must be an entity other than an individual -

that is not incorporated, established or formed in South Africa;

that carries on the business of an investment scheme similar to that of a portfolio of a

collective investment scheme;

the business of which is carried on outside South Africa;

the assets of which consist of solely one or more of, inter alia, amounts in cash or that

constitute cash equivalents; financial instruments issued by a listed company or by the

Government of South Africa; and financial instruments the value of which are

determined with reference to financial instruments issued by a listed company;

where no more than 10% of the shares or other form of participatory interest in that

entity are directly or indirectly held by South African residents; and

17

that has no employees and no directors or trustees that are engaged in the management

of that company or trust on a full-time basis.

To the extent that these requirements are met, the place of effective management test will not

take into account services provided by a foreign investment fund that qualifies as a licensed

“financial services provider” under the Financial Advisory and Intermediary Services Act,

2002 (‘FAIS’). Activities that will be disregarded include the provision of financial product

advice, intermediary services and incidental activities thereto in terms of FAIS.

This is a welcome amendment which will allow South African fund managers to actively and

competitively take part in the international investment fund business and this accords with the

Government’s initiative to strategically place South Africa as the gateway into Africa.

The proposed effective date for this change is 1 January 2013 and it will apply in respect of

years of assessment commencing on or after that date.

Edward Nathan Sonnenbergs

ITA: Section 1 definition of ‘resident’; and Section 9D(1)

2153. Treatment of foreign exchange gains and losses


The treatment of foreign exchange (forex) gains and losses is dealt with in terms of section

24I of the Income Tax Act, No 58 of 1962 (the Act). Over time, through various

amendments, section 24I has developed into quite a complicated set of rules. In many

instances the tax treatment of exchange items differs markedly from the treatment for

accounting purposes. It is National Treasury’s intention that section 24I be more aligned with

IFRS. There are essentially three parts of section 24I legislation in respect of which changes

are proposed, namely:

to the connected person rules (section 24I(7A) and 24I(10));

in respect of assets purchased and sold in foreign currency (section 24I(11) and

paragraph 43(1) and (4)); and

to the deferral in respect of assets not yet brought into use (section 24I(7)).

Each of these are discussed below.

The connected person rules

18

In terms of section 24I(7A) pre-8 November 2005 currency gains and losses are deferred in

respect of loans and advances of a capital nature, loans and advances between companies that

are connected persons and loans and advances that are not hedged by a related or matching

FEC. These items are spread over 10 years (i.e. until 2015).

Post 8 November 2005, exchange differences (and not just debt related items) in respect of

related company loans are deferred until realised. This applies to exchange items between a

resident and a connected person in relation to a resident, a resident and a CFC and a CFC and

another CFC.

It is proposed that the only instance where exchange differences will be deferred will be

where entities form part of the same group for IFRS purposes, and then only in respect of

debt between group companies where settlement is neither planned nor likely to occur in the

foreseeable future (in terms of IFRS), or for FEC’s and currency option contracts which are

designated as an effective hedge of foreign investments for IFRS. In all other instances the

tax treatment, it is proposed, will follow the accounting treatment.

Assets purchased and sold in foreign currency

The capital gains tax (CGT) system ignores currency gains and losses when an asset is

acquired and disposed of in the same foreign currency. This rule applies for non-monetary

assets and excludes foreign equity and SA sourced assets. A CGT gain or loss is calculated

on a simplified basis in the foreign currency firstly, which gain or loss is then translated into

rands at the average rate in the year of disposal. It is proposed that this simplified approach

should no longer apply for companies and trading trusts. If applicable, the acquisition price

will be translated into local currency in the year of acquisition, and the disposal price

translated into local currency in the year of disposal. The currency differences will give rise

to a capital gain or loss.

As a separate point, currency gains and losses in respect of loans used to acquire non-

monetary assets (and hedges) are generally ignored. Treasury is of the view that disregarding

currency gains and losses in respect of non-monetary assets is hard to justify. It is proposed

that the matching of monetary to non-monetary items be removed from the mark to market

system of currency taxation applicable to companies and trading trusts.

Deferral for assets not yet brought into use

Forex differences are generally realised for tax purposes on an annual basis irrespective of

realisation. Annual currency recognition is deferred if monetary items are linked to non-

monetary depreciable or amortisable assets which will only be brought into use at a later

stage. This essentially relates to forex differences relating to foreign currency loans that are

19

used to acquire, install, erect or construct tangible property or devise develop, create,

produce, acquire or restore intangible property.

It is proposed by Treasury that the recognition of currency gains and losses should follow

financial accounting on the basis that IFRS does not link monetary items with non-monetary

items (e.g. loans with assets). The current tax deferral rule, for currency exchange items in

order to finance pre-production assets, is without foundation.

Timing of the changes

It is proposed that the changes will apply to all years of assessment commencing on or after

1 January 2013 and all capital gains and losses on the disposal of assets on or after that date.

All currency gains and losses deferred at that date will be triggered at the closing date before

the effective date.

-It is important in anticipation thereof to review the current foreign exchange items in place

and consider the impact if the legislation stays in the format it is proposed.

Ernst & Young

ITA: Eighth schedule - paragraphs 24I and 43

TAX ADMINISTRATION ACT

2154. The Act takes effect


Introduction

The Tax Administration Act, No 28 of 2011 (TAA), which was promulgated on 4th July

2012, took effect on 1st October 2012, except for certain specific provisions dealing with the

imposition of interest payable to the Commissioner: South African Revenue Service by

taxpayers, and, also, by the Commissioner to taxpayers. The rules regulating the payment of

interest will be changing, such that, in future, interest will be compounded on a monthly

basis, both in respect of interest payable by a taxpayer on the late payment of tax, and also, in

respect of refunds payable by SARS to taxpayers.

Transitional rules

Chapter 20 of the TAA contains a number of transitional provisions seeking to ensure the

smooth transition from actions which were commenced under the administrative provisions

of various fiscal statutes, but which had not yet been completed by 30th September 2012.

Chapter 20 of the TAA provides that any tax number allocated to a taxpayer prior to the TAA

20

taking effect will continue to be applicable until SARS allocates a new number to the

taxpayer under the TAA.

Section 259 of the TAA provides that the Minister of Finance must appoint a person as a Tax

Ombud within one year of the commencement date of the TAA, namely 1st October 2012.

The National Treasury has indicated that it was intended to appoint a Tax Ombud before the

end of 2012.

All SARS officials are required to subscribe to an oath or solemn declaration of secrecy,

which was previously contained in section 4 of the Income Tax Act, No 58 of 1962 (the Act),

or section 6 of the Value-Added Tax Act, No 89 of 1991, as amended. Those officials who

may have been administered the oath under another fiscal statute and will be regarded as

having taken the required oath under section 67(2) of the TAA.

Section 261 of the TAA confirms that those persons appointed as the public officer under a

tax act, who held office immediately prior to the commencement of the TAA, will be

regarded as the public officer appointed under the TAA.

Those persons who were appointed as chairpersons of the Tax Board or members of the Tax

Court will continue in office until their appointment is terminated or lapses.

Section 264 of the TAA confirms that those rules of the Tax Court issued under another tax

act prior to the commencement of the TAA, will continue in force as if they were issued

under section 103 of the TAA. It is envisaged that the rules governing objections and appeals

will be reviewed after SARS has followed a consultative process, whereafter those rules will

be promulgated under the TAA.

SARS officials who were authorised to conduct audits under a tax act before the

commencement of the TAA, will be regarded as the official envisaged in section 41 of the

TAA, which allows for a senior SARS official to grant a SARS official written authorisation

to conduct a field audit or criminal investigation.

Section 269 of the TAA provides that those forms issued under the authority of any tax act

prior to the commencement of the TAA, and in use before the date of commencement of that

Act, will be considered to have been prescribed under the authority of the TAA to the extent

consistent with that Act. Similarly, any rulings and opinions issued under the provisions of a

tax act repealed by the TAA, and enforced prior to the commencement of the TAA, which

have not been revoked, will be regarded as having been issued under the authority of the

TAA.

21

Section 270 of the TAA provides that the TAA applies to an act, omission or proceeding

taken, occurring or instituted before the commencement date of the TAA, but without

prejudice to the action taken or proceedings conducted before the commencement date of the

comparable provisions of the TAA. This section, therefore, seeks to ensure that those actions

commenced prior to the TAA and not yet completed by the date of its commencement, must

be continued and concluded under the provisions of the TAA as if taken or instituted under

the TAA itself.

Public notices

The TAA envisages various notices being published in the Government Gazette dealing with

certain aspects of the TAA. Thus far, four public notices have been gazetted under the

provisions of the TAA.

Section 1 of the TAA defines “this Act” as including the regulations and the public notices

issued under the TAA. Thus, the public notices issued pursuant to the TAA, are to be

regarded as part and parcel of the Act itself. The four public notices which have been issued

deal with specific aspects of the TAA.

Record keeping

Section 30 of the TAA sets out the manner in which records, books of account and

documents referred to in section 29 of the Act, must be kept or retained. The TAA requires

that records are kept in the original form, in an orderly fashion, and in a safe place, or, where

retained in electronic form, in the manner to be prescribed by the Commissioner in a public

notice, or in a form specifically authorised by a senior SARS official in terms of section 30(2)

of the Act. Government Notice No 787 contained the public notice issued pursuant to section

30(1)(b) of the TAA. The public notice in question allows taxpayers to keep records in terms

of section 29 in an electronic form, so long as the rules contained in the public notice are

adhered to. Rule 3.2 of the public notice defines an “acceptable electronic form” as a form in

which the integrity of the electronic record satisfies the standard contained in section 14 of

the Electronic Communications and Transactions Act. Furthermore, it is required that the

person required to keep records is able to, within a reasonable period when called on by

SARS, to provide SARS with an electronic copy of the records, in a format that SARS is able

to readily access, read and analyse, or to send the records to SARS in an electronic form that

is readily accessible by SARS, or to provide SARS with a paper copy of those records.

Rule 4 of the public notice requires that the records retained in electronic form must be kept

and maintained at a place physically located in South Africa. Thus, the electronic documents

may not be retained outside of the country without SARS’ consent. The notice states that a

22

senior SARS official may authorise a person to keep records in an electronic form outside of

South Africa where that official is satisfied that the electronic system used by that person will

be accessible from the person’s physical address in South Africa for the duration of the

period that the person is obliged to keep and retain records under the TAA. Furthermore, the

locality where the records are proposed to be kept will not affect access to the electronic

records themselves. In addition, the rules require that there is an international tax agreement

for reciprocal assistance in the administration of taxes in place between the country in which

the person proposes to keep the electronic records and South Africa. Furthermore, the form in

which the records are to be kept satisfies all the requirements of the rules contained in the

public notice, apart from the issue of the physical locality of the storage of those records, and,

importantly, that the person concerned will be able to provide SARS with an acceptable

electronic form of the records on request, within a reasonable period. The public notice also

deals with documentation required to be retained regarding the system utilised by the

taxpayer. Where the computer software used by the taxpayer is commonly recognised, the

taxpayer is not required to retain systems documentation relating thereto. Where, however,

the software used by the taxpayer is not commonly recognised in South Africa, or has been

adapted for the taxpayer’s particular environment, it is necessary to retain the systems

documentation set out in rule 5 of the public notice.

Rule 6 of the public notice places a requirement on persons who keep records in an electronic

format to ensure that measures are taken for the adequate storage of the electronic records for

the duration of the period referred to in section 29 of the Act. It is necessary to store all

electronic signatures, login codes, keys, passwords or certificates required to access the

electronic records, and the procedures to obtain full access to any electronic records that are

encrypted.

Rule 7 of the public notice requires persons to retain electronic records to have the records

available for inspection by SARS in terms of section 31 of the TAA at all reasonable times,

and at premises physically located within the country, or accessible from such premises if

authority in terms of rule 4.2 has been granted. Under rule 8 of the notice, the electronic

records must be able to be made available for purposes of an audit or investigation conducted

by SARS in terms of section 48 of the TAA.

Finally, rule 9 of the public notice provides that any person who keeps records in electronic

form, must be able to comply with the provisions of the rules contained in the public notice

throughout the period that the person is required to keep the records, in order to comply with

section 29 of the TAA.

SARS audits and taxpayer feedback

23

Government Notice No 788, also issued on 1st October 2012, sets out the form and manner of

a report to be submitted by SARS to a taxpayer on the stage of completion of an audit, in

terms of section 42(1) of the TAA. It must be remembered that, in accordance with the TAA,

a taxpayer is required to be advised as to the status or progress in an audit conducted on their

affairs by SARS, which is an improvement in that the Act did not contain any such provision.

Under rule 2 of this public notice, a SARS official responsible for an audit instituted before

but not completed by the commencement date of the TAA, or instituted on or after its

commencement date, must provide the taxpayer subject to audit with a report indicating the

stage of completion of the audit. Where the audit started before the commencement date of

the TAA, SARS must provide feedback within 90 days of the TAA’s commencement and

within 90 day intervals thereafter. Where SARS instituted an audit on or after the TAA

commencement date, the report must be submitted within 90 days of the start of the audit and

within 90 day intervals thereafter, until the audit is concluded by SARS.

In terms of rule 3, SARS must advise the taxpayer as to the current scope of the audit, the

stage of completion of the audit, and relevant materials still outstanding from the taxpayer.

Unfortunately, in the past, it happened too often that taxpayers were subjected to an audit and

would hear nothing from SARS for a long period of time, and then, suddenly, be requested to

supply information within a very short period. The new provisions contained in the TAA

should alleviate this from happening in future.

Interviews by SARS and travelling distance

Government Notice No 789 was issued pursuant to section 47(4) of the TAA, which deals

with the distance to be taken account of in determining whether a person may lawfully

decline to attend an interview with SARS. This public notice prescribes that a person other

than a person described in section 211(3)(a),(b) and (c) of the TAA may decline to attend an

interview where that person is required to travel more than 200kms between the place

designated in the notice and their usual place of business or residence and back.

Where the person described falls within section 211(3)(a),(b) and (c) of the Act, the distance

is increased to 2500kms, and that relates to companies listed on a recognised stock exchange,

a company whose gross receipts or accruals for the preceding tax year exceed R500 million,

or a company that forms part of a group of companies of either of the aforementioned

entities.

Fixed amount penalties

24

Government Notice No 790 was issued pursuant to section 210(2) of the TAA, which deals

with the imposition of a fixed-amount penalty under the TAA. Rule 2 of this public notice

provides that failure by a natural person to submit an income tax return as and when required

under the Income Tax Act, for years of assessment commencing on or after 1 March 2006,

where that person has two or more outstanding income tax returns for such year of

assessment, will be liable to the fixed-amount penalty as envisaged in section 211 of the

TAA.

Outstanding public notices

From a review of the TAA, it would appear that other public notices remain to be issued,

particularly those dealing with the following sections:

section 81(1), regarding fees for advance rulings

section 103, dealing with rules for dispute resolution

section 166(2) and (3), dealing with allocation of payments

section 167, pertaining to rules regarding instalment payment agreements

section 245, regarding dates for submission of returns and payment of tax

section 255, dealing with rules regarding the submission of returns in electronic

format.

Conclusion

The TAA introduces significant changes in the administrative provisions regulating the fiscal

statutes in South Africa, and it is going to take time for both taxpayers and SARS to become

accustomed thereto. SARS has published various documents dealing with the introduction of

the Act, particularly the SARS Short Guide to the Tax Administration Act, 2011, as well as

various other documents dealing with frequently asked questions, and penalties

administration and dispute administration. Taxpayers will need to familiarise themselves with

the provisions of the TAA and the documents published by SARS to obtain a better

understanding of how the TAA impacts on their obligations so as to comply with the fiscal

statutes of the country.


Tax Administration Act: Sections 1; 29; 30; 30(1)(b); 31; 41; 42(1); 47(4); 67(2); 81(1);

103; 166(2)-(3); 167; 210(2); 211; 211(3)(a)-(c); 245; 255; 259; 261; 264; 269; 270

Electronic Communications and Transactions Act

TRADING STOCK

2155. Held and not disposed of

25


Where a taxpayer is engaged in the construction industry and is contracted to erect a building

or effect improvements on land belonging to his client, the ordinary tax consequences would

be that –

since the taxpayer is being contracted to provide services (as distinct from supplying

goods), no amount accrues to him for income tax purposes until he has fully

performed his contractual obligations by rendering those services (except to the extent

that the terms of the contract provide for interim progress payments); in short, no

amount accrues to the taxpayer in respect of work-in-progress where the contract is

one for services rendered;

expenditure incurred in the performance of the contractual obligations is deductible

when incurred;

any fixtures that the taxpayer erects on the land with his own materials pass

immediately, by operation of law, into the dominium of the land-owner by the

principle of accessio.

In the judgment discussed below, the court accepted – see footnote 11 of the judgment – that

the materials that were used to build the prison in question were trading stock.

Consequently, in the absence of legislation to the contrary, the building contractor’s

deduction for the expenditure he incurred in purchasing construction materials that had

passed out of his ownership would not be counterbalanced by their being included in his

income as closing stock at the end of the tax year, and he would get the full fiscal benefit of

the deduction in the year of purchase.

The ordinary tax consequences are overridden where section 22(2A) applies

Section 22(2A) of the Income Tax Act 58 of 1972 has the effect of overriding those ordinary

tax consequences by providing that the building materials (the taxpayer’s trading stock) are,

by a legal fiction, regarded as being “held and not disposed of” by him (although in reality

they had passed out of his ownership when they became fixtures on the property of the land-

owner) and must consequently be included in his year-end closing stock.

This artificial fiscal position endures until the contract has been completed, that is to say,

until such time as the taxpayer has carried out all his contractual obligations and is entitled to

payment of all amounts due by him. In practice, large building contracts usually provide that

the builder is not entitled to final payment until an architect has certified that the building is

complete.

26

In effect, a building contractor’s deduction in respect of his trading stock in the form of

building materials that become fixtures on the client’s property is deferred until he becomes

entitled to payment in full of the contract price. In the interim, the expenditure that he

incurred in the purchase of such materials is counter-balanced by the continued recognition of

their value in the determination of his taxable income in terms of section 22(2A).

In Commissioner of South African Revenue Service v South African Custodial Services (Pty)

Ltd [2012] 74 SATC 61 the building contractor in question tried to argue that the acquisition

cost should be brought into account in terms of section 22(2A), thereby laying the foundation

for claiming that expenditure in a later tax year.

The facts in SA Custodial Services

South African Custodial Services (Louis Trichardt) (Pty) Ltd (“SACS”) entered into a

concession contract with the Minister of Correctional Services to design and construct a

prison in Louis Trichardt on land owned by the Department of Correctional Services and to

operate the prison for 25 years.

The contract in question provided that SACS was entitled to employ sub-contractors. SACS

duly entered into a sub-contract (“the construction contract”) in terms of which the sub-

contractor was appointed to “undertake the design, construction and commissioning” of the

prison in question and to discharge SACS’s contractual obligations to the Minister in this

regard. It was stipulated that the sub-contractor was to be an independent contractor and not

an employee of SACS.

The prison was thereafter duly designed and built in accordance with the specifications

contained in the concession contract. The court pointed out (at para [43] of the judgment) that

the relationship between SACS and its sub-contractor was expressly stated in the construction

contract not to be that of employer and employee and that it was also evident that the sub-

contractor was not to be SACS’s agent, for it was explicit that the sub-contractor was to be an

independent contractor.

Moreover, the contract provided that the sub-contractor undertook to provide all goods and

materials necessary for the works. From this, said the court, it followed that SACS had not

provided the requisite materials and had never owned them at any stage.

The court concluded (at para [45]) that SACS did not fall within the scope of section 22(2A),

in that it had never carried on any construction, building, engineering or other trade in the

course of which improvements were effected to fixed property owned by another person as

envisaged in that provision. Since it had never effected improvements to State-owned

27

property and had never delivered materials to that property, SACS had not at any stage, for

the purposes of section 22(2A), held trading stock that was capable of being deemed to be

held and not disposed of by it.

The lessons of this judgment

It is clear from this judgment of the Supreme Court of Appeal that, from a tax perspective, it

is of critical importance to be aware of the distinction between employees, independent

contractors and agents, and the tax consequences that may flow from the way in which a

party to a contract is categorised.

If a sub-contractor is an employee or agent, then all fiscally relevant acts of the sub-

contractor (for example the purchasing of trading stock and delivery to a building site) are

regarded as acts of the principal; but if he is not an employee or agent, then those are his own

acts and the fiscal consequences are attributed to him, and not to his employer or principal.

These distinctions are critical in relation to building contracts and the application of the

provisions of section 22(2A).

pwc

ITA: Section 22(2A)

VALUE-ADDED TAX

2156. Submission date


Where a vendor files its value-added tax (VAT) returns electronically via the South African

Revenue Service’s (SARS) e-Filing system, the vendor was entitled, in terms of proviso (iii)

to section 28(1) of the Value-Added Tax Act (the VAT Act), to submit the VAT return and to

make payment of the VAT on or before the last business day of the month following the end

of the vendor’s tax period.

Proviso (iii) was amended with effect from 1 October 2012 by the Tax Administration Act

(the TAA) to delete the entitlement of a vendor to file its VAT returns by the last business

day of the month. The effect of the amendment was that the vendor is obliged to file the VAT

return on or before the 25th day of the month following the end of the tax period, but the

vendor is still entitled to make payment on or before the last business day of the month.

28

The amendment created uncertainty with regard to the date when VAT returns must be

submitted in order to avoid penalties and criminal prosecution. An opinion issued by SARS

confirming that as from 1 October 2012, VAT returns must be submitted by the 25th day of

the month even though payment may still be made on or before the last business day of the

month, added to the confusion.

The uncertainty was whether the amendment effected by the TAA applied to all VAT returns

to be submitted electronically on or after 1 October 2012 (which would have included the

VAT returns for September) or only for VAT returns in respect of tax periods ending on or

after 1 October 2012. It was further unclear as to why a vendor would be required to submit

his VAT return by the 25th day of the month, but is allowed to make payment only by the last

business day of the month.

Fortunately, sanity prevailed and SARS issued a notice on 19 October 2012 in which it

clarified that SARS does not require vendors to submit their electronic VAT returns by the

25th day of the month. Vendors may continue to file their VAT returns and make payment on

or before the last business day of the month following the end of a tax period without running

the risk of penalties, interest or criminal prosecution.

SARS also advised that proviso (iii) to section 28(1) will be amended again in the 2012 Tax

Administration Amendment Act, No 21 of 2012, to clarify the position.

It is important to note if a vendor fails to submit a VAT return by the last business day of the

month following the end of a tax period as provided for in section 28(1), the vendor is guilty

of an offence and is liable on conviction to a fine or to imprisonment for a period up to 24

months.

If payment of the VAT is not made in full on or before the last business day of the month

following the end of a tax period, then the vendor is liable for a late payment penalty of 10%

of the VAT amount payable. The vendor will also be liable for interest with effect from the

25th day of the month in which the payment should have been made.


VAT Act: Section 28(1)

2157. Potential pitfalls


Amounts overpaid to you by your customers

29

Where an amount received in respect of a taxable supply of goods and services exceeds the

consideration charged for the supply and that excess is not refunded within four months of

receipt, that excess amount is deemed to be consideration for a supply of services on the last

day of the VAT period during which the four month period ended.

In simple language, that means that if your customer overpays you and you don't refund the

overpayment within four months (e.g. because your customer knows of the overpayment and

asks you to use the overpayment towards his next purchase from you), the overpayment is

vatable and the tax fraction (14/114) of the overpayment is payable by you as output VAT.

When the overpayment is subsequently refunded or used against the later purchase, the tax

fraction of the overpayment “used” can be claimed back as input tax.

Amounts due by you to suppliers

If a VAT vendor claims input tax in respect of a taxable supply of goods or services made to

him and within 12 months after the end of the VAT period within which the deduction of

input tax was made, he has not paid the full consideration in respect of that supply, the tax

fraction (14/114) of the portion of consideration not paid is deemed to be output tax payable.

When the consideration is paid subsequently, the tax fraction can be deducted as input tax in

that VAT period.

In simple language, that means if you haven't paid your supplier within 12 months and you

claimed input tax on the supply, you must pay to SARS as output tax the tax fraction

(14/114) of the amount not paid.

The above two circumstances are often overlooked by VAT registered enterprises and SARS,

on a routine audit, will undoubtedly levy penalties and interest on amounts which should

have been correctly paid to SARS.

Horwath Zeller Karro

VAT Act: Sections 8(27) and 22(3)

SARS NEWS

2158. Interpretation notes, media releases and other documents

Readers are reminded that the latest developments at SARS can be accessed on their website

http://www.sars.gov.za

30

Editor: Mr M E Hassan

Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI

Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees.

The Integritax Newsletter is published as a service to members and associates of the South

African Institute of Chartered Accountants (SAICA) and includes items selected from the

newsletters of firms in public practice and commerce and industry, as well as other

contributors. The information contained herein is for general guidance only and should not be

used as a basis for action without further research or specialist advice. The views of the

authors are not necessarily the views of SAICA.

All rights reserved. No part of this Newsletter covered by copyright may be reproduced or

copied in any form or by any means (including graphic, electronic or mechanical,

photocopying, recording, recorded, taping or retrieval information systems) without written

permission of the copyright holders.

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