Estate Agency Affairs Board. Tax Notes

Transcription

1 Estate Agency Affairs Board Tax Notes

2 Contents Page Chapter 1: Tax Administration Act... 1 Part A - Objections... 2 A.1 What assessments and decisions may be objected against?... 2 A.2 SARS s decision on objection... 2 A.3 Condonation of late objection... 3 Part B - Returns... 4 B.1 What is a return and where can a return form be obtained?... 4 B.2 When must a taxpayer submit a return?... 4 B.3 Form and manner of submitting a return... 4 B.4 Due date for submitting returns... 4 B.5 What if a mistake is made in the return?... 4 B.6 Third party returns... 5 B.7 Other returns required... 5 B.8 Statement concerning accounts by preparer... 5 Part C - Tax payments... 6 C.1 Taxpayers and categories of persons liable to tax... 6 C.2 Duties, entitlements and liabilities of representative taxpayers... 6 C.3 Duties and liabilities of withholding agents... 6 C.4 Responsible third parties... 6 C.5 Personal liability for tax debts... 7 C.6. When must tax be paid?... 8 C.7 Suspension of payment if there is a dispute... 8 Part D - Refunds... 9 D.1 Introduction... 9 D.2 Entitlement to a refund... 9 D.3 When may SARS withhold paying a refund?... 9 D.4 Time period in which to claim a refund... 9 D.5 Refunds and set-off... 9 Part E - Record keeping E.1 The duty to keep records E.2 Who must keep records? E.3 In what form must records be kept? E.4 For what period must records be retained?... 10

3 Part F - Burden of proof F.1 The burden of proof Part G - Disputes and dispute resolutions G.1 Purpose of Chapter Part H - Penalties H.1 Introduction and purpose H.2 What are administrative non-compliance penalties? H.3 When will a fixed-amount penalty be imposed? H.4 How much is the fixed-amount penalty? H.5 Examples of duties H.6 Percentage based penalties H.7 How is a penalty imposed? H.8 Overview of understatement penalty H.9 How is the shortfall calculated? H.10 Applying the Understatement Penalty Table H.11 The behaviours understood Chapter 2: Capital Gains Tax Part A A.1 What is CGT? Part B B.1 Who is liable for CGT B.2 Residents B.3 Non resident Part C C.1 Key definitions C.2 The basic computation C.3 Annual exclusion C.4 The inclusion rate Part D D.1 Primary residence Part E E.1 When is CGT paid? Chapter 3: Transfer Duty Chapter 4: Transfer Duty and VAT... 42

4 Chapter 1: Tax Administration Act INTRODUCTION The drafting of a Tax Administration Act was announced by the Minister of Finance in the 2005 Budget Review. The first draft of the Tax Administration Bill was published in 2009, which was followed by an extensive public consultation process and the Tax Administration Act, 28 of 2011 (the Act), was promulgated on 4 July The Act came into operation on 1 October 2012 by Proclamation No. 51 of 2012, published in Government Gazette on 14 September In terms of the law that has created SARS, the South African Revenue Service Act, 1997 (the SARS Act), SARS s objectives include the efficient and effective collection of revenue. Tax legislation, such as the Tax Administration Act, 2011, seeks to achieve this objective. Tax legislation typically comprises two aspects: Tax liability provisions or tax charging provisions; and Tax administration provisions. The following applicable extracts have been taken from the Tax Administration Act. The full version of the Act is available on 1

5 Part A - Objections Objection against assessment or decision A.1 What assessments and decisions may be objected against? A taxpayer may object against any assessment where the taxpayer is aggrieved by the assessment; a decision by SARS to not extend the period for objection or appeal where the taxpayer requested such extension; any decision that may be objected to or appealed against under a tax Act; a decision to not authorise a refund; a decision to not remit an administrative non-compliance penalty; and a decision to not remit an understatement penalty. The Act distinguishes between an assessment and a decision subject to objection and appeal. Regarding decisions that may be objected to or appealed against under a tax Act, the Act effects amendments to, for example, 3 in the Income Tax Act to include most of the decisions under the Income Tax Act that are subject to objection and appeal. In the VAT Act these decisions are mostly to be found in 32. The requirements for a valid objection are regulated by the rules, which rules will essentially prescribe that an objection must be lodged within 21 business days after the date of assessment; lodged in the prescribed form; specify the grounds of objection in full; specify an address at which the taxpayer will accept notice and delivery of documents for purposes of the dispute; signed by the taxpayer or duly authorised representative; delivered at the SARS address specified for this purpose in the assessment. An objection that does not comply with any of the above requirements will be regarded as invalid and of no effect, unless the taxpayer remedies the invalidity within a prescribed period after delivery of SARS s notice of invalidity to the taxpayer. A taxpayer may not always be required to file an objection against an assessment or a decision made by SARS to correct an assessment. If there is an undisputed error in an assessment the taxpayer can request SARS to correct the mistake by issuing a reduced assessment A.2 SARS s decision on objection The Act provides that SARS must consider a valid objection in the manner and within the period prescribed under the Act and the rules. The Act provides that SARS may disallow the objection or allow it either in whole or in part and alter the assessment accordingly; and SARS must inform a taxpayer by notice of the disallowance or partial allowance of an objection, which notice must o state the basis for the decision; and o contain a summary of the procedures for appeal. 2

6 A.3 Condonation of late objection SARS is authorised to extend the deadline of the period within which an objection must be filed, but the procedure and grounds for such extension are prescribed. The requirements for and limitations of the condonation of a late objection are an application for the extension of the period within which an objection must be filed must be submitted to SARS in the prescribed form before the deadline expires unless o reasonable grounds exist for the delay and the application is submitted within 21 business days of the deadline; or o the delay is due to an exceptional circumstance referred to in 218 or any other circumstance of analogous seriousness and the application is submitted within three years of the deadline; to qualify for an extension for a late objection, the taxpayer has to prove that o for an extension of the objection period for a period of less than 21 business days, reasonable grounds exist for the delay; or o for an extension of the objection period for a period of more than 21 business days, exceptional circumstances exist for the delay; the objection period may not be extended by SARS in the following circumstances: o if more than three years have lapsed from the date of assessment or decision that is subject to objection. In other words, SARS may not condone a late objection that is lodged more than three years after the date of assessment; or o if the grounds of the objection is based on a change in a practice generally prevailing which applied on the date of assessment or the decision. The ordinary dictionary meaning of reasonable is having sound judgment; moderate; ready to listen to reason; not absurd; within the limits of reason; not greatly less or more than might be expected; tolerable; fair. Essentially, for a decision to be reasonable the Commissioner is required to consider all relevant matters. The Constitutional Court has held that there is no absolute standard of reasonableness what is reasonable would depend on the particular circumstances of each case. The concept exceptional circumstances is not defined in the Act in this context, but it is accepted law that when an Act refers to exceptional circumstances it contemplates something out of the ordinary and of an unusual nature. The Constitutional Court has held that the lawgiver cannot be expected to prescribe that which is inherently incapable of delineation if something can be imagined and outlined in advance; it is probably because it is not exceptional. Each case must, therefore, be considered according to its own merits in order to determine whether the reason for requesting an extension of time beyond the prescribed period after the date of assessment, is exceptional and, therefore, justifies the requested extension. Examples of what would constitute exceptional circumstances for purposes of the remittal of penalties are included in 218(2). 3

7 Part B - Returns B.1 What is a return and where can a return form be obtained? The Act defines a return as a form, declaration, document or other manner of submitting information to SARS that incorporates a self-assessment or is the basis on which an assessment is to be made by SARS. A return will generally be a prescribed form, for example Form ITR12 for income tax, which can be obtained at a SARS office or on the SARS website. Non-receipt by a person of a return form does not affect the obligation to submit a return. Return forms can be obtained as follows: Manual returns: A return may be obtained by submitting a request at a SARS office, by post or telephonically. Returns for manual filing cannot be obtained electronically, for example from the SARS website, but are posted by SARS if requested by a taxpayer. efiling: A return is available once an efiler accesses the system by using a username and password. B.2 When must a taxpayer submit a return? If the obligation to submit a return is imposed under a tax Act, the taxpayer must submit the return in accordance with the requirements of the relevant tax Act and the Act. A taxpayer, who is generally not obliged to submit a return, may still be specifically required by SARS to do so. Specific returns required under current law, for example income tax returns by companies, will now be regulated under the general return requirements of the Act and the specific information required will be set out in the prescribed form. B.3 Form and manner of submitting a return A taxpayer who is required to submit a return must do so in the prescribed form, including completing all the information prescribed by a tax Act or the Commissioner in the return; in the prescribed manner, which includes submitting the return at the prescribed place. In the case of efilers, this will be on the efiling system and in the case of manual filers, at the place and in the manner (for example postal delivery) indicated in the return; and by the date specified. Additionally, a return must be a full and true return; and be signed by the taxpayer or an authorised representative and the person who signs a return is regarded for all purposes to be cognisant of the statements made in the return. B.4 Due date for submitting returns A taxpayer who is required to submit a return must do so by the date specified in the tax Act; by the date specified by the Commissioner in a public notice; if an individual extension has been given to the taxpayer by SARS, by that extended date; if a general extension has been given by the Commissioner, by that extended date; or the date for submission of returns determined by the Minister, if he or she exercises the power to do so. B.5 What if a mistake is made in the return? Before an original assessment is issued, SARS may request or allow a person to submit an amended return to correct an undisputed error in the return. This will typically apply in the efiling environment as a way to correct honest errors made in the return which may result in an incorrect assessment being issued. If a taxpayer, who was requested to submit an amended return, accesses the efiling system, a new return populated with the information in the erroneous return will be accessible and the taxpayer must fix the error and file this return. However, once an original assessment has been issued the only way to rectify it is through an additional or reduced assessment, or the withdrawal thereof. 4

8 B.6 Third party returns Third party reporting enables income tax returns to be pre-populated and helps SARS to verify accuracy of taxpayers disclosures. This contributes to the development of an appropriate risk assessment environment. Currently a return is prepopulated with remuneration received from employers. As SARS s systems evolve, the pre-populated returns may include interest, medical aid related information and other third party information. This is intended to simplify the filing process. The Commissioner may in a public notice require specific third party information to be provided. Every person who meets the criteria set out in this public notice has a duty to submit the information in the form and manner and by the date prescribed in the notice. The notice calling on third party returns to be filed must set out who must file a third party return; stipulate by when the third party return must be filed (a third party return may be required at any time and not necessarily once a year); and prescribe what information is to be included. The Commissioner determines the prescribed form that must be completed, and, therefore, will determine what information an affected third party must report on. The notice may require returns from, for example employers that employ people; institutions that receive amounts for another person or pay money to another person; or institutions that control the assets of another person. B.7 Other returns required Under this Act, SARS may call on any person, whether a taxpayer or third party, to file a further or more detailed return for any tax. An interim income tax return can also be requested under the Income Tax Act, 1962, which is normally required before a taxpayer emigrates, becomes non-resident or ceases to exist before the end of the relevant tax period. A special return for VAT purposes must still be rendered when a deemed supply is made. B.8 Statement concerning accounts by preparer If any return furnished by a person under a tax Act is supported by any balance sheet, statement of assets and liabilities or account prepared by any other person, the taxpayer may be requested to submit a certificate or statement recording the extent of the examination by the preparer of the books of account and of the documents from which the books of account were written up; and in so far as may be ascertained by the examination, whether or not the entries in those books and documents disclose the true nature of any transaction, receipt, accrual, payment or debit. The preparer must, at the request of the taxpayer, submit to that taxpayer a copy of the certificate or statement. The submission of false certificate or statement constitutes a criminal offence and may trigger an administrative noncompliance penalty 5

9 Part C - Tax payments C.1 Taxpayers and categories of persons liable to tax Categories A clear distinction is made between the person originally chargeable to tax and the person s representative, a withholding agent, and a responsible third party. A responsible third party becomes liable to pay tax in a personal capacity if certain circumstances are met. C.2 Duties, entitlements and liabilities of representative taxpayers A representative taxpayer is in such capacity subject to the duties, responsibilities and liabilities of the taxpayer represented; entitled to any abatement, deduction, exemption, right to set off a loss and other items that could be claimed by the person represented; and liable for the amount of tax specified by a tax Act. The above duties, responsibilities, entitlements and liabilities of a representative taxpayer are, however, limited to the following: The income to which the representative taxpayer is entitled; Moneys to which the representative taxpayer is entitled or has the management or control; Transactions concluded by the representative taxpayer; and Anything else done by the representative taxpayer in such capacity. A representative taxpayer may be assessed in respect of any tax but such assessment is regarded as made upon the representative taxpayer in such capacity only. C.3 Duties and liabilities of withholding agents The administration of withholding taxes is regulated both by the Act and the relevant tax Acts, which impose specific duties on withholding agents. Under the Act the following tax liability and payment obligations apply to withholding agents irrespective of the type of withholding tax: A withholding agent, i.e. a person who must withhold tax under a tax Act and pay it to SARS; When is a withholding agent personally liable for failure to withhold tax or pay tax withheld; When does a withholding agent have a right to recovery of the amount of withholding tax from the person who is primarily liable for the tax; SARS may require security from withholding agent for payment of withholding tax under certain circumstances e.g. if the withholding agent previously failed to pay withholding tax; The obligation to pay withholding tax is imposed by the relevant tax Act, e.g. 35 in the Income Tax Act, but the Act may prescribe the manner of payment, e.g. electronically; SARS may seize assets of defaulting withholding agent in anticipation of preservation order by High Court; Pay-now-argue-later and suspension of the amount for which the withholding agent is personally liable pending outcome of dispute Account of withholding agent and allocation of payments the Commissioner may apply the first-in-first-out principle in respect of a group of taxes, e.g. withholding taxes; and A withholding agent unable to pay may request deferment by means of an instalment payment agreement. C.4 Responsible third parties The Act extends personal liability for tax debts to the following third parties: A third party holding or owing money and appointed to satisfy tax debts: A person who holds or owes or will hold or owe any money for or to a taxpayer and who is required by SARS to pay the money to SARS, but fails to do so (known under current law as an agent appointment); A third party involved in financial management: A person who controls or is regularly involved in the management of the overall financial affairs of a taxpayer and who was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer; 6

10 Shareholders acquiring assets of a wound-up company: A shareholder who acquired assets within one year prior to the winding-up of a company without having satisfied its tax debts. This generally happens in a scenario known as asset stripping or dividend stripping of a company by shareholders; A transferee receiving assets below market value: Any person who is a connected person in relation to a taxpayer and received assets from that taxpayer without consideration or for consideration below fair market value; and A third party who assists with obstruction of tax collection: A person, who knowingly assists a taxpayer in order to obstruct the collection of tax debts, is jointly and severally liable with the taxpayer. C.5 Personal liability for tax debts The circumstances when a tax liability in respect of each category of person will arise both in representative capacities and personal capacities are prescribed. Requirements for personal liability Category Requirements for personal liability Representative taxpayers A representative taxpayer becomes liable in terms of 155 if the tax could have been paid to SARS but was not; or the amount in respect of which the tax was chargeable was disposed of. Withholding agents Liability arises in terms of 157 if tax is withheld but not paid to SARS, or if the tax could have been withheld but was not. Responsible third parties: Person in control of financial management Shareholders of a company in liquidation Section 180 provides that a person who controls or is regularly involved in the management of the overall financial affairs of a taxpayer is personally liable if the person was negligent or fraudulent in the payment of the tax debts of the taxpayer Section 181 provides that when a company is wound up while having a tax debt, a shareholder who received a company asset within one year is personally liable. The section does not apply to listed companies. It is important to note that the tax debt also includes tax that would have existed had the company complied with its tax obligations; and the shareholder has the same rights against SARS as the company had. The section applies to a company that is a principal taxpayer, a representative taxpayer, a withholding agent, and any category of responsible third party A transferee of assets Section 182 provides that if a connected party to the taxpayer receives a taxpayer s asset for free or below market value, the person becomes personally liable to pay a tax debt that existed at the time the asset was transferred. The liability is the lesser of the tax debt at the time of receipt and the difference between the fair market value and the consideration paid. The tax debt is the actual tax debt at the time or what the tax debt should have been had the taxpayer complied with tax obligations. Liability is triggered in respect of assets received less than a year before SARS notifies the transferee of personal liability. Person assisting to dissipate assets Section 183 provides that a person who obstructs collection assists in dissipating a taxpayer s assets is jointly liable with the original taxpayer. This person is liable to the extent that their assistance reduces the taxpayer s assets Liability of person appointed to satisfy a tax debt If SARS appoints a person to pay tax from money held for the taxpayer, and the person ignores the appointment, then in terms of 179 the person becomes personally liable for the money 7

11 C.6. When must tax be paid? The Act provides that tax is payable either on a date specified in a tax Act or on a date specified by SARS. The date when an amount must be paid, will be determined as set out below. Provision is also made for an expedited due date for payment or the provision of security where there is a risk of dissipation of assets to evade or frustrate the collection of tax. C.7 Suspension of payment if there is a dispute Also known as the pay-now-argue-later rule, the obligation to pay tax, which arises upon the issue of an assessment, is not automatically suspended by an objection or appeal. The obligation can only be suspended by SARS upon request by the taxpayer. A taxpayer who pays disputed tax and whose objection or appeal is upheld is entitled to interest from the date of payment of the disputed amount to the date on which such amount is refunded. This rule applies across all taxes. 8

12 Part D - Refunds D.1 Introduction The payment of a refund is unfortunately a significant risk area, because a small number of people submit incorrect or even completely false refund claims. Therefore, even though a taxpayer is entitled to be refunded, SARS has the right to establish the legitimacy of a claim. D.2 Entitlement to a refund A taxpayer is entitled to a refund in two instances, i.e. when the refund is correctly stated in an assessment; and if a taxpayer made a mistake and paid an amount greater than what is contained in an assessment. D.3 When may SARS withhold paying a refund? Even though a taxpayer is entitled to a refund, SARS may withhold payment of a refund to determine the correctness of the refund; and if a taxpayer has not submitted income tax, provisional tax, employees tax or VAT returns. If a taxpayer provides acceptable security SARS must release a refund before verification, inspection or audit is finalised. A decision not to authorise a refund is subject to objection and appeal. D.4 Time period in which to claim a refund If a refund relates to a self-assessment tax, then the refund must be claimed within five years from the date of the assessment. In the case of a SARS assessment the person must claim the refund within three years of the date of assessment by SARS. D.5 Refunds and set-off A refund and interest on the refund must be set off against a taxpayer s tax debt under a tax Act and a debt outstanding under the Customs and Excise Act, 1964, unless the tax debt is disputed and suspended by SARS. Similarly, a refund cannot be set off against a tax debt if there is a deferred payment arrangement. 9

13 Part E - Record keeping E.1 The duty to keep records This Act imposes a duty on a person to retain the records, books of account or documents needed to comply with a tax Act. It is important to note that certain taxpayers, for example employers and vendors, are required to keep additional specific records in terms of the relevant tax Acts. Under This Act, a person must keep the records, books of account or documents that enable the person to observe the requirements of a tax Act; are specifically required under a tax Act; and enable SARS to be satisfied that the person has observed these requirements. E.2 Who must keep records? The requirement to keep records for a tax period apply to a person who has submitted a return for the tax period; is required to submit a return for the tax period and has not submitted a return for the tax period; or is not required to submit a return but has, during the tax period, received income, has a capital gain or loss, or engaged in any other activity that is subject to tax or would be subject to tax but for the application of a threshold or exemption. E.3 In what form must records be kept? Regarding the manner of keeping records, a new requirement is added. This is to ensure the orderly and safe retention of the records and efficient access thereto by SARS, for purposes of an inspection or audit, during the prescribed retention period. To ensure that records are kept in the correct form, provision is made that SARS may inspect the records for this purpose, in addition to an examination, audit or investigation under the Act. A person obliged to keep records must keep the records in o their original form; o the form generally prescribed by the Commissioner by public notice; or o the form authorised by a senior SARS official upon request by a specific taxpayer for the retention of information contained in records or documents by that taxpayer in a different but acceptable form; in an orderly fashion; in a safe place; and open for inspection, audit or investigation by SARS. SARS can do an unannounced inspection to ensure that the records that have to be retained are actually retained and a taxpayer has the duty to keep the necessary E.4 For what period must records be retained? The periods for which persons are required to keep records are set out in the table below. 10

14 Record retention periods Person A person who has submitted a return A person who is required to submit a return for the tax period and has not submitted a return A person who is not required to submit a return but has, during the tax period, received income, has a capital gain or loss or engaged in any other activity that is subject to tax or would be subject to tax but for the application of a threshold or exemption A person who has been notified or is aware that the records are subject to an audit or investigation A person who has lodged an objection or appeal against an assessment or decision under this Act Period From the date of the submission of the return until the last day of a period of five years Indefinite, until a return is submitted, as from when the period of five years applies If required to submit return: Date of submitting return If not required to submit return but received income: End of the tax period If failed to submit return: End of the tax period Until the audit is concluded or the applicable five year period, whichever is the latest Until the disputed assessment or decision becomes final or the applicable five year period, whichever is the latest 11

15 Part F - Burden of proof F.1 The burden of proof This generally lies with a taxpayer in view of the fact that the assessment is essentially based on facts within the particular knowledge of that taxpayer. However, the Act now provides that the burden of proof is on SARS to prove an assessment based on an estimate is reasonable; and the basis for imposing an understatement penalty. It must also be noted that when the Commissioner authorises a jeopardy assessment a taxpayer has the right to approach a High Court for review on the basis that the assessment is excessive or that there is no justification for the jeopardy assessment. In such a review application SARS bears the burden of proving that the making of the assessment was reasonable in the circumstances. This, however, is not a burden of proof in the context of objections and appeals. 12

16 Part G - Disputes and dispute resolutions G.1 Purpose of Chapter When taxpayers are aggrieved by an assessment, they have a right to dispute it. However they must follow the rules issued under 103 governing the following: The procedures to lodge an objection and appeal against an assessment or decision that is subject to objection and appeal under 104(2); Alternative dispute resolution (ADR) procedures under which SARS and the person aggrieved by an assessment or decision may resolve a dispute; The conduct and hearing of an appeal before a tax board or tax court. Dispute Resolution rules have been published by SARS in its dispute resolution guide issues October 2014 and effective 11 July

17 Part H - Penalties H.1 Introduction and purpose The principal goal of sanctions is based on a simple premise the threat of punishment (imposition and effective collection of monetary administrative sanctions) deters unwanted behaviour (non-compliance and tax evasion). If the likely punishment is sufficient to outweigh the prospect of gain, a rational person will not undertake the activity that will result in that likely punishment. H.2 What are administrative non-compliance penalties? An administrative non-compliance penalty means a penalty imposed by SARS. This is due to the following types of examples: failure to keeps records, failure to report any reportable arrangements, non compliance with a request for information, obstruction of SARS officials, failure to comply with tax obligations or public notices. It comprises fixed amount-based and percentage-based penalties. A fixed amount-based penalty is charged when an administrative obligation is not complied with, and the percentage-based penalty is generally imposed when certain amounts of tax are not paid. H.3 When will a fixed-amount penalty be imposed? There are a number of obligations that a taxpayer is legally required to comply with, and a fixed amount penalty is imposed when a taxpayer does not comply with an obligation. The amount of the penalty imposed in a penalty assessment will increase automatically for each month, or part thereof, that the person fails to remedy the non-compliance within one month after the date of the delivery of the penalty assessment, if SARS is in possession of the current address of the person and is able to deliver the assessment, but limited to 35 months after the date the date of assessment of the penalty; or the date of the non-compliance if SARS is not in possession of the current address of the person and is unable to deliver the penalty assessment, but limited to 47 months after the date of non-compliance. H.4 How much is the fixed-amount penalty? The Act contains a table that specifies precisely what amount is imposed for non-compliance. As can be seen from the penalty table, the amount depends on the amount of the taxpayer s taxable income or assessed loss for the preceding year of assessment. This is essentially to ensure that the penalty is proportionate to the size of the taxpayer to ensure an impactful penalty. Special rules apply for large companies and their groups, as well as large exempt institutions. A penalty is regarded as tax as defined in the Act, and is interest bearing from the effective date which in relation to the original penalty amount, is the date for payment specified in the penalty assessment; and in relation to any increment under - 211(1), the date of the increment. Fixed amount penalty table Item Assessed loss or taxable income Penalty for preceding year 1 Assessed loss R R 0 R R R R R R R R R R R R R R R R R Above R R

18 H.5 Examples of duties The table below reflects examples of what could attract a fixed-amount administrative non-compliance penalty. Examples of duties for a fixed amount non-compliance penalty Registration requirements If there is a change to registration details Returns Retaining records Information gathering Debt management not registering when required to registering outside of the time prescribed to register not completing a registration form in full or correctly not submitting the supporting documentation not informing SARS when there is a change of a postal, physical or electronic address; to the representative taxpayer; or to banking details Not filing a return at all Not filing a return on time Not using the prescribed form Not signing the return as required Not retaining records in their original form or in an authorised manner Not retaining records for the prescribed period Not keeping the records open for inspection by SARS Not attending an interview when requested Not providing material available when requested at all or on time Not co-operating during a field audit or investigation Not giving full and accurate information when requesting a deferred or instalment payment arrangement H.6 Percentage based penalties Percentage based penalties are imposed under the Act if SARS is satisfied that an amount of tax was not paid as and when required under a tax Act. SARS may impose a penalty equal to the percentage, as prescribed in the relevant tax Act, of the amount of unpaid tax. The procedures for the imposition and remittance of a percentage based penalty are regulated by the Act, but the circumstances that trigger the imposition of the penalty remain in the tax Act. Examples when the percentage-based penalty will be imposed Income tax [ITA 35A] Turnover tax [ITA 6th Schedule par 11(6)] Provisional tax [ITA Fourth Schedule.] Employers & employees tax [ITA Fourth Schedule] Value-Added Tax [VAT Act 39 When a SA resident buys immovable property from a non-resident seller and does not withhold and pay the fixed percentage to SARS, a penalty of 10% is imposed A late payment penalty will be imposed if a micro-business doesn t pay VAT, or a vendor that deregistered because the value of supplies no longer exceeds R1million doesn t pay VAT A 10% penalty is imposed on the late or non-payment of provisional tax [par 27] A 20% penalty is imposed if a taxpayer fails to file an estimate [par 20A] A 20% penalty is imposed if the taxpayer understates a provisional tax estimate by a particular percentage of the taxable income [par 20] If an employer fails to file a return (reconciliation) SARS can impose a percentage based penalty for each month that the employer fails to submit a complete return, which in total may not exceed 10 per cent of the total amount of employees tax If employees tax is not paid the employer must pay a 10% penalty A 10% penalty is imposed if UIF contributions are not paid Failure to indicate taxable fringe benefits in employees tax certificates triggers a penalty equal to 10% of the cash equivalent of the taxable benefit. Failing to pay by the 25th attracts a 10% penalty H.7 How is a penalty imposed? The fixed-amount and percentage-based penalties are contained in a penalty assessment. This penalty assessment notice is in a prescribed format and contains the date when the penalty must be paid. If the penalty is raised simultaneously with an assessment for another tax then the date of payment is the same date of payment for the tax assessed. 15

19 H.8 Overview of understatement penalty An understatement penalty will be included in an assessment issued by SARS and must be paid by the date specified in the notice of assessment. An understatement penalty may only be imposed if the fiscus is prejudiced by the taxpayer s conduct in reporting. The fiscus will be prejudiced if there is a shortfall. In simple terms, the shortfall is the difference between the correct amount of tax that should have been reported and the amount that was reported by the taxpayer. If there is prejudice, this must have been caused because a taxpayer did not file a return; filed a return but omitted an item from that return; or filed a return in which an incorrect statement was made. H.9 How is the shortfall calculated? The shortfall on which the applicable percentage is applied, is the sum of the difference between (a) the tax properly chargeable and what would have been charged if the taxpayer s reporting had been accepted; (b) the amount properly refundable and what was refundable according to what the taxpayer reported; and (c) the notional amount of tax applied to the loss or other benefit properly carried forward, and what the loss or benefit was according to what the taxpayer reported. If an understatement results in a difference under both paragraphs (a) and (b), the shortfall must be reduced by the amount of any duplication between the paragraphs. The tax rate is the maximum tax rate applicable to the taxpayer, ignoring an assessed loss or any other benefit brought forward from a preceding tax period to the tax period. H.10 Applying the Understatement Penalty Table In the case of tax being underpaid because of an understatement made by a taxpayer, the Act provides for different rates of an understatement penalty based on the type of behaviour or the degree of culpability involved. Understatement Penalty Table Item Behaviour Standard Case If obstructive, or if is a repeat case Voluntary disclosure After notification of the audit Voluntary disclosure before notification of the audit 1 Substantial 25% 50% 5% 0% understatement 2 Reasonable care not 50% 75% 25% 0% taken in completing the return 3 No reasonable grounds 75% 100% 35% 0% for tax position taken 4 Gross negligence 100% 125% 50% 5% 5 Intentional tax evasion 150% 200% 75% 10% The amount of understatement penalty is determined by the amount resulting from applying the highest applicable understatement penalty percentage in accordance with the understatement penalty table to the shortfall. In other words, if a taxpayer s behaviour involves both that no reasonable grounds exist for a tax position taken (item (3) in the table) and gross negligence (item (5) in the table), item (4) will apply. H.11 The behaviours understood H.11.1 Substantial understatement If no other behaviour defines the facts of a case, then an understatement penalty will be triggered if there is a substantial understatement. A substantial understatement means that the prejudice to SARS must exceed the greater of 5% of the tax properly chargeable or refundable, or R1 million. A specific rule is provided in the Act that allows the remittance of a substantial understatement, under which SARS must remit a penalty imposed for a substantial understatement if SARS is satisfied that the taxpayer made full disclosure of the arrangement that gave rise to the prejudice to SARS or the fiscus by no later than the date that the relevant return was due; and 16

20 was in possession of an opinion by a registered tax practitioner that o was issued by no later than the date that the relevant return was due; o took account of the specific facts and circumstances of the arrangement; and o confirmed that the taxpayer s position is more likely than not to be upheld if the matter proceeds to court. H.11.2 Reasonable care not taken Reasonable care is not defined, so the ordinary meaning must apply. Taxpayers are legally responsible for their tax affairs. A taxpayer must take reasonable care in keeping records and in providing complete and accurate information to SARS. Reasonable care means that a taxpayer is required to take the degree of care that a reasonable, ordinary person in the circumstances of the taxpayer would take to fulfil his or her tax obligations. It means, for example, a taxpayer must try his or her best to lodge a correct tax return. Although a taxpayer is liable for the actions of their employees, the question of whether the taxpayer has taken reasonable care must still be considered. The reasonable care standard does not mean perfection, but refers to the effort required commensurate with the reasonable person in the taxpayer s circumstances. If the taxpayer uses an adviser to complete a return and the practitioner does not exercise reasonable care, the taxpayer is liable to pay an understatement penalty. H.11.3 No reasonable grounds for the tax position Where an underpayment of tax occurs due to a taxpayer s interpretation of the application of a tax Act, an understatement penalty is payable if the taxpayer does not have a reasonably arguable position. A taxpayer s interpretation of the application of the law is reasonably arguable if, having regard to the relevant authorities, for example an income tax law, a court decision or a general ruling, it would be concluded that what is being argued by the taxpayer is at least as likely as not, correct. Tax position is defined to mean an assumption underlying one or more aspects of a tax return, including whether or not an amount, transaction, event or item is taxable; an amount or item is deductible or may be set off; a lower rate of tax than the maximum applicable to that class of taxpayer, transaction, event or item applies; or an amount qualifies as a reduction of tax payable. If a shortfall arises because of a substantive disagreement concerning the application of a taxation provision, this understatement penalty will be imposed if the taxpayer s position is not based on reasonable grounds. The purpose is not to levy a penalty when SARS disagrees with a position adopted by a taxpayer but to attach a penalty where a taxpayer assumes a position unreasonably. As there is an inherent risk in assuming a tax position, taxpayers are expected to adopt a sensible approach in the process of adopting a tax position and to also have considered the integrity of the tax position taken. H.11.4 Gross negligence Where a taxpayer is grossly negligent, the result may be that too little tax is paid or payable or a tax refund is overstated. Gross negligence essentially means doing or not doing something in a way that, in all the circumstances, suggests or implies complete or a high level of disregard for the consequences. The test for gross negligence is objective and is based on what a reasonable person would foresee as being conduct which creates a high risk of a tax shortfall occurring. Gross negligence involves recklessness but, unlike evasion, does not require an element of mens rea, meaning wrongful intent or guilty mind, or intent to breach a tax obligation. H.11.5 Intentional tax evasion The most severe penalty is preserved for cases where a taxpayer has acted with the intention to evade tax. To evade tax includes actions that are intended to reduce or extinguish the amount that should be paid, or which inflate the amount of a refund that is correctly refundable to the taxpayer. Intentional tax evasion can exist where a taxpayer makes a false statement in a return, and even where a person does not file a return. The most important factor is that the taxpayer must have acted with intent to evade tax. Intention is a wilful act, that exists when a person s conduct is meant to disobey or wholly disregard a known legal obligation, and knowledge of illegality is crucial. Whether SARS acts on or accepts a false declaration is irrelevant. If SARS does not accept the declaration, but audits the taxpayer and determines the correct tax position the original intent to evade tax is not excused. Intention may, at times, be difficult to distinguish from an act that is grossly negligent. Since the application of tax law to a particular taxpayer may be complex, it may be that a genuine misunderstanding of the practical application of a taxing provision does not indicate intentional tax evasion. If the taxing provision is uncertain, 17

21 for instance if there are conflicting judgments on the issue, and the taxpayer applies a reasonable interpretation, it is doubtful that intent to evade could be established and that the more appropriate behavioural category would be whether the taxpayer had taken a tax position on unreasonable grounds or, at worse, that the taxpayer has been grossly negligent. This is an area that is also influenced by the nature of the actions that underlie an understatement and the circumstances of the taxpayer. 18

22 Chapter 2: Capital Gains Tax Introduction Capital gains tax (CGT) was introduced in South Africa with effect from 1 October 2001 (referred to as the valuation date ) and applies to the disposal of an asset on or after that date. Internationally, such a tax is not uncommon, with many of South Africa s trading partners having implemented CGT decades ago. All capital gains and capital losses made on the disposal of assets are subject to CGT unless excluded by specific provisions. Extracts regarding Capital Gain Tax have been taken from the Comprehensive Guide to Capital Gains Tax. The full version of this guide is available on 19

23 Part A A.1 What is CGT? Capital gains tax (CGT) is not a separate tax but forms part of income tax. A capital gain arises when you dispose of an asset on or after 1 October 2001 for proceeds that exceed its base cost. The relevant legislation is contained in the Eighth Schedule to the Income Tax Act 58 of 1962.Capital gains are taxed at a lower effective tax rate than ordinary income. Pre- 1 October 2001 CGT capital gains and losses are not taken into account. Not all assets attract CGT and certain capital gains and losses are disregarded. A withholding tax applies to non-resident sellers of immovable property (section 35A). The amount withheld by the buyer serves as an advance payment towards the seller s final income tax liability. 20

24 Part B B.1 Who is liable for CGT Paragraph 2 of the Eight schedule makes a distinction between persons who are residents in South Africa and persons who are not. B.2 Residents CGT applies to any (capital) asset of a South African resident. This means that a South African resident is taxed on capital gains made on the sale or disposal of assets which he owns anywhere in the world. B.3 Non resident As far as non residents are concerned, the sale or disposal of the following assets is subject to the CGT provisions, if the assets are capital in nature: fixed property in South Africa Any interest or right in immovable property situated in South Africa Assets connected with a South Africa permanent establishment of the non resident person For non residents paragraph 2(2) defines an interest in immovable property situated in SA as including equity shares in a company, or vested interest in the assets of a trust if: At least 80% of the value of the shares, rights or vested interest is attributable to immovable property and In the case of a company or other entity, the non resident holds at least 20% of the equity shares or ownership or right to ownership. 21

25 Part C How much is CGT C.1 Key definitions The Eighth Schedule provides for four key definitions (Asset, Disposal, Proceeds and Base Cost) which form the basic building blocks in determining a capital gain or loss. C.1.1 Asset An asset is widely defined and includes property of whatever nature and any right to, or interest in, such property. CGT applies to all assets disposed of on or after 1 October 2001 (valuation date), regardless of whether the asset was acquired before, on, or after that date. Nevertheless, only the capital gain attributable to the period on or after 1 October 2001 will be subject to CGT. C.1.2 Disposal A wide meaning is given to the term disposal. The following are some examples of events that are disposals: Sale of an asset Donation of an asset Death Cessation of residence Loss or destruction of an asset C.1.3 Proceeds The amount received by or accrued to the seller on disposal of the asset constitutes the proceeds. Assets disposed of by donation, for a consideration not measurable in money, or to a connected person at a non-arm s-length price are treated as being disposed of for an amount received or accrued equal to the market value of the asset. Amounts included in income such as a recoupment of capital allowances are excluded from proceeds. C.1.4 Base cost Broadly the determination of the base cost of an asset depends on whether it was acquired on or after 1 October 2001; before 1 October 2001; or by donation, for a consideration not measurable in money or from a connected person at a non-arm s length price. Assets acquired on or after 1 October 2001 The base cost of an asset acquired on or after 1 October 2001 generally comprises the actual expenditure incurred on the asset. In order to qualify for inclusion in base cost such expenditure must appear on the list of qualifying expenditure in paragraph 20 of the Eighth Schedule. Some of the main costs that qualify to be part of the base cost of an asset include the costs of acquisition or creation of the asset; the cost of valuing the asset for the purpose of determining a capital gain or loss; the following amounts actually incurred as expenditure directly related to the acquisition or disposal of the asset, namely o the remuneration of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal advisor, for services rendered; o transfer costs; o securities transfer tax, transfer duty or similar duty; o advertising costs to find a seller or to find a buyer; o moving costs; o installation costs including foundations and supporting structures; o donations tax limited by a formula; o cost of an option used to acquire or dispose of the asset; cost of establishing, maintaining or defending a legal title to or right in the asset; 22

26 cost of effecting an improvement to or enhancement of the value of the asset, if that improvement or enhancement is still reflected in the state or nature of the asset at the time of its disposal. and value-added tax incurred on an asset and not claimed as an input tax credit for value-added tax purposes. Assets acquired before 1 October 2001 In order to exclude the portion of the gain or loss relating to the period before 1 October 2001, you need to determine a value for the asset as at that date (referred to as the valuation date value ). You may use one of the following methods to determine the valuation date value of the asset: 20% (proceeds less allowable expenditure incurred on or after 1 October 2001). This method would typically be used when no records have been kept and no valuation was obtained at 1 October Market value of the asset as at 1 October In order to use this method you must have valued your asset on or before 30 September 2004 except in the case of certain assets whose prices were published in the Government Gazette, such as South African-listed shares or participatory interests in collective investment schemes. Time-apportionment base cost method. This is a method of calculating the value of the asset based on how long you have owned it before and after 1 October The calculation is done as follows: Original cost + [(proceeds original cost) Number of years held before 1/10/2001 Number of years held before 1/10/ number of years held on or after 1/10/2001] Note: When the time-apportionment method is used to determine the base cost of an asset as at 1 October 2001, selling expenses must be deducted from proceeds when applying the relevant formulae. Note: When no records have been kept and no valuation was obtained on or before 30 September 2004, the 20% of proceeds method must be used. A part of a year is treated as a full year. The number of years before valuation date is determined by counting in yearly intervals starting on the date of acquisition and ending on 30 September Similarly, the number of years on or after the valuation date is determined by counting the yearly intervals starting on 1 October 2001 and ending on the date of disposal. The proceeds used in the above formula are determined using a separate formula when improvements to an asset have been made on or after valuation date. C.2 The basic computation Capital gain or capital loss? A person s capital gain on an asset disposed of is the amount by which the proceeds exceed the base cost of that asset. A capital loss is equal to the amount by which the base cost of the asset exceeds the proceeds. Determining a taxable capital gain or assessed capital loss A taxable capital gain (which will be included in your taxable income) or an assessed capital loss (which will be carried forward to the following year of assessment for set-off against future capital gains) is determined as follows: Sum of capital gains and losses during the year of assessment Less: Annual exclusion = Aggregate capital gain or loss Less / add: Assessed capital loss brought forward from previous year of assessment = Net capital gain or assessed capital loss Multiply a net capital gain by the inclusion rate (33,3% for individuals and special trusts 40% in latest budget Feb 2016) = Taxable capital gain to be included in taxable income. C.3 Annual exclusion For each year of assessment an annual amount of R (referred to as the annual exclusion ) of the sum of your capital gains and losses is excluded for CGT purposes. The annual exclusion increases in the year in which a person dies to R A net loss that results after adding together the capital gains and losses for the year of assessment must also be reduced by the annual exclusion. Note this is only for a natural person. 23

27 C.4 The inclusion rate Where properties are owned by individuals or special trusts, 33 percent of the capital gain must be included in the taxable income for the years 2013 to 2015 (and 25% for 2013 and earlier) and 40% from 2016 Where properties are owned by companies, close corporations or ordinary trusts, 66 percent of the capital gain must be included in the taxable income 80% from Capital gains on the disposal of assets are included in taxable income. Maximum effective rate of tax on Capital Gains Individuals and special trusts 16.4% Companies 22.4% Other trusts 32.8% 24

28 Part D The primary residence exemption D.1 Primary residence Most primary residences will not be subject to CGT because the first R2 million of any capital gain or loss on the sale is disregarded for CGT purposes. This means that you need to make a capital gain of more than R2 million in order to be subject to CGT. Before 1 March 2012 the primary residence exclusion was R1,5 million and before 1 March 2006 it was R1 million; and in addition, if the proceeds on disposal of a primary residence do not exceed R2 million, any resulting capital gain must be disregarded (this rule is subject to certain conditions, for example, no part of the residence must have been used for the purposes of trade). D.1.1 What is a primary residence? A home will not constitute a primary residence unless it is owned by a natural person (not a trust, company or close corporation); and the owner or spouse of the owner must ordinarily reside in the home as his or her main residence and must use the home mainly for domestic purposes. D.1.1 When will the sale of a primary residence be subject to CGT? A capital gain or loss will not be fully excluded in the following circumstances: If the capital gain on the sale of a primary residence exceeds R2 million, the portion of the capital gain that exceeds R2 million will be subject to CGT. Similarly, if you have a capital loss in excess of R2 million, only the portion of the loss exceeding R2 million will be allowed as a capital loss. The capital gain or loss attributable to the portion of a property that exceeds two hectares is subject to CGT. The primary residence exclusion does not apply to the portion of a capital gain or loss that relates to a period on or after the valuation date (1 October 2001), in which a person or his or her spouse was not ordinarily resident in a primary residence. The primary residence exclusion does not apply to the portion of a capital gain or loss that relates to any part of the primary residence that is used for the purposes of trade. This situation would apply, for example, if you use your study as an office for business purposes or if you let the residence. D.1.2 Deemed period of ordinary residence You will be treated as having been ordinarily resident for a continuous period of up to two years even if you were not living in your home during that two-year period if any one of the following circumstances applies: Your old home was in the process of being sold while a new primary residence was acquired or was in the process of being acquired. Your home was being built on land acquired for the purpose of erecting your primary residence. The primary residence had been accidentally rendered uninhabitable. Upon your death. D.1.3 Deemed domestic usage despite letting You will be treated as having used your primary residence for domestic purposes despite letting it for a rental if you were absent from the residence for a continuous period not exceeding five years; you or your spouse resided in the residence as a primary residence for a continuous period of at least one year before and after the letting period; you did not have another primary residence during the letting period; and you were either o temporarily absent from South Africa during the letting period (for example, you worked overseas); or o you were employed or carried on business more than 250 km from your primary residence. 25

29 What happens if you and your spouse hold a primary residence jointly? The primary residence exclusion of R2 million is divided according to the interest each of you hold in the primary residence. For example, if you and your spouse have an equal interest in your primary residence, you will each qualify for a primary residence exclusion of R1 million. 26

30 Part E E.1 When is CGT paid? As stated before Capital Gains Tax is included in Taxable Income payment of it will depend on if the Capital Gain was earned as an individual or company. If you are an individual your Capital Gain will be paid when your annual tax is paid. If a company has a Capital Gain it will be paid when the provisional taxes are paid of the company. 27

31 Chapter 3: Transfer Duty IMPORTANT DEFINITIONS INTRODUCTION The Transfer Duty Act imposes a transfer duty on the value of any property acquired by any person by way of a transaction or in any other manner, on the value by which any property is enhanced by the renunciation of an interest in or restriction upon the use or disposal of that property. It is therefore necessary to understand the meaning of certain terms before one can establish whether or not there is a liability for transfer duty in respect of any property acquired, the date of the transaction at which the liability arises, and the amount of transfer duty (if any) which is payable. We will therefore have a look at a number of important definitions in section 1(1) to explain the scope and application of transactions and value of property upon which transfer duty may be levied. The following key definitions will be discussed: date of acquisition, fair value, property, residential property, residential property company and transaction. The following applicable extracts regarding Transfer Duty have been obtained from the Transfer Duty Guide. The full version of this guide is available on Please also note that since this guide was issued, the Minister of Finance has amended the Transfer Duty Rates (which were updated and included in the below extracts). 28

32 Chapter Date of Acquisition The Act does not contain a definition of the term acquisition. date of acquisition means (a) in the case of the acquisition of property (other than the acquisition of property contemplated in paragraph (b)) by way of a transaction, the date on which the transaction was entered into, irrespective of whether the transaction was conditional or not or was entered into on behalf of a company already registered or still to be registered and, in the case of the acquisition of property otherwise than by way of a transaction, the date upon which the person who so acquired the property became entitled thereto: Provided that where property has been acquired by the exercise of an option to purchase or a right of pre-emption, the date of acquisition shall be the date upon which the option or right of pre-emption was exercised; (b) in the case of the acquisition of property in terms of item 8 of Schedule 1 to the Share Blocks Control Act, 1980 (Act No. 59 of 1980), and if section 9A of this Act does not apply to that acquisition, the date of the written request referred to in sub-item (1)(b) of the said item 8; (c) General rule Most cases involve the acquisition of rights to receive transfer of immovable property by way of a transaction in terms of an agreement of purchase and sale. In these cases, the date of acquisition will be the date on which the transaction was entered into, being the date that the last contracting party has signed the agreement. This rule applies regardless of whether the contract is subject to any conditions or was entered into on behalf of a company (whether registered or still to be registered). It also applies to various forms of transaction such as donations, expropriations and renunciation of rights. For example, if an offer to purchase a property is accepted on 10 February 2011, subject to the purchaser obtaining finance, the date of acquisition is 10 February 2011 and not the date when the finance is granted. The date of acquisition of property by a person otherwise than by way of a transaction, is the date upon which the person acquiring the property became entitled thereto. In some of these cases the date of acquisition (being the date of entitlement) may have to be determined by a court. For example, in the case of an acquisition by way of prescription, the view is that the date of entitlement is the date of the court order and not the exact date upon which prescriptive title would have vested after the 30 year period of free and undisturbed possession. Typically ownership will not be registered in the new owner s name without the sanction of a court. It should be noted that when any announcement is made by the Minister to reduce the rate of transfer duty before the effective date of the change, the parties to an agreement may not merely cancel an existing agreement and enter into a new agreement in respect of the same property to take advantage of the lower transfer duty rates. Should this occur, SARS will not regard the transaction as a true cancellation, but rather, a transaction entered into for the purpose of avoiding or evading transfer duty. Similarly, the conclusion of an addendum setting out further negotiated terms or amendments to the original agreement will not alter the date of acquisition for Transfer Duty purposes, as an addendum cannot be read or applied independently of the original agreement. Transfer duty will therefore be calculated in such cases using the original date of acquisition as if the original agreement had not been cancelled. 2.3 Fair Value fair value (a) (b) in relation to property as defined in paragraphs (a) and (c) of the definition of property, means the fair market value of that property as at the date of acquisition thereof; in relation to a share or member s interest in a company as contemplated in paragraph (d) or (e) of the definition of property, means so much of the fair market value as at the date of acquisition of that share or member s interest, of any property held by that company which constitutes (i) (ii) residential property; a share or member s interest in any company as contemplated in paragraph (d) or (e) of the definition of property ; or 29

33 (iii) a contingent right in property of a trust as contemplated in paragraph (f) of the definition of property, (without taking into account any lease agreement or any liability in respect of any loan or any right to or an interest in the use of immovable property conferred on the owner of a share in a share block company as contemplated in section 1 of the Share Blocks Control Act, 1980 (Act No. 59 of 1980), in relation to that residential property or any residential property of any company or trust contemplated in subparagraph (ii) or (iii)), as is attributable to that share or member s interest; or (c) in relation to any contingent right to any property, which constitutes (i) (ii) (iii) residential property; a share or member s interest contemplated in paragraph (d) or (e) of the definition of property ; or a contingent right in property of a trust as contemplated in paragraph (f) of the definition of property, held by a discretionary trust, means the fair market value of that property (without taking into account any lease agreement or any liability in respect of any loan in relation to that residential property or any residential property of any company or trust contemplated in subparagraph (ii) or (iii)), as at the date of acquisition of that contingent right. (d) in relation to a share in a company as contemplated in paragraph (g) of the definition of property, means so much of the fair market value, as at the date of acquisition of that share, of any property held by that company which constitutes property as contemplated in paragraphs (a) and (c) of that definition (without taking into account any lease agreement or any liability in respect of any loan in relation to that residential property) as is attributable to that share: Provided that (a) (b) the fair market value of any property of a company or a trust which constitutes a contingent right in property of a trust, as contemplated in paragraphs (b)(iii) and (c)(iii), shall be equal to the fair value of that contingent right as determined in terms of paragraph (c) of this definition; and where property, has been acquired by the exercise of an option to purchase or a right of pre-emption, the fair value in relation to that property shall be the fair market value thereof as at the date upon which the option or right of pre-emption was acquired by the person who exercised the option or right of pre-emption; 2.4 Property property means land in the Republic and any fixtures thereon, and includes (a) any real right in land but excluding any right under a mortgage bond or a lease of property other than a lease referred to in paragraph (c); (b) ;30 (c) (d) (e) (f) any right to minerals (including any right to mine for minerals) and a lease or sub-lease of such a right; a share (other than a share contemplated in paragraph (g)) or member s interest in a residential property company; a share (other than a share contemplated in paragraph (g)) or member s interest in a company which is a holding company (as defined in the Companies Act, 1973 (Act No. 61 of 1973), or as defined in the Close Corporations Act, 1984 (Act No. 69 of 1984), as the case may be), if that company and all of its subsidiary companies (as defined in the Companies Act, 1973, or Close Corporations Act, 1984), would be a residential property company if all such companies were regarded as a single entity; a contingent right to any residential property or share or member s interest, contemplated in paragraph (d) or (e) held by a discretionary trust (other than a special trust as defined in section 1 of the Income Tax Act, 1962 (Act No. 58 of 1962)), the acquisition of which is (i) a consequence of or attendant upon the conclusion of any agreement for consideration with regard to property held by that trust; 30

34 (ii) (iii) accompanied by the substitution or variation of that trust s loan creditors, or by the substitution or addition of any mortgage bond or mortgage bond creditor; or accompanied by the change of any trustee of that trust; and (g) a share in a share block company as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980); 2.7 Transaction transaction means (a) (b) (c) in relation to paragraphs (a) and (c) of the definition of property, an agreement whereby one party thereto agrees to sell, grant, waive, donate, cede, exchange, lease or otherwise dispose of property to another person or any act whereby any person renounces any right in or restriction in his or her favour upon the use or disposal of property; or in relation to any shares or member s interest contemplated in paragraph (d) or (e) of the definition of property, an agreement whereby one party thereto agrees to sell, grant, waive, donate, cede, exchange, issue, buy-back, convert, vary, cancel or otherwise dispose of any such shares or member s interest to another person or any act whereby any person renounces any right in or restriction in his or her favour upon the use or disposal of any such shares or member s interest; or in relation to a discretionary trust, the substitution or addition of one or more beneficiaries with a contingent right to any property of that trust, which constitutes residential property or shares or member s interest contemplated in paragraph (d) or (e) of the definition of property or a contingent right contemplated in paragraph (f) of that definition; Paragraph (a) of this definition deals with transactions involving the acquisition of ownership of property or real rights in property which are required to be registered in a Deeds Registry as envisaged in paragraphs (a) and (c) of the definition of the term property. It provides that a transaction includes not only an acquisition by way of purchase, donation, exchange, and any other modes of acquisition, but also any act whereby the value of property is enhanced through the renunciation of any other person s interest in, or restriction upon, the use or disposal of the property. Also included in paragraph (a) of the definition are transactions involving the acquisition or renunciation of personal servitudes. A positive personal servitude is where the owner of the land burdened by the servitude must allow the holder of the servitude to exercise some right or benefit over the land in question. Examples include rights of usufruct, habitation, right of way, right to collect fire wood, power line servitudes etc. A negative personal servitude prohibits the owner of the land from exercising a right which is inherent in the ownership of the property. In other words, these types of servitudes amount to registrable restraints or veto rights which prohibit the owner of the land from doing something which would usually be permissible. Examples include: prohibiting the owner from subdividing without the necessary consent, restricting the height of buildings or prohibiting more than one building to be erected on the land, prohibiting the transfer of the land without the consent from the Home Owners' Association etc. Paragraphs (b) and (c) of the definition of a transaction must be read with the definitions of fair value, property and residential property as far as shares in a company, member s interest in a close corporation or a contingent right to property held in a discretionary trust is concerned. These provisions ensure that the acquisition of an interest in a residential property company to the extent that it relates to residential property is a transaction for transfer duty purposes, regardless of whether that property is held directly or indirectly via an entity or a multi-tiered structure, or whether that structure contains companies, close corporations, trusts or combinations thereof. However, not all changes with regard to trusts holding residential property are transactions which give rise to tax events. For example, the birth of a child may create changes in the number and status of trust beneficiaries of a family trust, but that event would not be a taxable event, because of the requirements contained in paragraph (f) of the definition of a property. A further aspect to consider in the context of the definition of a transaction is whether a transaction is divisible or indivisibile. This is important for the purposes of correctly applying the rates of transfer duty when a single contract involves the acquisition of more than one property. In such cases it must be established if there are a number of separate transactions embodied in one agreement, or if all the properties concerned are acquired in terms of one indivisible transaction. When a number of properties held under separate title are purchased under one deed of sale, and the agreement stipulates the terms of payment of the total consideration payable, the contract would be regarded as one indivisible transaction for the aggregate of the values or prices attributed to the properties concerned. This means that legally, the effect of any failure on the part of the purchaser to adhere to the terms of the contract would result in the cancellation of the entire 31

35 contract as no part thereof could be implemented. On the other hand, when the contract is so worded as to make each unit of property the subject matter of a contract, which stands by itself, even if embodied in a single deed of sale, that contract is divisible and transfer duty would be chargeable on the consideration payable in respect of each property. Whether a contract is divisible or indivisible is a matter of construction, a crucial point being whether there is an appropriation of separate considerations to the separate parts of the contract. 32

36 Chapter 3 Person liable to pay duty 3.1 General Rules The acquisition of property by, or the enhancement of value of property in the case of a renunciation in favour of any person, gives rise to a liability for transfer duty. The person who acquires the property or the person whose property is enhanced in value by a renunciation of rights will therefore be liable for payment of transfer duty. Normally it is the person who acquires the property (the transferee) who is liable to pay the duty, but there are exceptions where other persons could become liable in the context of the extended meaning given to the term property and transaction in the Act. Before the amendment to section 2(1) of the Act which came into effect on 23 February 2011, there were different rates of transfer duty applicable to a natural person and a person other than a natural person (i.e. a legal or juristic person). This means that there were actually two separate categories of taxpayers. Transactions which took place before 23 February 2011 must therefore be distinguished from those that took place after that date, because the graduated tax rates in section 2(1)(b) of the Act previously only applied to natural persons, whereas on or after 23 February 2011, they apply to all persons. Before these changes, companies, trusts and other juristic persons paid transfer duty at a flat rate of 8%. Some examples of persons other than natural persons are shown below for the purposes of applying the transfer duty rates for transactions which took place before 23 February 2011: Companies and close corporations; Foundations; Parastatals and other entities created by statute (although some of these entities may be exempted from transfer duty); and Trusts. Note also the following points regarding the application of the law for transactions before 23 February 2011: A partnership is not a separate legal entity, and each individual partner therefore acquires property where the partnership acquires property. Section 2(5) must be applied to partnerships where one or more of the partners is a natural person. This provision applies in situations where a natural person acquires an undivided share in property.96 Section 2(8) deems the following persons to be persons other than natural persons : o Trustees or administrators of trusts; and o Any other person acting in a fiduciary capacity (e.g. a curator of an insolvent or deceased estate). Although partners act in a fiduciary capacity when they act on behalf of the partnership, section 2(8) is not in practice applied in respect of the acquisition of property by partners who are natural persons. 33

37 Chapter 4 Dutiable Value 4.1 Introduction Transfer duty is payable on the higher of the following values in respect of the acquisition of property [section 1(1), read with section 5(6)]: The amount of the consideration payable (where consideration is payable); The declared value (where no consideration is payable); or The fair value (also known as the fair market value). In Union Government (Minister of Finance) v Tahan, Botha J states the following (at 90): In the ordinary case of sale and purchase of fixed property the price paid is deemed to be the value of the property for transfer duty purposes. But transfer duty is always payable on the value of the property not the price. In Brink v Wiid, Van Blerk JA states (at 543H) that op skrif gestelde koopprys... hoogstens as leidraad dien vir die bepaling van die waarde waarop hereregte betaalbaar is. This means that the purchase price in a deed of sale serves, at most, as a guideline to determine the value on which transfer duty is payable. 4.2 Determination of Fair Value General The Act specifically uses the concept of fair value as opposed to market value or fair market value. However, in most cases fair value and fair market value will have the same meaning. To accommodate the extended definitions of property and transaction, the definition of the term fair value also deals specifically with share block transactions and situations where entities such as companies, close corporations and trusts hold, and then transfer shares or other interests in that property to other persons (as contemplated in paragraphs (d), (e) and (f) of the definition of the term property ). The basis of the liability for any transfer duty payable is the value of the property acquired. In the case of property acquired by bona fide purchase, the main criterion used to determine the value is the price for which it is purchased. The price paid at a bona fide sale by public auction is accepted as conclusive within the terms of section 5(9). The price includes the amount paid and also the amount of any additional consideration where the purchaser agrees to pay certain other expenses of the seller as part of the conditions of sale. Examples include payments for arrear rates and municipal service charges, bond payments, collection and legal charges etc. When the transaction involves the renunciation of a usufruct, the amount by which the value of the property is thereby enhanced should be calculated from the tables as prescribed by the Estate Duty Act 45 of 1955 (refer to Annexure B) by capitalising the annual value of the usufruct over the life expectancy or other period for which the usufructuary was entitled to its enjoyment. Where the interest renounced was less than a full usufruct, e.g. usus or habitatio, an estimate should be obtained of its annual value for purposes of calculating its capitalised value according to the above-mentioned tables. When the transaction is a renunciation of a restriction such as that under a fideicommissum or other restraint upon the disposal or use of the property, a reasonable estimate of the enhancement in value should be furnished by the person benefiting from that renunciation, having regard to all the known and probable circumstances. Where the renunciation in any of the above-mentioned cases is made upon payment of consideration, it may be necessary to determine whether the consideration can be accepted as the fair and reasonable value for the purposes of calculating the duty. The so-called Land Bank values cannot be used for the purposes of determining the fair value of agricultural land (used for bona fide farming purposes) for transfer duty purposes. The Act does not provide for the use of these values. As regards the fair value of an interest in a company or close corporation, it is in essence the market value of the types of property as contemplated in the definition of that term which is owned by that entity, but disregarding the loan liabilities and leases attributable to that interest. Similarly, the fair value of a contingent right to property should also disregard loan liabilities and leases. The extension of the definition of the term fair value is aimed at countering the use of loan liabilities and leases as mechanisms to shift or artificially depress values of rights pertaining to immovable property. In short, the definitions of fair value, property and transaction ensure that any indirect transfer of immovable residential property (primarily to avoid transfer duty) becomes taxable in the same manner as any direct transfer of the property. In other words, the transfer of shares or a member s interest in a company or close corporation or the transfer 34

38 of a contingent right to property of a discretionary trust (where the only or primary asset in each case is a residential property ) should be taxed in the same way and based on the same fair value as if the property itself were the subject of the sale in any of those cases. 35

39 Chapter 5 Tax rates and calculations 5.1 Introduction The potential tax bases for VAT and transfer duty overlap to some extent, so to ensure that the sale of fixed property is not subject to both taxes, an exemption from transfer duty applies if the supply is subject to VAT. The Deeds Registry in the region concerned will not allow a property transfer to take place unless a transfer duty receipt is issued indicating that the transfer duty has been paid or the relevant receipt must be endorsed to indicate that the zero rate applies where the transaction value does not exceed R (R as per 2016 budget) in terms of section 2(1)(b)(i). If the transaction is exempt from transfer duty, an exemption receipt must be issued by SARS before the registration of the transfer may take place. (Refer also to Chapter 8: Exemptions). It should, however, be kept in mind that not all acquisitions of property as defined in section 1(1) will constitute real rights in immovable property which are required to be registered in a Deeds Registry. For example, any transaction relating to the sale or disposal or shares, rights and interests in companies and other entities as contemplated in paragraphs (d) to (g) of the definition of a property will merely be noted in the share registers or other records of the entities concerned. For example, in the case of changes to the membership of a close corporation or changes in a trust deed, the Companies and Intellectual Property Commission (CIPC)119 or the Master s Office (as the case may be) must be advised, but no submission will be made to a Deeds Registry in this regard. From 23 February 2011 the graduated rates of transfer duty became applicable to all persons. Before this date the graduated rates were only applicable to acquisitions of property by natural persons. Non-natural persons (legal or juristic persons) such as companies, close corporations and trusts were taxed at a flat rate of 8% (or 10% before 31 March 2006). There is, therefore, no longer any distinction in the rates of transfer duty applicable to natural persons and legal or juristic persons as was the case before 23 February Rates and Duty extracted from: 36

40 Chapter 8 Exemptions Taxable supply of goods to the person acquiring property [section 9(15)] The purpose of this exemption is to prevent the possible double taxation of a transaction. In order to ensure that the supply of goods constituting fixed property is not subject to both VAT and transfer duty, the Transfer Duty Act provides an exemption so that no transfer duty is payable on the acquisition of property in these circumstances. The payment of VAT will therefore take precedence over the payment of transfer duty where the supplier is a vendor. However, sometimes the supply of fixed property may be subject to transfer duty even if the seller is a vendor. For example, the sale of a vendor s private residence will usually not be in the course or furtherance of that vendor s enterprise, and therefore, the transaction will be subject to transfer duty. The following must be considered in determining if a supply is a taxable supply of goods and fixed property in terms of the VAT Act: A taxable supply is a supply on which VAT must be charged at the standard rate (currently 14%) or at the zero rate. To be a taxable supply, the supplier (seller or transferor) must be a vendor and the supply of the property must be in the course or furtherance of an enterprise. The supply of an entire enterprise with all its assets (including any fixed property) as a going concern may qualify as a zero-rated taxable supply if all the conditions in section 11(1)(e) of the VAT Act are met. Refer to Interpretation Note 57: Sale of an enterprise or part thereof as a going concern and VAT News 15 - August 2000 for more details in this regard. An exempt supply or a supply which is out of scope for VAT purposes is not a taxable supply. It follows that transfer duty would be payable in such cases, unless an exemption applies in the circumstances refer to paragraph which discusses the exemption in section 9(15B). The term goods as defined in section 1(1) of the VAT Act includes fixed property. Fixed property, in turn, is defined as including o land and improvements affixed to the fixed property, o sectional title units; o shares in a share block company which confers a right to or interest in the use of immovable property; o time-sharing interests; and o any real right in such land, unit, share or time-sharing interest. The supply of shares in a share block company (paragraph (g) of the definition of the term property in section 1(1) of the Transfer Duty Act) is a supply of goods and fixed property for VAT Act purposes. Such a supply may constitute a taxable supply, and if so, it will be exempt from transfer duty. However, the supply of other types of shares or members interests and certain interests in a discretionary trust constitute the supply of services for VAT purposes. In addition to points mentioned above regarding the supply of goods, the following should be noted when determining if a supply is a taxable supply of services in terms of the VAT Act: Services are anything done or to be done, including the granting, assignment, cession or surrender of any right or the making available of any facility or advantage, but excluding a supply of goods. The type of services with which we are concerned here are financial services constituting the sale, transfer or acquisition of shares in a company or a member s interest in a close corporation and certain interests in a discretionary trust contemplated in paragraphs (d), (e) and (f) of the definition of the term property in section 1(1). Refer also to paragraphs and to The transfer of ownership of an equity security, being an interest in or right to a share in the capital of a juristic person or member s interest in a close corporation is a financial service for VAT purposes and is exempt from VAT in terms of section 12(a) of the VAT Act. However, as mentioned above, the supply of shares in a share block company constitutes fixed property and goods for VAT purposes and is not the supply of a service or a financial service. The term equity security does not include the following: o Ownership or an interest in land (for instance a sectional title unit, excluding an interest as mortgagee). o o A share in the share capital of a share block company. A member s interest in a close corporation of which the association agreement confers on the member a timesharing interest. In summary, the supply of shares or other interests in a residential property company as defined in the Transfer Duty Act will, in most cases, be a financial service which is exempt from VAT. In such cases, the exemption in section 9(15) of the Transfer Duty Act is not applicable and transfer duty is payable. However, the sale of shares in a share block company constitutes a supply of goods being fixed property, and may constitute a taxable supply. For example, if the 37

41 seller of the share block is a developer or speculator in property, the supply will be subject to VAT, but the sale of that person s private dwelling will usually not be a taxable supply even if that person is a vendor. When the TDC01 return is submitted to SARS in this regard, the exemption receipt is issued once SARS is satisfied that the VAT payable on the transaction has been paid, or will be paid. In some cases, the seller may be required to provide security if the VAT has not yet been paid. For example, if the seller of the property has a history of non-compliance, security for the unpaid VAT may be required. Some refinements to this process were implemented in August 2010 to ensure that the exemption receipts are issued promptly, whilst also addressing any fiscal risks. In terms of the refined process, where security is required, the seller will be informed of certain options which may be available to resolve the outstanding issues before SARS will be in a position to issue the transfer duty exemption receipt. These options are resolve all outstanding tax obligations; or provide security for the VAT payment in respect of the property transaction concerned; or instruct the seller s transferring attorney (conveyancer) to provide an undertaking to pay the VAT out of the proceeds of the property sale directly to SARS. Where the vendor has elected for this option, the conveyancer will be required to complete a SARS TD-VAT form. These options together with the associated procedures are explained in detail in a letter dated 4 August 2010 which was addressed to the Law Society of South Africa. The letter can be accessed on the link AS-TD-L03 Application for Transfer Duty Exemption in terms of Section 9(15) of the Transfer Duty Act, No.40 of 1949 (Transfer Duty Act) and Request for Security. Refer to the VAT Guide for Vendors and the VAT Guide for Fixed Property and Construction (especially Chapter 4) on the SARS website for more information regarding VAT. 38

42 Chapter 9 Payment and recovery of Transfer Duty 9.1 Liability and period for repayment It is important to differentiate between the date of liability for transfer duty which is the same as the date of acquisition of the property as discussed in Chapter 2 and the due date for payment of transfer duty. Section 3(1) provides the general rule which states that transfer duty is payable within six months of the date of acquisition (as defined in section 1(1)). In the case of an acquisition of property, the person who is liable to pay the duty is the person who acquires the property. In the case of a renunciation of property, the person who is liable to pay the duty is the person in whose favour, or for whose benefit, any interest in, or restriction upon the use or disposal of property has been renounced. Remember that a suspensive condition concerning the acquisition of property does not delay the liability for transfer duty. Liability for transfer duty arises on the date that the contract for the acquisition of property has been entered into - irrespective of any suspensive condition. Conditional transactions which are dissolved by the operation of a resolutive condition are handled the same as cancelled transactions under section 5(2)(a). Sections 3(1A) and 3(1B) provide that persons other than those who acquire property can in certain circumstances be liable for transfer duty and the parties may be held liable jointly or severally. This refers to acquisitions as contemplated in paragraphs (d), (e), (f) and (g) of the definition of the term property. 9.2 Deposit on account of duty A deposit or advance payment can be made in exceptional circumstances in a case where the determination of the amount on which duty is payable is pending. In such a case, with the permission of the Commissioner, the transfer duty on the declared value or the consideration may be accepted in the interim. The details of the transaction must, however, be submitted by way of a return on efiling and will not be released as final while the fair value is being determined by the Commissioner. This will prevent the accrual of interest after the date of payment on the amount. Interest will, however, be payable in the normal way on any additional duty or understatement penalty which may be payable, subject to any extension of time which may have been granted.168 Once the fair value and the final dutiable amount is known, the REQUEST FOR CORRECTION function on the efiling system can be used to make the necessary adjustments and the balance of the transfer duty (if any), can be paid, plus any interest which may be applicable on the balance. 9.3 Payment of duty and issuing of receipts All payments of transfer duty as well as any TDC01 returns which may be required for the processing of transactions must be submitted to SARS via efiling as the manual submission of forms or payments is no longer accepted. On the new single form, the selection of an office no longer applies. Generally, no supporting documentation will be required in order to submit the transaction on efiling. This, however, depends on the level of risk associated with the transaction. If further documentation or information is required, this will be requested by way of a letter issued via efiling. Alternatively, if no further information is required, the system will automatically release the receipt once payment has been made. Similarly, an exemption receipt will be issued via efiling if the transaction is exempt from transfer duty and a zero-rated receipt will be issued when the consideration, fair value or declared value which is accepted by the Commissioner in relation to the transaction falls under the threshold for the zero rate of transfer duty. Receipts may not be altered after issue and a new transaction must be submitted via efiling with the correct information. If it appears that a return is incorrect, or that the properties to be transferred were not correctly described or fully itemised, a refund request should be submitted (if applicable). There are, however, certain minor errors and corrections that do not require a new transaction to be lodged. These can be corrected under cover of a Certificate by a Conveyancer which should state the correct position. Refer to the Chief Registrar s Circular No.9 of 2009 (RC 9/2009) for a list of these errors. 39

43 9.4 Penalty or interest on late payment The proviso to section 4(1) prescribes the manner in which any penalty which may be due and payable, is calculated where the period of six months contemplated by section 3(1) ended before 1 July 1982, and the duty was not paid before 1 July The amendment in 2004 serves to clarify that transactions entered into before 1 March 2005, will be subject to the penalty provisions of section 4(1). However, after 1 March 2005, the word penalty is no longer used, but instead the late payment charge is referred to as interest. The method of calculation as well as the rate of 10% per annum which applies to the calculation of penalty or interest remains the same, but is calculated and levied under section 4(1A). The interest (or penalty as the case may be) is calculated for each completed month calculated from the date of acquisition until the date of payment. 40

44 Chapter 10 Administrative provisions VAT Going concerns Before completing the TDC01 return indicating that the supply is a taxable supply for VAT purposes, and hence, exempt from transfer duty, please check that the transaction concerned indeed complies with the requirements of the VAT Act. This is important so that the correct documentation can be submitted and payment made on the correct facts, which will avoid any refund application at a later stage as a result of the incorrect tax having been paid. For example, sometimes the parties view a property transaction as a zero-rated going concern for VAT purposes when it does not meet the requirements of section 11(1)(e) of the VAT Act. Alternatively, it might be assumed by the parties that the transaction is subject to transfer duty because the supplier is not registered for VAT at the time, incorrectly believing that there is no liability to register and to charge VAT in respect of the supplies made. The submission of a return indicating that a supply is zero-rated for VAT purposes and therefore exempt from transfer duty is of particular concern to SARS. This is because it is often found upon investigation that the transaction is structured as the mere sale of property and not a zero-rated supply of an enterprise as a going concern as contemplated in section 11(1)(e) of the VAT Act. Vendors and conveyancers are therefore encouraged to make every effort to check that the requirements of the VAT Act which substantiate the decision to zero rate the transaction have actually been met. Alternatively to confirm that the transaction is indeed a taxable supply for VAT purposes before completing the return on efiling and making payment of transfer duty. It should also be kept in mind that the rendering of incorrect returns may be seen as a serious tax offence in terms of the TA Act, particularly if it is a false return made in an attempt to evade tax or to obtain an undue refund of taxes. For more information in this regard, refer to paragraph , Interpretation Note 57 - Sale of an enterprise or part thereof as a going concern, VAT Guide for Fixed Property and Construction, VAT Guide for Vendors and VAT News 15 August Prices, charged, advertised or quoted to include VAT In terms of section 65(1) of the VAT Act, it is a requirement that any price charged, advertised or quoted by a vendor must include VAT if the supply is taxable under the VAT Act. A vendor may also not state or imply that any form of trade, cash or any other form of discount or refund is made in lieu of the VAT that is chargeable on a supply. Despite these requirements, some property developers and speculators still advertise VAT-exclusive prices on their websites, billboards, newspaper adverts and marketing brochures, which mislead the public into believing that it is possible to escape the VAT which is payable on a transaction. In addition to it being illegal and misleading, a vendor will be exposed to commercial risks if advertised or quoted prices do not include VAT. For example, if you contract with your customer to buy a property based on the advertised price, and no reference is made to VAT in the sale agreement, you may be challenged on the final price. This is because section 64 of the VAT Act deems any price charged by a vendor to include VAT whether it has been included in the price or not. It is also important to make sure that the contract refers to VAT and not transfer duty if the supply is a taxable supply for VAT purposes. This will help to avoid any dispute arising at a later stage. Vendors such as property developers or speculators should also not advertise that no transfer costs are payable on fixed property purchases, especially where the advert does not contain a specific statement indicating that VAT is included in the price. One of the inferences of making such a statement is that no transfer taxes such as VAT or transfer duty are payable. Furthermore, such a statement does not have the effect of shifting the liability from the person who is liable to pay the tax. Regardless of any contractual arrangements, it is always the seller (supplier) who is liable to pay the VAT if the supply is taxable for VAT purposes and in the case of a non-taxable supply under the VAT Act, the purchaser is the person who is liable to pay the transfer duty. If the contractual arrangement is for the seller to pay certain costs such as the legal expenses associated with transferring the property into the purchaser s name, it is better to advertise the price as including any legal or conveyancing costs rather than stating that no transfer costs apply. 41

45 Chapter 4: Transfer Duty and VAT The following applicable extracts regarding Transfer Duty and VAT have been taken from the VAT 404 Guide for Vendors and the VAT 409 Guide for Fixed Property and Construction. The full version of this guide is available on 42

46 VAT 404 Guide for Vendors *Only this specific extract from Chapter 8 of the VAT 404 guide has been included in this Manual for the purposes of the presentation, the full guide is available on What amount can I deduct? The VAT Act allows vendors under certain circumstances to deduct input tax on second-hand goods acquired from nonvendors where no VAT is actually payable to the supplier, or where the goods are supplied by a vendor but do not form part of the vendor s enterprise. This is known as a notional or deemed input tax deduction. The conditions under which a deemed or notional input tax deduction may be made: The goods must be second-hand goods as defined in the VAT Act. The supply may not be a taxable supply (for example, the goods are purchased from a non-vendor). The supplier must be a South African resident and the goods supplied must be situated in RSA. The purchaser must have made payment for the supply, or at least made part payment as an input tax deduction is only allowed to the extent that payment has been made. The goods must be acquired by the vendor wholly or partly for consumption, use or supply in the course of making taxable supplies. The prescribed records must be kept. In the case of the supply of second-hand goods being fixed property which is not subject to VAT, the input tax is limited to the transfer duty payable if the property was acquired on or before 9 January The input tax in such cases may only be deducted once the time of supply for VAT purposes has occurred, and only after the transfer duty has actually been paid to SARS. With effect from 10 January 2012 the law was amended so that the input tax in such cases is no longer limited to the transfer duty payable. A vendor s entitlement to deduct input tax therefore no longer depends on whether the transfer duty has been paid to SARS or not. However, it is still a requirement that before any input tax can be deducted, the time of supply for VAT purposes must have occurred. Furthermore, as with other second-hand goods, the input tax is limited to the extent that the consideration for the property has been paid to the seller. Example Limitation of notional input tax to the amount of transfer duty payable D CC, a property developing enterprise buys vacant land for R on 1 December 2010 from a non-vendor, on which it intends to develop houses. D CC pays the full purchase price on registration of the property into its name. Since the sale of the land is not a taxable supply for VAT purposes, D CC must pay transfer duty at the rate applicable at the time in this case 8% of R = R Therefore input tax = R / 114 = R6 140,35, but limited to R4 000 (actual transfer duty paid). Note that D CC would not be entitled to deduct the input tax of R2 140,35 (that is, the difference between R6 140,35 and R4 000) which was previously denied as a result of the amendment to the law in this regard on 10 January 2012, as the property was acquired on 1 December 2010 which was before the law was amended. Had D CC acquired the land for enterprise purposes on or after 10 January 2012, the full amount of R6 140,35 would be deductible as input tax. 43

47 VAT 409 Guide for Fixed Property and Construction. *Only these specific extracts from the VAT 409 guide have been included in this Manual for the purposes of the presentation, the full guide is available on Chapter 1 Introduction 1.2 Scope of transactions VAT is an indirect tax which is levied on the supply of any goods or services supplied by a vendor in the course or furtherance of any enterprise carried on by that vendor. Goods is defined to include fixed property and any real right in any such fixed property, but excluding any right under a mortgage bond or pledge of any fixed property. The scope of transactions with which this guide is concerned are therefore those described in the definition of fixed property, which includes land (together with improvements affixed thereto); any unit as defined in section 1 of the Sectional Titles Act 95 of 1986; any share in a share block company which confers a right to or interest in the use of immovable property Share Blocks Control Act, 1980; in relation to a property time-sharing scheme, any time-sharing interest as defined in section 1 of the Property Timesharing Control Act 75 of 1983; and any real right in any such land, unit, share or time-sharing interest. It will therefore be found that most transactions which have some connection with the acquisition of rights to fixed property (excluding rights under a mortgage bond or pledge of fixed property) will fall within the ambit of the definition and will be subject to VAT if the supplier is a vendor. Other examples of rights falling within the definition include: Certain rights of use such as usufructs, usus or habitatio. Bare dominium rights of ownership. Servitudes, encroachments and other encumbrances. Exclusive use areas in sectional title developments. Rights to minerals or rights to mine for minerals. Leases or sub-leases of rights to minerals, or to mine for minerals. One of the challenges making the supply of all forms of fixed property rights by a vendor subject to VAT is that the interaction between VAT legislation and other forms of indirect taxation on fixed property needs to be considered. For example, although most supplies of fixed property by a vendor will be subject to VAT, there are certain instances when such supplies will not constitute taxable supplies under the VAT Act. In these cases, the transaction will be subject to transfer duty instead of VAT. It is therefore important that vendors are able to distinguish between the different types of supplies to establish whether VAT or transfer duty applies so that the correct tax is paid. The VAT Act and the Transfer Duty Act therefore both contain special rules to deal with these situations. 44

48 Chapter 2 Definitions and Concepts 2.2 Goods, Fixed Property and second-hand goods The term goods includes corporeal movable things, fixed property and any real right in such thing or fixed property. The definition basically refers to any tangible property and any real right in such tangible property. Fixed property, in turn, is defined to mean land, including any improvements permanently affixed thereto; any sectional title unit; any share in a share block company which confers a right to or an interest in the use of immovable property; any time-sharing interest as defined in section 1 of the Property Time-sharing Control Act, 1983; and any real right in any of the above. 45

49 Chapter 4 Interaction between VAT and other Indirect Taxes 4.1 Introduction This chapter deals with the interaction between VAT and other indirect taxes which could potentially be applicable on a transaction involving fixed property. The other taxes discussed in this chapter include transfer duty, stamp duty (withdrawn with effect from 1 April 2009), and securities transfer tax (introduced on 1 July 2008). 4.2 VAT vs. Transfer Duty Transfer duty is an indirect tax imposed on the value of fixed property obtained by any person by means of a transaction as defined in the Transfer Duty Act. A transaction is defined to include, amongst other things, transactions under a sale, donation or waiver. Property is defined in section 1 of the Transfer Duty Act to mean land in the Republic and any fixtures thereon and includes real rights in land; rights to minerals or rights to mine for minerals (including leases or sub-leases pertaining to those rights); an interest in a residential property company,10 an interest in a holding company (including a close corporation) where that company and all of its subsidiaries would together be regarded as a residential property company if it were a single entity; certain contingent rights or shares or member s interests which relate to the use or acquisition of residential property 11 held in a discretionary trust under certain circumstances; and a share in a share block company acquired on or after 1 September The new rates apply to all persons. No distinction is made between natural persons and legal persons as was the case before 23 February

50 In order to ensure that the sale of fixed property is not subject to both VAT and transfer duty, the Transfer Duty Act contains an exemption from transfer duty to the extent that the supply is subject to VAT, irrespective of whether it is subject to VAT at the standard rate or zero-rate. Therefore the payment of VAT normally takes precedence over the payment of transfer duty where the supplier is a vendor. Sometimes the supply of fixed property may be subject to transfer duty even if the seller is a vendor. For example, the sale of a vendor s private residence, or the sale of property used by a vendor for the purposes of employee housing will be subject to transfer duty as these supplies are not in the course or furtherance of the enterprise carried on by the vendor. On 23 August 2012 SARS introduced a modernised Transfer Duty system. The new system is mandatory from 1 October 2012 and entails the merging of the five Transfer Duty forms into one dynamic form [TDC01].15 In some cases, the seller may be required to provide security16 if the VAT has not yet been paid. For example, if the seller of the property has a history of non-compliance, security for the unpaid VAT may be required. Where security is required, the seller will be informed of certain options which may be available to resolve the outstanding issues before SARS will be in a position to issue the transfer duty exemption certificate. These options are: Resolve all outstanding tax obligations; or Provide security for the VAT payment in respect of the property transaction concerned; or Instruct the seller s transferring attorney (conveyancer) to provide an undertaking to pay the VAT out of the proceeds of the property sale directly to SARS. Where the vendor has elected for this option, the conveyancer will be required to complete a SARS TD-VAT form. Fixed property which is sold by a vendor will usually attract VAT at the standard rate. However, it is also possible for the fixed property concerned to form part of the supply of a going concern where an entire enterprise and all its assets (including the fixed property) are sold to the purchaser. In such cases, the supply of the whole business, including the fixed property, may qualify as a zero-rated supply. (Refer to Chapter 9 for a discussion on the supply of a going concern.) The sale of a share, or a member s interest in a company or close corporation that owns residential property does not constitute a supply of fixed property for VAT purposes, but rather a financial service which is exempt from VAT. These supplies are, however, subject to transfer duty as they are included in the definition of property as mentioned above. All shareblock transactions (irrespective of whether residential or other properties) on or after 1 September 2009 are subject to transfer duty if it does not constitute a taxable supply for VAT purposes. 47

51 Example VAT vs. transfer duty payable on a transaction (note this example is based on the older rates) Scenario Mr P decides to move his business and residence from Pretoria to Cape Town. He therefore sells the property from where his business is conducted for R3 million plus VAT and his private residence for R1,4 million. Both properties were sold on 1 March Question - Which taxes apply on the sale of the properties? Answer The sale of the business property is subject to VAT at the standard rate as it is supplied in the course or furtherance of Mr. P s enterprise (R x 14% = R ). However, as Mr P s private residence was not part of the enterprise, the purchaser will pay transfer duty calculated as follows: On the first R of value 0% x R = nil On the value exceeding R but not exceeding R1 million 3% x R = R On the value exceeding R1 million but not exceeding R1,5 million 5% x R = R Total transfer duty = R Note that Mr P is liable for the VAT (to be declared as output tax on his VAT 201 return), whereas the purchaser is liable to pay the transfer duty to SARS. When a vendor sells fixed property which does not form a part of the enterprise activity (for example, the sale of a vendor s private residence), the sale will not be subject to VAT, but will be subject to transfer duty instead. 48

52 Example Property not part of an enterprise Scenario Mrs T is a sole proprietor who is registered for VAT in respect of the tax consulting business which she conducts. She sells the shares in a share block company for R on 25 May The shares confer a right to use the share block company s property as a place of residence. Question - Is the sale of the share block shares (fixed property) a taxable supply for VAT purposes? Answer Although the shares in a share block company constitute the supply of fixed property as defined, the sale thereof by Mrs T falls outside the scope of her enterprise activity. This is because Mrs T used the property concerned as her private residence and not for any enterprise purposes. Accordingly, the sale of the shares in the share block company by Mrs T is not a taxable supply and will not be subject to VAT. The purchaser would be liable for transfer duty on the acquisition of shares as these shares constitute property as defined in section 1 of the Transfer Duty Act. 49

53 Example Fixed property acquired from non-vendor where no transfer duty is payable Scenario On 25 April 2010, Mr S (non-vendor) sells a residential sectional title unit to Mr A for R Mr A is a vendor and a speculator in fixed property. Mr A will hold the property as stock until the market price has increased sufficiently to make a reasonable profit. As the selling price of the property is less than R , transfer duty is calculated at 0% on that amount (which was the rate applicable at the time). Question - Determine if Mr A may deduct notional input tax, and if so, the amount that may be deducted. Answer Input tax calculation = R x 14/114 = R The supply was made before 10 January Mr. A would therefore be able to deduct notional input tax limited to the amount of transfer duty paid as the property is acquired for taxable purposes. However, as transfer duty was levied at the rate of 0%, no input tax may be deducted. The law was however amended with effect from 10 January 2012 to remove the transfer duty limitation where fixed property is supplied on or after 10 January If Mr S therefore sold the property to Mr A on 3 March 2012 for R , Mr A could deduct notional input tax of R (R x 14/114) to the extent payments were made. Mr A may, however, only deduct input tax after the property is registered in his name in the deeds registry. 50

54 Example Limitation of input tax on fixed property acquired from a non vendor Scenario Company A (vendor) acquired an office block from ABC Properties (non-vendor) for R7,5 million on 11 February The property is to be used exclusively for making taxable supplies. Company A paid transfer duty of R to SARS on 12 March On 1 April 2012, the full purchase price was paid to the transferring attorney and registration of the transfer was effected in the Deeds Registry. Question - Determine the amount of input tax to which Company A is entitled, and the tax period in which input tax can be deducted. Answer The input tax deduction is based on the lesser of the consideration given in money or the open market value of the property. This is an anti-avoidance measure to discourage the artificial over-inflation of prices. (If the sale took place before 10 January 2012, the input tax deduction would be limited to the transfer duty which would have been payable, based on the applicable rates as at the date of acquisition in terms of the Transfer Duty Act.) Input tax = R7,5 million x 14/114 = R Company A would be entitled to deduct input tax of R as the office block is acquired for use in the course of making taxable supplies. The deduction of notional input tax can only be made once the time of supply has occurred and after the consideration has been paid. The time of supply for fixed property is the earlier of the date the transfer of the property is effected in the deeds registery or the date on which any payment is made in respect of the consideration for the property. Even though payment for the transfer duty occurred on 12 March 2012, the input tax deduction will only be permitted in the tax period covering the month of April 2012 as the time of supply only occurred on 1 April 2012 and not in February The deduction will only be permitted after the property is registered in Company A s name in the deeds register on condition that Company A is in possession of the relevant documents (VAT 264, etc). 51

55 Example Limitation of input tax on fixed property acquired from a non vendor where the purchaser is exempt from transfer duty (before 10 January 2012) Scenario A municipality (vendor) acquired an office block exclusively for making taxable supplies from ABC Properties (non-vendor) for R7,5 million on 25 July As the municipality is exempt from transfer duty in terms of the Transfer Duty Act, no transfer duty is payable. Had the municipality not been exempt, transfer duty of R would have been payable. The full purchase price was paid to the transferring attorney on 1 August 2011 to be kept in a trust pending registration of the transfer. The transfer of the property was registered in the Deeds Registry on 1 October Question - Determine the amount of notional input tax that the municipality would be entitled to deduct and the tax period in which it can be deducted. Answer Input tax = R7,5 million x 14/114 = R However, the deduction is limited to R , as this is the transfer duty which would have been payable had there been no exemption.27 The deduction of notional input tax can only be made in the tax period in which the time of supply occurs, which is the earlier of the date of transfer of the property into the name of the municipality, or the date that any consideration for the supply is paid. The deduction can be made in the tax period covering the month of October 2011 on condition that the municipality is in possession of the relevant documents (VAT 264, etc). The input tax will only be allowed after the property is registered in the municipality s name and to the extent that payment of the consideration has actually been made. 52