JANUARY 2011 ISSUE 137 CONTENTS

Transcription

1 JANUARY 2011 ISSUE 137 CONTENTS CAPITAL GAINS TAX Resolutive conditions EMPLOYEES TAX Employee share incentive schemes INTERNATIONAL TAX Foreign partnerships NON-RESIDENTS Withholding tax on interest GENERAL The reverse onus provisions and fraud INDIVIDUALS Tax directives VALUE-ADDED TAX Security for transfer duty certificate VAT apportionment SARS NEWS Interpretation notes, media releases and other documents CAPITAL GAINS TAX Resolutive conditions Resolutive conditions are widely used in the drafting of contracts but the tax consequences associated with such conditions are often not considered by the contracting parties. If a contract contains a resolutive condition, the continuance of such a contract is made dependent upon the happening of an uncertain future event. However, there is no postponement or suspension of the contract and all rights and obligations come into existence immediately upon conclusion of an agreement between the parties. Such a date will be regarded as the date of disposal, as is envisaged in paragraph 13 of the Eighth Schedule to the Income Tax Act, No. 58 of 1962 (the Eighth Schedule). Accordingly, if the parties dispose of an asset, they will have to account for any capital gains tax that flows from the contract on such a date. However, if the resolutive condition is subsequently fulfilled, the agreement will terminate immediately with retrospective effect. In such an instance, the legal position is the same as if the contract was never entered into and all rights and obligations that resulted from the contract will cease Integritax Issue 137 January 2011 SAICA, 2011 page 1

2 to exist. As a result, the contracting parties are lawfully required to be restored to the position they were in, prior to the conclusion of the agreement (that is, the status quo ante). The tax treatment on termination will differ from the normal legal treatment, because tax is an annual event and cannot be dealt with retrospectively. In order to establish how the parties will be restored to their pre-contractual position, a distinction needs to be made between whether the resolutive condition was fulfilled in the year the contract was concluded or in a subsequent year of assessment. If the conclusion of the contract and the fulfillment of the resolutive condition fall within the same year of assessment, the proceeds received from the disposal and the base cost of the asset must be reduced by any amounts received as a result of the termination of the contract in terms of paragraphs 35(3)(c) and 20(3)(b) of the Eighth Schedule. Effectively, this will result in the proceeds to the seller and the base cost of the asset to the purchaser being reduced to nil and the parties are restored to their pre-contractual position. However, if the termination of the contract takes place in a subsequent year of assessment, the capital gain that was accounted for on the date the contract was concluded will be treated as a capital loss under paragraphs 3(b)(ii) and 4(b)(i)(aa) of the Eighth Schedule. In terms of these provisions the repayment of proceeds will be treated as a capital loss, whilst the reversal of the claim of the base cost will be treated as a capital gain in the year of termination. In order to illustrate this, assume that Mr. A entered into a contract on 15 February (year 1), with Company B in terms of which Mr. A disposes of an asset for R6 million (the original cost of acquiring the asset was R2 million). The contract stipulates that the purchase price must be settled within three months (year 2). Company B fails to pay within the prescribed period, which results in the resolutive condition being fulfilled and the termination of the contract. Mr. A will have to account for capital gains tax on the R4 million gain realised in year 1 and the base cost of the asset in Company B's hands will be R6 million. In year 2, Mr. A will realise a capital gain of R2 million (reversal of base cost accounted for in year 1) and a capital loss of R6 million (reversal of proceeds accounted for in year 1). The net result for Mr. A in year 2 is an aggregate capital loss of R4 million. Company B's cost of acquisition of the asset is reduced under paragraph 20(3)(b) of the Eighth Schedule by R6 million and will neither realise a capital gain or a capital loss. In light of the above, taxpayers need to be mindful that the fulfillment of a resolutive condition in a succeeding year of assessment can have adverse cash flow implications which need to be carefully considered when concluding an agreement. It would be preferable, from a tax point of view, if the conditions are suspensive in nature. On that basis, the tax consequences of a contract are deferred until the suspensive conditions are fulfilled. Edward Nathan Sonnenbergs IT Act: Eighth Schedule par 3(b)(ii), 4(b)(i)(aa), 13, 35(3)(c), 20(3)(b) Integritax Issue 137 January 2011 SAICA, 2011 page 2

3 EMPLOYEES TAX Employee share incentive schemes Employee share incentive schemes are ordinarily implemented by employer companies in order to incentivise and retain employees (participants) and for such participants to receive indirect benefits from the appreciation in the growth of such company. Situations may, however, arise where a decline in the market value of the shares of the employer company may cause an impoverishment for the participants. For this reason employee share scheme documents (the scheme document) ordinarily contain "stop loss" provisions which aim to prevent the participants from being detrimentally affected by a decline in the value of the employer company s shares. It is often stipulated in the scheme document that, if the purchase price of such share exceeds its market value on a specified date, the participant has a put option to sell the share to the share incentive trust (the trust) of the employer company. Accordingly, from a commercial perspective, the participant will not suffer an economic loss as a result of the decrease in the market value of the shares of the employer company should such participant exercise his/her put option to sell such share to the trust. In certain situations, on a literal wording of section 8C of the Income Tax Act No. 58 of 1962 (the Act), the tax treatment of the exercise by such participant of his/her put option to sell the share to the trust may lead to anomalous results. As a result of the right which the participants would have to "put" the shares to the trust at the strike price in the event of the strike price exceeding the market value of the shares on delivery date, the share will likely remain a restricted equity instrument (in terms of paragraph (f) of the definition of restricted equity instrument contained in section 8C of the Act). A question which requires consideration is whether the restricted equity instruments coming up for delivery would "vest" in the participant on the delivery date. Vesting of restricted equity instruments In accordance with section 8C(3)(b) of the Act, restricted equity instruments are deemed to vest at the earliest of a number of circumstances (which are not dealt with in this article). Of relevance, however, is section 8C(3)(b)(ii) which provides that restricted equity instruments are deemed to vest (if such occurs earlier than any other situation contemplated in section 8C(3)(b) of the Act) "immediately before that taxpayer disposes of that restricted equity instrument, other than a disposal contemplated in subsection (4) or (5) (a), (b) or (c)... " As the participants will dispose of their shares at a consideration which is more than the market value of such shares (and the transaction would therefore arguably not constitute an arm s length transaction), and assuming the participants are not "connected" to the trust, section 8C(5)(a) of the Act may be applicable and accordingly, there will be no vesting of the shares in the participants prior to their disposal to the trust as contemplated in section 8C(3)(b)(ii) of the Act. It may be argued, however, that section 8C(5)(a) of the Act was intended to combat certain tax avoidance transactions - other than stop losses. Although on the literal wording it is applicable, it seems anomalous that it results in a vesting loss being imputed to the participants after disposal of the shares pursuant to the stop loss, as explained below. Integritax Issue 137 January 2011 SAICA, 2011 page 3

4 Since the matter is not entirely clear cut, an analysis of both (a) the consequences arising should the shares be deemed to vest in the participants as well as (b) the consequences which may arise should the shares not so vest in the participants, is required. Tax considerations should the shares be deemed to vest in the participants Disposal of the share by the trust to the participant Should the shares vest in the participants immediately prior to their disposal by the participants to the trust (i.e. if section 8C(5)(a) is not applicable), as the strike price of the share upon the time of vesting will exceed the market value of the shares, a loss equal to the difference between the strike price and the market value of the shares will arise in accordance with section 8C(2)(b)(ii) of the Act. This loss will be suffered in the hands of the participant in terms of section 8C(1)(a)(i) of the Act. Subsequent disposal of the share by the participant to the trust The gain realised by the participants (equal to the difference between the market value and the strike price) upon the subsequent disposal of the share to the trust, could arguably constitute a taxable fringe benefit granted by the employer company to the participant in terms of the Seventh Schedule to the Act. Accordingly, such gain is to be included in the gross income of the employee for the relevant year of assessment. However, it may be argued that, as the gain in question did not arise as a result of a transaction in respect of which section 8C applies or the cancellation of a section 8C transaction, such gain will be exempt from tax in the hands of the participants in terms of section 10(1)(nE)(ii) of the Act as it constitutes a repurchase by the trust of shares previously purchased by the participant under a share scheme. On this basis, the gain arising in the hands of the participant upon the subsequent disposal of the share to the trust will constitute exempt income and no tax liability will arise for the participants upon such disposal of the shares to the trust. Alternatively, should the gain realised by the participant upon disposal of the share to the trust not be regarded as a fringe benefit, such may possibly be regarded as a disposal for capital gains tax purposes. In such event, in accordance with the Eighth Schedule to the Act, a capital gain equal to the difference between the market value of the share and the strike price will be realised in the hands of the participant. Tax considerations should the shares not be deemed to vest in the participants Disposal of the share by the trust to the participant The share will not vest in the participant, accordingly there will be no tax effect in terms of section 8C of the Act. Subsequent disposal of the share by the participant to the trust In accordance with section 8C(5)(a) of the Act, as the shares would be transferred by the participants to the trust in terms of a non-arm s length transaction, should the shares thereafter "vest" in the trust, any gain or loss realised by the trust in respect of such vesting would be deemed to have been made by the participants. Accordingly, as the trust would acquire the shares at the strike price which exceeds the market value, and (presumably) the shares would vest in the trust upon acquisition by the trust (as all restrictions pertaining to the shares as they relate to the participants would then presumably cease to have effect), a loss will arise in the hands of the trust in accordance with section 8C(2)(b)(ii) and such loss will be deemed to have been incurred by the participants in terms of section 8C(5)(a) of the Act. Integritax Issue 137 January 2011 SAICA, 2011 page 4

5 On this basis, should the shares not be deemed to vest in the participants prior to the participants transferring the shares to the trust, a loss will be deemed to arise in the hands of the participants upon the receipt of the shares by the trust (and the vesting thereof when the last of the restrictions ceases). Should the shares be regarded as capital in the hands of the participants, as the participants would not obtain any vested rights to the shares, in accordance with paragraph 11(2)(j) of the Eighth Schedule to the Act, any disposal of shares to the trust would be disregarded. Accordingly, no capital gains tax liability would arise in the hands of the participants. Recoupments There seems to be no income tax recoupment or other provisions which would reduce the (deemed) loss suffered by the participants. Conclusion It is evident that section 8C of the Act does not satisfactorily address the scenarios that may arise in practice. While there will be no tax liability for the participant or the employer company in respect of the share delivery or repurchase in question, depending on whether the shares vest in the participant prior to the re-sale of such share to the trust, under certain circumstances, the participants arguably have a tax loss available to them. The existence thereof seems to be anomalous as it is not matched by their commercial position. Edward Nathan Sonnenbergs IT Act: s 8C, s 8C(3)(b), s 8C(1)(a)(i), s 8C(2)(b)(ii), s 8C(5), s 8C(5)(a), s 10(1)(nE)(ii) Eighth Schedule par 11(2)(j) Integritax Issue 137 January 2011 SAICA, 2011 page 5

6 GENERAL The reverse onus provisions and fraud The prevalence with which one encounters reverse onus provisions in South African legislation has somewhat diminished in recent years with the advent of the Constitutional regime and in particular the enshrined right to be presumed innocent. However, reverse onus provisions are still found in the various tax statutes, the most prevalent of these being sections 82 and 102(4) respectively of the Income Tax Act No. 58 of 1962 (the Act) and the Customs and Excise Act No.91 of 1964 (Customs Act). Many a taxpayer will attest to the fact that the South African Revenue Service (SARS) is never shy to apply such provisions. Despite its frequent application by SARS the scope of these provisions has never really been defined until recently. In the case of AMI Forwarding (Pty) Ltd v Government of the Republic of South Africa (Department of Customs & Excise) & another [2010] JOL (SCA), the Supreme Court of Appeal (SCA) was faced with the question of whether the reverse onus provision contained in section 102(4) of the Customs Act extended to an allegation of fraud made by SARS. Briefly the facts of the case are as follows. AMI was a subsidiary of a Belgian company and conducted business as a clearing and forwarding agent in relation to goods imported and exported to and from South Africa. During October 2000 SARS issued a letter of demand to AMI in the amount of R 331, in relation to three bills of entry which it claimed were falsely acquitted. In particular, SARS claimed that the stamps on the bills of entry did not conform with the stamps that were currently used by border officials. Interestingly enough SARS did not attribute fraudulent conduct on the part of AMI, nor did they provide any evidence as to who could have perpetrated the fraud. Nevertheless, SARS argued that due to the provisions of section 102(4) of the Customs Act it was AMI that bore the onus of proving that the stamps were genuine, notwithstanding the fact that SARS had alleged fraud. Section 102(4) of the Customs Act provides: If in any prosecution under this Act or in any dispute in which the State, the Minister or the Commissioner or any officer is a party, the question arises whether the proper duty has been paid or whether any goods or plant have been lawfully used, imported, exported, manufactured, removed or otherwise dealt with or in, or whether any books, accounts, documents, forms or invoices required by rule to be completed and kept, exist or have been duly completed and kept or have been furnished to any officer, it shall be presumed that such duty has not been paid or that such goods or plant have not been lawfully used, imported, exported, manufactured, removed or otherwise dealt with or in, or that such books, accounts, documents, forms or invoices do not exist or have not been duly completed and kept or have not been so furnished, as the case may be, unless the contrary is proved. The SCA rejected SARS contention and upheld the long established principle that the party who alleges and pleads fraud must prove it. The court went on to state that the assumption of liability created by section 102(4) did not shift the onus of proving the existence of fraud from SARS onto the taxpayer. Therefore, the court found that since AMI had proved that it had removed the goods in bond or in transit as required by the Customs Act, the onus created by section 102(4) had been discharged. Once AMI had achieved this, it was up to SARS, as the party alleging fraud, to provide evidence that the Integritax Issue 137 January 2011 SAICA, 2011 page 6

7 bills of entry had been falsified. Because SARS was unable to provide such evidence it could not claim duties in respect of those bills of entry. Section 82 of the Act, which is similar to section 102(4) of the Customs Act, places the burden of proof on the taxpayer to show that an amount should not form part of his taxable income. Given the similarity of the provisions and their effect on the taxpayer there does not seem to be any reason why the principle laid down in AMI should not be applicable to section 82. Therefore, where the taxpayer has discharged the burden of proving that an amount should not form part of his taxable income and SARS raises the issue of fraud it is SARS which bears the onus of proving it notwithstanding the provisions of section 82. Furthermore, the judgment also ensures that the provisions of section 79(1) of the Act are not circumvented by SARS. Section 79 gives SARS a three year window period within which to raise additional assessments against a taxpayer. However the window period is not applicable where the Commissioner is satisfied that non-assessment was as a result of fraud, misrepresentation or material non-disclosure. If the court accepted SARS contention and extended the burden of proof on the taxpayer to include allegations of fraud, SARS would have been able to sidestep the three year period by claiming fraud but requiring the taxpayer to disprove it. The judgment handed down in the AMI case provides some welcome relief from the reverse onus provisions contained in the Customs and Income Tax Acts. More importantly, however, the judgment establishes an important precedent that the reverse onus provision should not be afforded an open ended interpretation and there are limitations to its application. Edward Nathan Sonnenbergs IT Act: s 79, s 82 Custom and Excise Act No. 91 of 1964: s 102(4) Integritax Issue 137 January 2011 SAICA, 2011 page 7

8 INDIVIDUALS Tax directives During the course of a tax year many events occur outside the normal monthly payroll run requiring an employer to re-evaluate the position of certain payments with respect to employee's tax. These include, inter alia, the exercise of share options, retrenchment of employees or retirement. The Fourth Schedule to the Income Tax Act, Act 58 of 1962 (the Act) governs the way in which employees tax needs to be withheld from remuneration paid to employees on a monthly basis. There are certain exceptions to the general rule, which place an obligation on the employer to approach SARS and obtain a tax deduction directive (directive) for certain classes of remuneration before it is paid to an employee. The obligation to obtain directives in the aforementioned circumstances has also given SARS a foothold to recover unpaid taxes of employees. The process involves SARS either declining to issue a directive until such time that the employee's affairs are brought up to date, thereby delaying payment, or appointing the employer as an agent to deduct the outstanding tax from the payment due to the employee. This is certainly a worrying factor for employees who find themselves in arrears with their tax affairs and places the employer in a difficult position, as it is required to withhold the additional amounts if instructed to do so by SARS. For purposes of this article a distinction has been made between directives which are compulsory, i.e. the employer has no choice but to apply, and those which are voluntary, and may be issued by SARS on application. Compulsory directives In practice, employers will deal mostly with the following payments which place an obligation under the provisions of the Fourth Schedule to obtain a directive: Share options exercised by an employee; Lump sum payments as a result of retrenchment; and Lump sum payments as a result of retirement. The obligation to request a directive from SARS in relation to share options exercised by an employee is contained in paragraph 11A(4) of the Fourth Schedule to the Act. The obligation under paragraph 11A(4) of the Fourth Schedule to obtain a directive, before making any payment to an employee, extends to gains made under sections 8A (right to acquire a marketable security), 8B (broad based share plans) or 8C (vesting of equity instruments) of the Act. In many instances employers ignore the directive obligation in relation to share gains and merely subject the payment to tax at the employee's marginal tax rate. This approach is fraught with danger as it is regarded as an offence not to withhold the correct amount of employees tax. It is further an offence where an employer obtains a directive as required, but does not act in accordance with the instruction stipulated on that directive. In relation to the accrual of lump sums as a result of retrenchment, an employer is obliged, under the provisions of paragraph 9(3) of the Fourth Schedule, to obtain a directive before making any payment to an employee. Integritax Issue 137 January 2011 SAICA, 2011 page 8

9 Where benefits become due as a result of retirement, the obligation is also placed on the employer to obtain a directive. However, it must be understood that for purposes of the Fourth Schedule a fund administrator is also regarded as an employer. This means that the fund administrator is responsible for obtaining a directive only in relation to payments made from an employee's retirement fund. Voluntary directives Paragraph 11 of the Fourth Schedule provides SARS with a discretionary power to issue directives in certain circumstances. Directives under paragraph 11 of the Fourth Schedule can be issued in order to alleviate hardship of an employee relating to factors beyond the control of that employee or to correct employees tax calculation errors. Hardship directives are also available to directors of private companies, but are most commonly used by commission earners and personal services companies in order to reduce their effective tax rates by taking into account deductions allowable on assessment. On issuing the directive under paragraph 11, SARS may either direct that no employees tax be withheld or that a specified amount or percentage be withheld. Employers relying on directives issued by SARS must ensure that it is a valid document having regard to the period it was issued for. Many employers have found themselves on the wrong end of a SARS employees tax audit where reliance is placed on outdated and invalid directives provided by employees. Cliffe Dekker Hofmeyr IT Act: s 8A, s 8B and s 8C Fourth Schedule par 9(3), 11, 11A(4) Integritax Issue 137 January 2011 SAICA, 2011 page 9

10 INTERNATIONAL TAX Foreign partnerships In South Africa (SA) a partnership is not a legal person distinct from the partners. Partners are liable for the debts of the partnership equally or as otherwise agreed. In this way, a partnership is different from a company: shareholders of a company are not liable for debts of the company. Partnerships are also taxed differently to companies. The income and capital gains of a company are taxed in the hands of the company. A company also pays secondary tax on companies when it distributes amounts to shareholders. But a partnership is not a "person" as defined in the Income Tax Act, No. 58 of 1962 (the Act) and is not subject to tax. Instead, the partnership is "tax transparent". For income tax purposes, income and expenses of the partnership are deemed to be those of partners (section 24H of the Act). For purposes of capital gains tax the proceeds on disposal of a partnership asset are deemed to have accrued to the partners (paragraph 36 of the Eighth Schedule to the Act). Some other countries, notably the United Kingdom, have created limited liability partnerships (LLPs) which are partnerships with legal personality separate from that of their members. However, although the LLPs are separate legal entities, the partners are still taxed in their own hands, like in SA. Because of their legal nature, LLPs may be seen to be companies and not partnerships for purposes of SA s tax law, so the partnership (and not the partners) may be subject to tax in SA. This may lead to unfavourable tax treatment for LLPs who may then choose not to invest in SA. The Taxation Laws Amendment Act No. 7 of 2010 (the Amendment Act), changes the way that LLPs - and other foreign partnerships - are taxed in SA. The changes are in line with other changes contained in the Act which seek to make SA more attractive for investors who wish to use SA as a regional base (see, for instance, the Media Statement issued by the National Treasury in relation to the 2010 Taxation Laws Amendment Bill on 1 May 2010). The Amendment Act introduces a definition of "foreign partnership" in the Act. Simply put, a foreign partnership is a partnership which is formed outside SA, the partners of which (and not the partnership) are subject to tax under the laws of the relevant country. A foreign partnership has been excluded from the definitions of "company" and "person". Section 24H of the Act has also been changed. Practically, the effects of the changes are as follows: Partnerships formed in other countries will not be subject to tax in SA, despite the fact that they may be LLPs. The partners of such partnerships will be subject to tax in SA (to the extent that they have taxable income or capital gains in SA). As foreign partnerships are no longer defined as companies for purposes of the Act, they will not, for instance, be controlled foreign companies (CFCs) for purposes of section 9D of the Act. Integritax Issue 137 January 2011 SAICA, 2011 page 10

11 Simply put, passive income of CFCs - being companies owned by South African tax residents as to more than 50% - is attributed to the SA tax resident shareholders. Compare the Binding Private Ruling (BPR 0061 dated 30 October 2009) in terms of which SARS ruled that a foreign limited partnership, incorporated in a foreign jurisdiction, was a "company" as defined in the Act and, as such, constituted a CFC for purposes of section 9D of the Act. As foreign partnerships are no longer defined as "persons" for purposes of the Act, they will not, for instance, be "employers" as defined for purposes of employees' tax under the Fourth Schedule to the Act. Where a partnership (as opposed to the partners) is subject to tax in the foreign country, the partnership could still constitute a "company" and a "person" for purposes of the Act. The introduction of the concept of "foreign partnership" opens up interesting planning opportunities. Cliffe Dekker Hofmeyr IT Act: s 1 definition of person, foreign partnership, s 24H, s 9D Eighth Schedule par 36 Taxation Laws Amendment Act No. 7 of 2010 Integritax Issue 137 January 2011 SAICA, 2011 page 11

12 NON-RESIDENTS Withholding tax on interest In terms of the 2010 Draft Taxation Laws Amendment Bill, interest earned by non-residents in future, would only be exempt in certain limited instances and section 10(1)(h) of the Income Tax Act No. 58 of 1962 (the Act), which allows for a an exemption from normal tax of any interest received by a non-resident, would effectively be replaced. However, the Taxation Laws Amendment Act, No.7 of 2010 (the TLAA), contains provisions for the introduction of a withholding tax on interest, as opposed to the restricted interest exemption. This amendment will however only be effective from 1 January 2013 and apply in respect of any interest that accrues on or after that date. The South African Revenue Service has commented on this delayed introduction, stating that it requires time to renegotiate double tax agreements (DTA). DTA s concluded between South Africa and a foreign jurisdiction, may allow for a reduced withholding tax rate on interest. Specific reference is made in the TLAA, to the fact that the withholding tax rate may be reduced, should the person to whom the interest is paid, be able to provide a declaration to the person making the payment, stating that such interest is subject to a reduced rate by virtue of the application of any DTA. Once the new provisions take effect, section 37J of the Act will impose a withholding tax on interest, calculated at the rate of 10% on the amount of any interest that is received by, or accrues to any nonresident, which is not a controlled foreign company, subject to certain exemptions in section 37K. In terms of section 37K, an exemption from the withholding tax on interest will apply to interest received by a non-resident company, in respect of: any government debt instrument held by that non-resident; any listed debt instrument held by the non-resident; any debt owed by any bank, the South African Reserve Bank or any other non-resident to that resident; any other debt owed by a non-resident, unless the non-resident is a natural person who was physically present in the Republic for a period exceeding 183 days during that year; or carried on business through a permanent establishment situated in South Africa; and essentially any interest arising from the import or export of goods. The extent of these exemptions would need further consideration in future, for instance, the exemption in respect of "any other debt" owed by a non-resident, raises the question as to what would constitute "any other debt" since the term "debt" is not defined in section 37I. The provision contains a definition of "debt instrument", which is any loan, advance, debt, bond, debenture, bill, promissory note, banker s acceptance, negotiable certificate of deposit or similar instrument. However, the specific provision refers to "any other debt". In terms of the ordinary meaning of debt, Black s Law Dictionary defines the term to include, inter alia: "Liability on a claim; a specific sum of money due by agreement or otherwise, a non-monetary thing that one person owes another...". Therefore, in terms of this definition, it appears that a debt can even be owed in terms of a non-monetary item. Furthermore, at this stage, it is unclear whether section 10(1)(h) of the Act will continue to apply once the withholding tax on interest is introduced. Integritax Issue 137 January 2011 SAICA, 2011 page 12

13 The obligation to withhold is imposed on the person making the payment, that is, the resident, in terms of section 37L. The amount so withheld, must be paid to the Commissioner within 14 days after the end of the month during which the amount is withheld. Therefore, even though this is essentially a tax levied on the interest income received by nonresidents, the resident company effecting interest payments will be the person burdened with this obligation. It is important to note, that should the Commissioner satisfy himself that any amount of withholding tax due by an unlisted company has not been paid, he may estimate the unpaid amount and issue an assessment. The shareholders and directors of such company, who made the interest payment without withholding the prescribed amount, may in such cases become personally liable for the amount due to the Commissioner. Editorial comment: In view of the fact that the introduction of this tax is dependent on the renegotiation of the Double Taxation Treaties the date of the implementation may need to change. Edward Nathan Sonnenbergs IT Act: s 10(1)(h), s 37I, 37J, s 37K, s 37L Taxation Laws Amendment Act No. 7 of 2010 Integritax Issue 137 January 2011 SAICA, 2011 page 13

14 VALUE-ADDED TAX Security for transfer duty certificate SARS issued correspondence on 4 August 2010 relating to the application for exemption from transfer duty in terms of Section 9(15) of the Transfer Duty Act, 40 of 1949 (Transfer Duty Act) and SARS's request for security. Generally, when immovable property is transferred, transfer duty will be calculated and paid over to SARS in terms of the Transfer Duty Act. However, section 9(15) of the Transfer Duty Act provides that no transfer duty shall be payable in respect of the acquisition of any property under any transaction which constitutes a taxable supply for purposes of the Value-Added Tax Act No. 89 of 1991 (VAT Act). If the transfer of the property forms a taxable supply for purposes of the VAT Act, then section 9(3)(d) of the VAT Act provides that VAT on the transaction needs to be accounted for on receipt of the consideration for the supply, or on registration of the property, whichever date is earlier. The VAT is thus paid as output VAT by the seller and claimed as an input VAT deduction by the purchaser, provided that the purchaser will also use the property in the course or furtherance of the purchaser's enterprise. VAT output need only be accounted for by the parties in the VAT period following the time of supply provision being triggered. SARS is seeking to enforce section 9(15)(b) of the Transfer Duty Act which provides that the Commissioner may require that security be provided for the payment of the VAT due in instances where such VAT has not yet been paid. Practically speaking, this means that, notwithstanding the fact that the VAT Act allows for the output VAT to become payable once payment is made - in terms of section 16(3)(iiA), - SARS is suggesting that section 9(15)(b) empowers the Commissioner to request that such VAT be paid upfront as security for the VAT due. In the letter issued by SARS on 4 August 2010, SARS sets out the procedure that will be followed in practice in which the VAT amount will be required to be paid as security in order for a transfer duty exemption certificate to be issued, notwithstanding the fact that the VAT is not yet due for payment to SARS. The letter states that upon receipt of a transfer duty exemption application, SARS will assess the vendor's tax compliance concerning all taxes with regard to the submission of returns and payments. If there is repeated non-compliance ie. non-filing of returns or non-payment of taxes on more than one occasion for each tax type, the vendor must: Resolve all outstanding tax obligations; or Provide security for the VAT payment in respect of the property transaction for which the application is being made; or Instruct the attorney to provide an undertaking for the VAT payment in respect of the property transaction for which the application is being made. The letter further provides that, regardless of having opted to pay the security referred to above, the vendor must declare and pay the full VAT on the property transaction in question on the relevant VAT return when due as provided for in the VAT Act. The vendor may however apply to SARS that the Integritax Issue 137 January 2011 SAICA, 2011 page 14

15 security paid should be offset against the VAT liability for the tax period in which the sale of the property must be declared, or alternatively apply for the refund of the security. It is uncertain at what stage SARS will allow the purchaser to claim a VAT credit, that is, whether it would be once VAT is paid as security in terms of section 9(15)(b) of the Transfer Duty Act, or only once payment is in fact made in terms of the VAT Act. In terms of the current provisions of the VAT Act, the purchaser should be entitled to claim input tax even though the seller has not actually paid output tax to SARS. It is also questionable whether the procedure calling for the vendor to resolve outstanding tax obligations is lawful. If a taxpayer has not complied with its VAT obligations, then SARS has an arsenal of weapons available to it under the VAT Act to force compliance. However, there is no provision in the Transfer Duty Act or the VAT Act that allows SARS to withhold a transfer duty exemption certificate because a taxpayer has not complied with its tax obligations. Similarly, the provisions of section 9(15)(b) of the VAT Act state that security must be provided, not that VAT must be paid, as SARS is suggesting in its correspondence. Effectively, SARS is holding taxpayers involved in a property transaction to ransom without any power to do so and using attorneys as its - unpaid - agents to do its dirty work. The above measures will lead to further delays in property transfers, often to the detriment of innocent purchasers. Cliffe Dekker Hofmeyr Transfer Duty Act: s 9(15), s 9(15)(b) VAT Act: s 9(3)(d), s 16(3)(iiA) Integritax Issue 137 January 2011 SAICA, 2011 page 15

16 1912. VAT apportionment General The VAT rules require a vendor who makes both taxable supplies and supplies other than taxable supplies (such as loans earning interest) to claim input tax only to the extent that the goods or services concerned are acquired for consumption in making taxable supplies. Put differently, only a portion of the input tax incurred in respect of goods and services acquired for the purposes of making mixed supplies, such as general overhead expenditures in the case of a bank, may be claimed. Calculating the ratio To calculate the input tax that is recoverable on expenses consumed in the making of both taxable and exempt and non-supplies, the taxpayer must, in the absence of a specific SARS approval, apply the standard turnover-based method. The ratio is calculated as follows: Taxable % = Total value of consideration for taxable supplies Total value of consideration for all supplies In terms of section 17 of the VAT Act, if the intended taxable use of the goods and services exceeds 95%, the goods and services concerned are regarded as having been acquired wholly for the purpose of making taxable supplies and the input VAT is then recoverable in full. The VAT 404 Guide for Vendors specifies that the denominator (total value of all supplies) should include any other amounts received or accrued in the period (whether in respect of supplies or not). The terms received and accrued are not defined in the VAT or Income Tax Acts but the High Court ruled many years ago in Geldenhuys v CIR [1947] (14 SATC 149) case that received means beneficially received (i.e. on the recipients own behalf) and in CIR v People Stores (Walvis Bay) (Pty) Ltd [1990] (52 SATC 9), that accrued means unconditional entitlement. According to SARS, this means that vendors must include in the denominator (for example): realised gains on foreign exchange transactions dividend and interest income proceeds of a debtor s book securitisation (for working capital purposes). The vendor s guide is also clear that consideration for non-supplies (an unusual category of transaction that we will not discuss here) must also be included and the taxpayer must obtain prior approval to exclude them should it result in an unfair or distorted apportionment ratio. In our view, dividends received and foreign currency gains are generally not the result of any ongoing effort by a vendor and should properly be excluded on the basis that no inputs are acquired for earning them. Unfortunately, discussions with SARS aimed at removing these amounts from the formula in appropriate instances have been consistently unsuccessful. Integritax Issue 137 January 2011 SAICA, 2011 page 16

17 Tainted expenses The next step is to determine the expenses/input VAT that requires apportioning. SARS focus has recently moved from the calculation of the denominator to challenging the expenses in the pot that require apportioning. SARS view is that even if an input is used minimally in making supplies other than taxable supplies, the related expense is tainted and the input VAT paid should be apportioned in accordance with the ratio calculated above. In other words, SARS applies the 95% only after all mixed inputs are in the pot, and does not apply it to determine whether an input should go into the pot in the first place. Again, in our view this is a blatant distortion of the clearly worded requirements of the legislation, but attempts to argue against it continue to fall on deaf ears. What you can expect Since withdrawing all rulings at the end of June 2007, SARS has not reconfirmed the apportionment rulings previously issued to vendors for the use of anything other than the standard turnover based method, so vendors using any other methodology are at risk. SARS clearly views apportionment of input tax as a primary generator of revenue and vendors across all sectors can expect a knock on the door and to be challenged on input VAT claimed in full. Those vendors making non-vatable supplies in excess of 5% of their total receipts and accruals may therefore find themselves liable to apportion any VAT on inputs not wholly attributable to the making of taxable supplies, on the basis of the formula discussed above. Although the technical validity of this approach is, we believe, faulty, experience suggests that unless a vendor is prepared to take matters to court (and resist the temptation to settle), they might as well decide on the amount they are prepared to pay SARS to go away, and aim for a settlement on that basis. Ernst & Young VAT Act: s 17 Integritax Issue 137 January 2011 SAICA, 2011 page 17

18 SARS AND NEWS Interpretation notes, media releases and other documents 07 February 2011 Legal and Policy BCR 026 Income Tax Act, 1962 Tax status of bursaries awarded to students 04 February 2011 Legal and Policy Rule amendments in terms of sections 21 and 120 Substitution of CCA SARS offices with IDZ SARS offices 03 February 2011 Legal and Policy Turnover Tax: Tax Guide for Micro Businesses February 2011 Legal and Policy Tariff Amendments for Schedules No s 2 and 3 03 February 2011 Legal and Policy Rule Amendments Environmental levy for March rule 54FB.05(b) 02 February 2011 Legal and Policy Additional Questions and Answers added under Voluntary Disclosure Programme 02 February 2011 Legal and Policy Draft Rules and Forms relating to Diamond Levy were replaced with new drafts comments due on 10 February February 2011 Legal and Policy VAT News 37 and BTW Nuus January 2011 Legal and Policy Implementation of sections 13(1) and 38(1) of the Taxation Laws Second Amendment Act, 2009 on 1 February January 2011 Legal and Policy Draft Excise Form DA 160 and its Annexures Due date for comments has been extended to 14 February January 2011 Legal and Policy Draft Excise Form DA 160 and its Annexures comments due on 10 February January 2011 Legal and Policy Draft Diamond Export Levy rules and forms comments due 10 February January Legal and Policy - Draft VDP relief lists comments due 28 January January 2011 Legal and Policy Interpretation Note 60 Loss on disposal of depreciable assets Readers are reminded that the latest developments at SARS can be accessed on their website Editor: Mr M E Hassan Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees. The Integritax Newsletter is published as a service to members and associates of the South African Institute of Chartered Accountants (SAICA) and includes items selected from the newsletters of firms in public practice and commerce and industry, as well as other contributors. The information contained herein is for general guidance only and should not be used as a basis for action without further research or specialist advice. The views of the authors are not necessarily the views of SAICA. All rights reserved. No part of this Newsletter covered by copyright may be reproduced or copied in any form or by any means (including graphic, electronic or mechanical, photocopying, recording, recorded, taping or retrieval information systems) without written permission of the copyright holders. Integritax Issue 137 January 2011 SAICA, 2011 page 18