Tutorial Letter 103/0/2018

Transcription

1 TAX4862/103/0/2018 NTA4862/103/0/2018 Tutorial Letter 103/0/2018 Applied Taxation TAX4862 NTA4862 Year module Department of Financial Intelligence This tutorial letter contains learning units 2 and 3 as well as self-assessment Assignment 01. Bar code

2 2 TAX4862/103/0/2018 TABLE OF CONTENTS ORIENTATION... 4 I. INTRODUCTION... 4 II. STUDY PROGRAMME AND TIME FRAME... 4 III. INSTRUCTION ICONS (LEGENDS) AND ABBREVIATIONS... 5 IV. BEANCOUNTER SCENARIOS... 6 V. LECTURERS... 6 VI. IMPORTANT DATES FOR THIS TUTORIAL LETTER... 6 VII. UNISA S OPEN-BOOK POLICY... 6 VIII. SYLLABUS FOR THIS MODULE... 6 WORK PLAN FOR DAY 1 (14 FEBRUARY 2018)... 8 SECTION A INTERPRETATION OF LEGISLATION DONATIONS TAX BACKGROUND OUTCOMES OF THIS LEARNING UNIT BEANCOUNTER SCENARIO CONTENT FOR LEARNING UNIT Study approach Table of Reference Sections in SILKE you may ignore LAW AMENDMENTS ADDITIONAL NOTES Framework for the calculation of donations tax Donations in the same group of companies (section 56(r) SILKE ) Impact of donations on other taxes Solution Question 10.1 in AQSAT OUTCOMES OF THE BEANCOUNTER SCENARIO... 17

3 3 TAX4862/103/0/2018 WORK PLAN FOR DAYS 2-5 (15 18 FEBRUARY 2018) VALUE-ADDED TAX (VAT) BACKGROUND OUTCOMES OF THIS LEARNING UNIT BEANCOUNTER SCENARIO CONTENT FOR LEARNING UNIT Study approach Table of Reference Sections in SILKE you may ignore LAW AMENDMENTS ADDITIONAL NOTES Mind map representing an overview of VAT Mind map of the supply of goods and services OUTPUT TAX Services - SILKE par Zero rating of exported services - SILKE par Zero-rated supply: the sale of a going concern - SILKE par Taxable supply (commercial accommodation) - SILKE par Exempt supplies: Other (including transport of fare-paying passengers and their personal effects by road or rail) - SILKE par Deemed supplies: Ceasing to be a vendor - SILKE par Deemed supply: indemnity payments - SILKE par Deemed supply: Fringe benefits - SILKE par Time and value of supply - SILKE par and Basics of input tax - SILKE par Input tax: Denial of input tax - SILKE par Input tax: Importation of goods - SILKE par Special rules: fixed property - SILKE par Adjustments arising from the changed use of goods or services - SILKE par to Adjustments: Irrecoverable debts - SILKE par SECTION B INTEGRATED EXAMPLE WORK PLAN FOR DAYS 6-7 (19 20 FEBRUARY 2018) SECTION C Self-assessment assignment 1/

4 4 TAX4862/103/0/2018 ORIENTATION I. INTRODUCTION This tutorial letter is divided into two learning units. Learning unit ( LU ) 2 deals with donations tax and LU 3 deals with value-added tax ( VAT ). The goal of this tutorial letter is to assist you in making the most of the time available to master the topics in this tutorial letter. Follow the guidelines and try to keep to the time limitations. (Remember that these limitations are based on the fact that certain topics have already been covered in the your undergraduate studies). II. STUDY PROGRAMME AND TIME FRAME Your time should be divided into two parts: Obtaining the required knowledge (23 hours) This would entail working through this tutorial letter and the textbooks (SAICA Student Handbook Volume /2018 and SILKE: South African Income Tax 2018), underlining and making summaries, and familiarising yourself with the Value-Added Tax Act No. 89 of 1991 and the Income Tax Act No. 58 of 1962 (section A of this tutorial letter). Application of knowledge and revision of difficult concepts (7 hours) This would entail the completion of integrated and assignment questions (sections B and C of this tutorial letter). While obtaining the required knowledge (section A), you will, where we deem it necessary, be referred to specific questions in section C. We assume that you have three hours of study time on a weekday/night and 15 hours over a weekend. We have based the work plan in this tutorial letter on this assumption. Day Date Topic Hours 1 Wednesday 14 February 2018 LU 1 Interpretation of tax law in TL 102/2018 (30 minutes) LU 2 - Donations Tax in Section A 3 (2 hours and 30 minutes) Question 1 of Section C 2 Thursday 15 February 2018 LU 3 VAT in Section A 3 3 Friday 16 February 2018 LU 3 VAT in Section A 3 4 & 5 Week-end February 2018 LU 3 VAT in Section A (14 hours) Section B: Integrated example 15 (1 hour) 6 Monday 19 February 2018 Section C: self-assessment Assignment 01 (questions 2 18) 3 7 Tuesday 20 February 2018 Section C: Self-assessment Assignment 01 (questions 2 18) 3 30 hours

5 5 TAX4862/103/0/2018 III. INSTRUCTION ICONS (LEGENDS) AND ABBREVIATIONS In this tutorial letter, the following instruction icons will be used: Time allocation Work programme or Instruction or Activity Important or Additional information Examples or Exercises Information about changes in legislation Abbreviations used in the learning unit Outcomes of the learning unit The following abbreviations are used in this tutorial letter: Abbreviation Meaning of abbreviation Student Handbook SAICA Student Handbook 2017/2018, volume 3 OMV Par AQSAT SAICA SILKE LU the Income Tax Act the VAT Act the TAA TL VAT Open-market value Paragraph Advanced Questions on SA Tax 2018, Parsons, S. (Editor) The South African Institute of Chartered Accountants SILKE: South African Income Tax 2018, Stiglingh M et al. Learning unit the Income Tax Act No. 58 of 1962 (as amended) the Value-Added Tax Act No. 89 of 1991 (as amended) The Tax Administration Act No. 28 of 2011 (as amended) Tutorial letter Value-added tax

6 6 TAX4862/103/0/2018 IV. BEANCOUNTER SCENARIOS Refer to TL 101/2018 to meet the Beancounter family. V. LECTURERS The following lecturers compiled this tutorial letter: MS A Heyns Ms N Thoothe Ms M Ungerer Please contact any of the tax lecturers should you have questions regarding this tutorial letter. You may also send your queries (regarding administrative and academic matters) and comments via to TAX Y1@unisa.ac.za. (Note that correspondence is the preferred method of communication refer to TL 101/2018 in this regard.) For queries regarding academic matters, you may call the administrative officer at The administrative officer will put you in touch with the relevant lecturer on duty or will take a message. The lecturer will contact you as soon as possible, or you may call the hunting line at (remember to let it ring so that the exchange can find a free extension). VI. IMPORTANT DATES FOR THIS TUTORIAL LETTER Date of test 1: TUESDAY, 13 March 2018 The topics covered in both TL 103/2018 and TL 104/2018 as well as any relevant case law in TL 102/2018 will be assessed in Test 1. VII. UNISA S OPEN-BOOK POLICY VERY IMPORTANT Please refer to TL 101/2018 and CASALL2/301/2018 for information on UNISA s open-book policy (and calculator policy). It is very important to familiarise yourself with the policy, as you need to adhere to it strictly. VIII. SYLLABUS FOR THIS MODULE The content of this module is based on the SAICA Taxation Examinable Pronouncements for the 2019 Initial Test of Competence (ITC). Each LU has a Table of Reference which contains the sections to the different Taxation Acts and an indication of which sections or sub-sections are examinable.

7 7 TAX4862/103/0/2018 Take note that only Regulations and Binding general rulings included in the Student Handbook are examinable. Interpretation Notes will no longer be included in the Student Handbook, but to the extent that an Interpretation Note creates practice generally prevailing (refer to section 5 of the TAA), a relevant extract will be provided in the examination. Note The that the areas in SILKE that are highlighted in grey do not form part of the SAICA Taxation Examinable Pronouncements. for the 2019 ITC. cut-off date for taxation legislation examinable in the ITC for 2019 is as follows: Amendments promulgated by 31 January 2018* and which are effective for the 2018 year of assessment. In other words, all amendments effective for years of assessment 2019 or later are not examinable. If a withholding tax rate is changed in the Budget speech in February 2018, the new rate will be provided in the ITC. Therefore the ITC 2019 will assess individuals with a 2018 year of assessment and non-natural persons with a December 2018 year of assessment (or earlier). * SAICA reserves the right to change this to a later date should the relevant legislation not be promulgated before this date.

8 8 TAX4862/103/0/2018 WORK PLAN FOR DAY 1 (14 FEBRUARY 2018) SECTION A Time allocation for learning units 1 and 2 : Interpretation and application of legislation (LU 1) (TL 102/2018) Donations tax (LU 2) Total 0.5 hours 2.5 hours 3 hours Note that this is much work to master in the allocated time, but most sections would have been covered in depth in your first year of postgraduate studies. You will probably not have time to study every section in detail again, but will have to rely on your prior knowledge. Where necessary, you should refresh your memory regarding sections you already know. 1 INTERPRETATION OF LEGISLATION The content of LU 1 is contained in TL 102/2018. LU 1 will provide you with the skills on how to interpret legislation. Work through LU 1: "Interpretation of legislation" in TL 102/2018. This should assist you in the optimal use of the Student Handbook. 2 DONATIONS TAX 2.1 BACKGROUND Donations tax, although levied in terms of PART V of the Income Tax Act (sections 54 to 64), it is a separate tax from income tax. It is payable on the transfer of assets from one person (not necessarily a taxpayer) to another. Take note that donations tax could also affect the calculation of capital gains tax, where an asset (as opposed to cash) is donated. You therefore also have to refer to the applicable paragraphs in the Eighth Schedule to the Income Tax Act.

9 2.2 OUTCOMES OF THIS LEARNING UNIT 9 TAX4862/103/0/2018 After studying LU 2, you should be able to achieve the following outcomes: Achieve all the outcomes listed at the beginning of chapter 26 (Donations Tax) of SILKE. Explain and calculate the capital gains tax implications in terms of the Eighth Schedule to the Income Tax Act in the event of a donation. Before you start studying the detailed provisions of donations tax, you should first read the following scenario relating to the Beancounter family. As you study the applicable sections in the Income Tax Act, identify areas of concern that should be brought to the attention of the Beancounter family. 2.3 BEANCOUNTER SCENARIO Barry Beancounter is married in community of property to Bizzie Beancounter. Barry is a very charitable person, as he made a number of donations during the year. He donated R cash to the Butterbean Family Trust, R cash to his lovely wife, Bizzie, and R cash to each of his children, Jelly and Soya Beancounter. He also donated R5 000 to the B.E.A.N. political party. Barry considers selling a property with a market value of R to the Butterbean Family Trust on an interest-free loan account. This property is excluded from Barry and Bizzie s joint estate. The journal entry will be recorded as follows in the financial records of the trust: Dr Property R Cr Loan account: B Beancounter R He also considers making another donation to the trust utilising the rest of his R annual exemption. (Remember there is an existing loan [see above] that the trust owes Barry.) All cash donations (except for the donation to Bizzie) were made (and in future will be made) from funds available in an investment account. This investment is included in Barry and Bizzie s joint estate. Barry is, however, uncertain about the donations tax and capital gains tax implications (if any) that may arise from the above donations he made during the year, as well as those he considers making and he has therefore asked you to assist him. Before attempting to assist Barry with his donations tax and capital gains tax query, you should first work through and master the applicable sections in the Income Tax Act relating to donations tax.

10 2.4 CONTENT FOR LEARNING UNIT Study approach 10 TAX4862/103/0/2018 We provide you with a Table of Reference which contains the references to all the sections which must be studied in this learning unit together with a reference to the relevant paragraph in SILKE and a reference to additional notes provided (if any) in the tutorial letter, as well as an indication of whether a specific section is examinable or not. The Table of Reference is presented in such a way that you should use it to guide you through the content of the learning unit in this tutorial letter. You should therefore work your way through the content by starting at the top of the table and working your way through to the end. The ideal way to study tax is to always first read the specific section in the Income Tax Act and then to study the relevant paragraph(s) in SILKE together with any additional notes on that section included in this tutorial letter. We recommend that you study any additional notes on the section first before working through the paragraph(s) in SILKE. Also work through the examples in SILKE, because the examples illustrate the application of the theory of a section. We are not ignorant of the fact that most of our students study part time. We therefore realise that you may not always have the time available to follow the above study approach fully, with specific reference to our recommendation that you first read a section in the Income Tax Act. However, you still need to flag and underline your Income Tax Act in order for you to benefit from it, because the tests, the examination and the 2019 ITC are all limited open book examinations. Please keep this in mind. SILKE has a Table of provisions towards the back of both volumes (just before the Subject index). This is a handy table to use if you have a specific section on which you need more information. The table provides the paragraphs in SILKE which contain information on that specific section Table of Reference As mentioned above, the following table contains references to all the sections of the Income Tax Act that must be studied in this learning unit together with a reference to the relevant paragraph in SILKE and a reference to additional notes provided in the tutorial letter (if any), as well as an indication of whether a specific section is examinable or not. Start at the beginning of the Table of Reference and work your way down, keeping in mind the study approach as set out in par above.

11 Reference to Income Tax Act Topics 11 TAX4862/103/0/2018 Reference to SILKE Day 1: Wednesday 14 February 2018 (2.5 hours) Reference to notes in the TL Examinable Sections Donations tax 54 to 64 Framework for the calculation of donations tax s 54 Levy of donations tax 26.1 Yes 26.2 s 64 Rate of donations tax 26.2 Yes s 55 Definitions for purposes of this part 26.3 Yes s 58 Property disposed of under certain transactions deemed to have been disposed of under a donation Yes s 58(2) No s 7C Loan or credit advanced to a trust by a connected person (Effective 1 March 2017) Yes (also TL106) s 7C(5)(a), (b), (c), (f) & (h) No S 7D Calculation of amount of interest Yes (also TL106) s 56 Exemptions Yes s 56(o) No s 57A Donations by spouse married in community of 26.8 Yes property s 57 Disposals by companies under donations at the 26.9 Yes instance of any person s 62 Value of property disposed of under donations Yes s 62(a) (c): the value of limited interests in property will be given s 59 Persons liable for the tax Yes s 60 Payment and assessment of the tax Yes s 61 Extension of scope of certain provisions of Act for No purposes of donations tax Donations and Capital Gains Tax Disposals and acquisitions par 11 Disposals Yes Base cost par 20 Base cost of asset Yes (Only the basic principles) par 22 Amount of donations tax to be included in base cost Yes Proceeds par 38 Disposal by way of donation, consideration not measurable in money and transactions between connected persons not at an arm s length price Exclusions par 62 Donations and bequests to public benefit organisations and exempt persons Yes Yes

12 Reference to Income Tax Act Topics 12 TAX4862/103/0/2018 Reference to SILKE Reference to notes in the TL Examinable Roll-overs par 67 Transfer of asset between spouses Yes Questions and examples Work through Example in SILKE Do Question 10.1 in AQSAT Do Question 1 in Section C of this TL Sections in SILKE you may ignore Note that regarding the calculation of the value of limited interests (SILKE par to ) you need not know how to do the complex calculations (amounts will be provided in questions). You will be required to determine which value to use for the limited interests taking the provisos of section 62 into account. You must also be able to recognise and define the meaning of a fiduciary interest, usufruct and bare dominium, as described in the first few paragraphs of par LAW AMENDMENTS The taxation laws are amended annually. These amendments are firstly published in the form of draft Bills and then as Bills. Only once the Bills have been passed through Parliament and once it is then assented to by the President, it is published as Acts. It is normally expected that the Bills will be enacted early in the following year. The study material in this tutorial letter is based on amendments as proposed in the Bills. The publishing of the Bills coincides with the Medium Term Budget Policy Statement (MTBPS) made by the Minister of Finance. The last MTBPS was made on 25 October 2017 and the following Bills, relevant to your studies, were published: Rates and Monetary Amounts and Amendment of Revenue Laws Bill 26 of 2017; Taxation Laws Amendment Bill 27 of 2017; and Tax Administration Laws Amendment Bill 28 of The important proposed amendments which are applicable to this LU is summarised below. In some instances we repeat amendments from previous years which were enacted for your reference.

13 13 TAX4862/103/0/2018 Relevant amendments contained in the Taxation Laws Amendment Bill 27 of 2017 are as follows: Insertion of section 7D: South Africa has a common law and a statutory law in duplum rule, which protects borrowers from creditors in that the amount of unpaid interest may never exceed the amount of the unpaid principal debt. The new section 7D overrides these common law principles and statutory law provisions in instances where an amount must be determined that would have been incurred as interest in respect of any loan, debt, advance or amount of credit. Section 7D will come into operation on 1 January 2018 and applies in respect of years of assessment commencing on or after that date. Section 7D is relevant to the deeming provisions of section 7C which stipulates that the foregone interest on an interest-free loan made by a connected person to a trust is deemed to be a continuing donation for donations tax purposes. Amendment to section 7C: Section 7C which applies to a loan made by a person to a trust has been amended to include loans made by connected persons. The section has been amended further to include loans made to a company if at least 20 percent of the equity shares are held by or 20 persent of the voting rights can be excercised by the trust obtaining the loan or by a beneficiary of that trust. These amendments are deemed to have come into operation on 19 July See SILKE par 26.6 for more information. Relevant amendments contained in the Taxation Laws Amendment Act 15 of 2016, enacted on 19 January 2017, are as follows: A new section, section 7C, was introduced in the Income Tax Act, which stipulates that the foregone interest (calculated as the difference between the interest that would have been charged at the official interest rate and the actual interest paid) on an interest-free or low interest rate loan made to a trust by a connected person who is a natural person or at the instance of a natural person is deemed to be a continuing donation for donations tax purposes. This amendment came into operation on 1 March 2017 and the interest is deemed to be a donation to the trust on the last day of the year of assessment of that trust. Both sections 7C and 7D will be dealt with in detail again in LU 14 (trusts) in TL 106.

14 14 TAX4862/103/0/ ADDITIONAL NOTES Framework for the calculation of donations tax NO NO DID A RESIDENT DISPOSE OF THE PROPERTY? YES WAS THIS PROPERTY DISPOSED OF UNDER ANY DONATION OR DEEMED DONATION? References to the Income Tax Act Sections 1 and 54 Sections 54, 55 and 58 YES YES IS THE DONATION EXEMPT FROM DONATIONS TAX? Section 56 YES NO IS THE DONATION A REASONABLE CONTRIBUTION TO MAINTENANCE OF A PERSON? Section 56(2) NO CALCULATE THE VALUE OF THE DONATION. Section 62 CALCULATE THE TAXABLE DONATION = VALUE OF DONATION LESS BALANCE OF EXEMPTION (not a natural person: R per annum; natural person: R per annum) (exemption applied in order that donations take effect) Section 56(2) Section 60(2) NO DONATIONS TAX PAYABLE CALCULATE DONATIONS TAX TAXABLE DONATION x 20% Section 64

15 15 TAX4862/103/0/2018 Notes to the framework 1. Donations tax is payable on the fair market value of any property disposed of gratuitously or for less than the fair market value by a South African resident. 2. Donations tax must be calculated separately on each donation as and when the donation takes place and not at the end of the year of assessment as in the case of income tax. The R exemption, applicable to natural persons, and the R10 000, applicable to persons who are not natural persons, must therefore be applied in the order that the donations take place. 3. The R exemption, applicable to natural persons, applies to all property donated and is not apportioned where the period of assessment is less than a full year. The R exemption, on the other hand, applicable to a donor that is not a natural person, only applies to casual gifts and it must be apportioned where the period in question exceeds or is less than 12 months. 4. Donations tax is payable by the end of the month following the month during which the donation takes effect. Donations tax does not apply to non-residents, even if they donate South African assets. Donations tax is payable by the end of the month following the month during which the donation takes effect. Do not confuse the section 18A deduction (deductible donations to certain organisations) with the donations tax provisions. Even if no donations tax is payable on a specific donation, it does not mean that the specific donation may be deducted for normal tax purposes. Consider the provisions of section 18A to determine the deductibility for normal tax purposes Donations in the same group of companies (section 56(r) SILKE ) Note that a group of companies refers to at least a 70% direct holding of equity shares (by the controlling group company) in at least one controlled group company in the same group of companies. In addition, the donating company must be a resident for this exemption to apply Impact of donations on other taxes Always remember that a donation may affect many more things than merely donations tax. You may be required to consider the capital gains tax or normal tax (including income tax and capital gains tax) implications of a donation. Donations tax may therefore be combined/integrated with topics that will only be addressed in future tutorial letters, for example: Meaning of resident TL 104/2018 Capital gains tax TL 104/2018 Trusts (sections 7(3) 7(10)) TL 106/2018. Income tax (section 18A deduction of donations to certain organisations) TL 105/2018 and TL 107/2018.

16 16 TAX4862/103/0/ Solution Question 10.1 in AQSAT a) Date Donee (recipient) Amount R Exempt portion R Taxable portion R 20% R Note 1 20 March Niece (40 000) (s 56(2)(b)) 1 April SPCA (5 000) (s 56(h)) 30 April Husband (50 000) (s 56(b)) 10 June Son (60 000) (s 56(2)(b)) October Trust December Two children 10 million (10 million) (s 56(d)) January Best friend b) The donations tax is payable by Mrs Good by the end of the month following the month in which each separate donation takes effect (section 60). Notes to the solution 1. Payable by the end of the month following the month in which the specific donation takes effect. 2. Annual basic exemption from donations tax of R , applied in the order that the donations take effect. The donation to the niece is R40 000; therefore, R as exemption is still left for other donations. 3. For the benefit of the donor s spouse thus it is exempt. 4. The balance of the section 56(2)(b) exemption applies, that is, a R balance of the exemption applied against the donation (see note 2). (It will not qualify for the bona fide maintenance exemption [section 56(2)(c)], since it was donated for investment purposes.) 5. The contributions to the trust are a settlement of her legal obligations under the divorce settlement and therefore do not comprise a donation. 6. In terms of section 58, the donation will be the amount by which the value of the motor car exceeds the selling price; thus R R = R Read the Beancounter scenario again and make a rough summary of what your solution would be. Now read the outcomes of the scenario to determine if your answer is correct.

17 2.7 OUTCOMES OF THE BEANCOUNTER SCENARIO 17 TAX4862/103/0/2018 After you have studied donations tax, you should be able to answer Barry Beancounter s query on donations tax. In formulating your advice, you should have considered the following: For persons married in community of property, it is important to establish if the property falls in the joint estate or if it is excluded from the joint estate. The effect is explained in section 57A (refer to SILKE, par 26.8). Section 56 exemptions from donations tax must be considered, for example, donations to the spouse (section 56(b)) or to any political party (section 56(h)). Barry may be taxed on some of the income from the trust (donations in terms of section 7 refer to TL 106/2018). Also, note the order of donations in the case of multiple donations (section 60(2)). Donations tax payable R Donation of R to the Butterbean Family Trust (R ([section 56(2)(b) exemption] R / 2 [donation out of joint estate] = R [remaining balance of exemption]) - Donation to his wife, Bizzie exempt (section 56(b)) - Donation of R to Jelly (R [balance of section 56(2)(b) exemption] R20 000/2 [donation out of joint estate] = R [new balance of exemption]) Donation of R to Soya (R [balance of section 56(2)(b) exemption] R20 000/2 [donation out of joint estate] = R [new balance of exemption]) - Donation to B.E.A.N. political party exempt (section 56(h)) - All of the above taxable donations will be exempt from donations tax, as the first R of donations made by a natural person during a tax year are exempt from donations tax (section 56(2)). The R must be applied in the order that the donations take place, as donations tax must be calculated separately on each of the donations as and when they take place. Donations tax is payable by the end of the month following the month in which the donation takes effect. If Barry sells the property at the market value of R to the Butterbean Family Trust and the purchase price is settled with an interest-free loan from himself, he is deemed to have made a continuing donation in terms of section 7C (with effect from 1 March 2017) and donations tax may be payable. The deemed donation is NOT the amount of the selling price, but is rather equal to the foregone interest during the year. The donation is deemed to have been made to the Butterbean Family Trust on 28 February 2018 (in terms of the provisions of section 7C). Also, for income tax purposes, an interest-free loan is a continuing donation in terms of section 7. Both these sections will further be dealt with in TL 106/

18 18 TAX4862/103/0/2018 If Barry decides to make a further donation to the trust, you will have to establish if he has made a cash donation or if he has waived a portion of the loan owed by the trust. Waiving part of a loan is often done by utilising the R (or portion thereof the remaining balance, if any) annual exemption from donations tax. If this is the case, the waiver of the loan will have capital gains tax implications for the trust (paragraph 12A of the Eighth Schedule), or it might have section 19 implications. Note that, if it constitutes a donation or a deemed donation, neither paragraph 12A of the Eighth Schedule nor section 19 of the Income Tax Act will be applicable. Capital gains tax will be discussed in TL 104/2018 and section 19 is dealt with in TL 105/2018. If he makes a cash donation after the previous donations have been made, but before 28 February 2018 (the end of the year of assessment, i.e. the date of the deemed donation in terms of section 7C), he can make a donation of R without paying any donations tax, as it will be paid out of the joint estate. Therefore, his donation will be R and he will still have a section 56(2)(b) exemption of R that he may utilise. Bizzie, on the other hand, might have to pay donations tax if she has no portion of the section 56(2)(b) exemption available. If this is the case and he has utilised the entire R annual exemption, he will pay donations tax on the full value of the deemed donation in terms of section 7C (refer to previous bullet). Whenever there is a donation, settlement or other disposition in terms of section 7, the subsections of section 7 will be applicable on the income received by or accrued to a beneficiary from a donated asset. This section will be dealt with in TL 106/2018. An interest-free loan is a continuing donation for purposes of section 7 (income tax), as well as for purposes of section 7C (donations tax). END OF LEARNING UNIT 2

19 19 TAX4862/103/0/2018 WORK PLAN FOR DAYS 2-5 (15 18 FEBRUARY 2018) Time allocation for learning unit 3 VAT: LU 3 VAT Section B of this tutorial letter Total 20 hours 1 hour 21 hours 3 VALUE-ADDED TAX (VAT) 3.1 BACKGROUND After the completion of the first year of your postgraduate studies, you should have a basic knowledge of VAT. In this learning unit, you should concentrate on those areas that were not covered in your previous studies and master complex issues. While studying, ensure that you can also apply the theory to a practical situation. When you plan your study time, bear in mind the sections that are examinable in terms of the syllabus (as indicated in the SAICA tax syllabus) and those sections that are excluded from the syllabus (reflected in the Table of Reference under note of this learning unit). 3.2 OUTCOMES OF THIS LEARNING UNIT After studying LU 3, you should be able to meet all the outcomes listed at the beginning of chapter 31 of SILKE. Before you start studying the detailed provisions of the VAT Act, read the following scenario relating to the Beancounter family. The scenario provided requires that you first carefully read the information provided. Then, as you study the different VAT provisions, identify areas of concern that should be brought to the attention of the Beancounter family.

20 20 TAX4862/103/0/ BEANCOUNTER SCENARIO Bizzie Beancounter has decided to start her own business venture. She has located the perfect premises that is currently available for letting. She will start a dry cleaning business in her own name (recognised as a process of manufacture by the Commissioner) on 1 March 2017 (with a February year-end). She will employ four permanent staff members (non-connected persons) and she herself will take care of the dayto-day management of the business. Bizzie will import two dry-cleaning machines from Europe, which will have arrived by 1 March Bizzie has signed contracts with a few local restaurants to render dry-cleaning services to them with effect from March Her monthly turnover in terms of these agreements will be R for the first six months, increasing by 10% for every consecutive six-month-period. However, Bizzie is uncertain about what (if any) VAT implications might arise from her business venture and she has asked you to identify all the VAT areas which may affect her business. Six months have passed since your first meeting with Bizzie when she phones you to set a date for a second meeting. The dry-cleaning business is operating very successfully and Bizzie feels that it is time for one or two changes: The rented premises are no longer spacious enough for Bizzie s business venture and she wants to buy a house in Justice Mahomed Street, Pretoria, from where she will operate the business. She will buy the house from Ancient Eve, a 72-year-old woman who can no longer manage the old residence on her own (she is not a VAT vendor). The house has a separate, one-bedroom flat, which Ancient Eve wants to rent from Bizzie after the sale. The flat occupies 10% of the floor space of the residence. Bizzie wants to incorporate a collect-and-deliver dry-cleaning service into the business and she will need to buy a delivery truck for this purpose. Peter, the only man she currently employs, will do all the driving for business purposes. He will also be able to use the vehicle for private purposes during evenings and over weekends. All expenses relating to the delivery truck will be paid by the business. 3.4 CONTENT FOR LEARNING UNIT Study approach In this learning unit, we again provide you with a Table of Reference (par 3.4.2); however, we recommend that you study VAT in the sequence as set out in SILKE. We therefore provide you with another table (below), which divides the content of the SILKE chapter into the time available, together with references to additional notes in this tutorial letter. You should use this table to guide you through the content of this learning unit. Also, refer to the prescribed cases (indicated in the table) to be studied (refer to the relevant summaries in TL 102).

21 Par in SILKE Topic 21 TAX4862/103/0/2018 Day 2: Thursday 15 February 2018 (3 hours) Additional notes in the TL 31.1 Overview of VAT Calculation of VAT 31.3 The accounting basis 31.4 Tax periods 31.5 Output tax (supply of goods and services) & South Atlantic Jazz Festival (Pty) Ltd v CSARS (77 SATC 254) TL Vendor (registration) 31.7 Output tax (enterprise) 31.8 VAT levied importation of goods VAT levied imported services CSARS v De Beers Consolidated Mines Ltd (74 SATC 330) TL Output tax (zero rated supplies) & Stellenbosch Farmers Winery Ltd v CSARS [2012] (77 SATC 235) TL 102 Master Currency (Pty) Ltd v C: SARS [2013] 3 All SA 135 (SCA) TL Exempt supplies & the taxable supply of commercial accommodation & Day 3: Friday 16 February 2018 (3 hours) Output tax (deemed supplies) CSARS v British Airways PLC [2005] JOL (SCA) TL Output tax (non-supplies) Output tax (no apportionment) Time of supply Value of supply Interpretation note: No Supplies made for no consideration Day 4 and 5: Week-end February 2018 (15 hours) Basics of input tax Tax invoices South Atlantic Jazz Festival (Pty) Ltd v CSARS [2015] (77 SATC 254) TL Debit and credit notes The determination of input tax CSARS v De Beers Consolidated Mines Ltd [2012] (74 SATC 330) TL Input tax (denial of input tax) Input tax (deemed input tax on second-hand goods) Special rules instalment credit agreements Special rules fixed property Adjustments & Pre-incorporation expenses Agents VAT and Income Tax calculations Work through examples & in SILKE. Work through the question provided in Section B of this TL

22 22 TAX4862/103/0/ Table of Reference The Table of Reference contains the references to all the sections in the VAT Act and TAA which must be studied in this learning unit as well as an indication of whether a specific section is examinable or not. Reference to the VAT Act Topics Reference to SILKE Examinable Sections of the VAT Act s 1 All definitions, except for the following: Various yes (It will be stated if a service is an electronic service.) association not for gain, Controller, customs authority, customs controlled area, customs controlled area enterprise, designated entity, par (b)(i) (v) of the definition s 2 of enterprise, proviso (vi), (viii), (x), (xi) & (xii) to the definition of enterprise, paragraph (d) of the definition of exported, foreign donor funded project, grant, inbound insurance policy, international journey, licenced customs and excise storage warehouse, outbound insurance policy, public authority, SEZ, SEZ operator, share block companies, share block. Financial services Debt security (c), issue, allotment or transfer of ownership of an equity security (d), provision of credit (f) and provision of long-term insurance (i). Rest of the section no yes no s 3 Determination of "open market value" yes s 4 Administration of VAT Act no s 5 Exercise of powers and performance of duties no s 6 Secrecy no s 7 Imposition of VAT 31.5, 31.7, 31.8 & 31.9 yes s 8 Certain supplies of goods or services deemed to be made or not made yes Sub-sections (2A) (2G), (5), (5A), (5B), (6), (13), (13A), (17) (20), (22) (24), (26) & (28) no s 8A Sharia-compliant financing arrangements no s 9 Time of supply yes Sub-sections (3)(e), (3)(f), (9) & (11) no s 10 Value of supply of goods or services yes Sub-sections (4A), (8), (14), (17), (17A), (21A), (22A&B), (25) & (27) no s 11 Zero-rating yes s 11 Supply of goods yes Sub-sections (a)(ii), (b) - (d), (f), (g), (ha), (i), (m), (ma), (n), (r) - (v) no s 11(2) Supply of services yes Sub-sections (2)(g), (h), (j), (m), (n), (q), (s), (t), (u), (v), (x) no s 11(3) Principle yes s 12 Exempt supplies yes Sub-sections (b), (d), (e),(f), (k), (l) & (m) no s 13 Collection of tax on importation of goods, determination of value thereof and exemptions from tax 31.8 yes s 13(2B) value will be provided Sub-sections (5) & (6) no

23 Reference to the VAT Act Topics 23 TAX4862/103/0/2018 Reference to SILKE Examinable s 14 Collection of VAT on imported services, determination of value thereof and exemptions from tax 31.9 yes Sub-section 14(4) no s 15 Accounting basis 31.3 yes Sub-sections (2)(a), (2A), (3) (9) no s 16 Calculation of tax payable yes (excluding broad area exclusions, e.g. prizes and gambling) no s 17 Permissible deductions in respect of input tax & yes s 18 Change in use adjustments yes Excluding turnover tax provisions & s 18(4)(a) & 18(10) no s 18A Adjustments in consequence of acquisition of going concern wholly or partly for purposes other than making taxable yes supplies s 18B Temporary letting of residential fixed property yes s 19 Goods or services acquired before incorporation yes s 20 Tax invoices yes s 21 Credit and debit notes yes s 22 Irrecoverable debts yes s 23 Registration of persons making supplies in the course of yes 31.6 enterprises s 23(3A) & (5) no s 24 Cancellation of registration 31.6 yes s 25 Vendor to notify change of status no s 26 Liabilities not affected by person ceasing to be vendor no s 27 Tax period (category will be given) 31.4 yes s 27(2) (5) no s 28 Returns and payments of tax no s 29 Special returns no s 31 Assessments no s 32 Objections to certain decisions or assessments yes s 38 Manner in which tax shall be paid no s 39 Penalty and interest for failure to pay tax when due no s 40A Liability of public authorities and certain public entities for tax and limitation of refunds no s 41 Liability for tax in respect of certain past supplies or importations no s 41B VAT class rulings and VAT rulings no s 44 Refunds no s 45 Interest on delayed refunds no s 46 Persons acting in a representative capacity no s 50 Separate enterprises, branches and divisions 31.6 yes s 50A Separate persons carrying on same enterprise under certain circumstances deemed to be single person 31.6 yes s 51 Bodies of persons, corporate or unincorporated (other than companies) 31.6 yes s 52 Pooling arrangements no s 53 Death of vendor yes Insolvency of vendor no s 54 Agents (It will be clear from the information that there is an agent/priciple relationship)

24 Reference to the VAT Act Topics 24 TAX4862/103/0/2018 Reference to SILKE Examinable Auctioneers no s 55 Records no s 58 Offences no s 61 Recovery of tax from recipient no s 64 Prices deemed to include tax yes s 65 Prices advertised or quoted to include tax yes s 66 Rounding-off of the tax no s 67 Contract price or consideration may be varied according to rate of VAT no s 67A Application of increased or reduced tax rate no s 67B Registration of motor vehicles prohibited in certain circumstances no s 68 Tax relief allowable to certain diplomats and diplomatic and consular missions no s 72 Arrangements and directions to overcome difficulties, anomalies or incongruities no s 73 Schemes for obtaining undue tax benefits no s 74 Schedules and regulations no s 75 Tax agreements no s 77 Notice of variation of rate of tax no s 78 Transitional matters no s 78A Transitional matters: Turnover tax no s no s 85 Repeal of laws no s 86 Act binding on State, and effect of certain exemptions from taxes no s 86A Provisions relating to industrial development zones no s 87 Short title no Schedules to the VAT Act 1 Exemption: Certain Goods Imported in the Republic no 2 Part A no 2 Part B: Zero rate: Supply of goods consisting of certain foodstuffs Interpretation notes Interpretation note: No. 70. Date: 14 March 2013 Supplies made for no consideration (sections 1 definition of enterprise, Taxable supply input tax and consideration, (sections 10(4), 10(23)) Sections in SILKE you may ignore yes When working through chapter 31 in SILKE, you may IGNORE all paragraphs of the text with shaded headings.

25 25 TAX4862/103/0/ LAW AMENDMENTS The important proposed amendments which are applicable to this LU are summarised below. In some instances we repeat amendments from previous years which were enacted for your reference. Relevant proposed amendments to the VAT Act contained in the Taxation Laws Amendment Bill 27 of 2017, are as follows: Sections 8(29), 9(12), 10(28) and 18C will be inserted and will stipulate the following: Section 8(29): A supply of leasehold improvements by a vendor (lessee) shall be deemed to be a supply of goods in the furtherance of the lessee s enterprise to the extent that the leasehold improvements are made for no consideration. However, this section shall not apply where such leasehold improvements are used wholly for the making of other than taxable supplies, i.e. exempt supplies (residential accommodation). Section 9(12): The time of supply where a supply is deemed to be made in terms of section 8(29), will be at the time the leasehold improvements are completed. Section 10(28): The value of a supply made in terms of section 8(29) is deemed to be Rnil. Section 18C: Where goods have been supplied to a vendor as contemplated in section 8(29), the lessor shall be deemed to have made a taxable supply (adjustment to output tax) in the course of its enterprise, and where a deduction of input tax would have been denied in terms of section 17(2) or to the extent that the goods were not used to make taxable supplies by that lessor, those goods shall be deemed to be supplied by the lessor at the time of completion of the improvements and in accordance with the formula: A x B x C. Where A = the tax fraction, B = the amount of the improvements as stipulated in the agreement or if no amount is stipulated, then the open market value of the improvements and C = the percentage of supplies made other than taxable supplies (e.g. exempt supplies). These sections come into operation on 1 April See Silke par for more detail on these new provisions. Section 11(2)(d) will be amended: Section 11(2)(d) which zero rates exported transportation services has been amended to to include the zero rating of the insurance linked to the exported transported service in respect of which a single premium is levied. This amendment comes into operation on 1 April 2018.

26 26 TAX4862/103/0/2018 Amendments to the VAT Act contained in the Taxation Laws Amendment Act 15 of 2016, enacted on 19 January 2017 are as follows: Subparagraph (ii) of the definition of second-hand goods has been amended effective from 1 April 2017 and reads as follows: (aa) goods consisting solely of gold unless acquired for the sole purpose of supplying such goods in the same state without any further processing; (bb) gold coins contemplated in section 11(k); or (cc) any other goods containing gold unless those goods are acquired for the sole purpose of supplying those goods in the same or substantially the same state to another person. Section 7(4) has been added and stipulates the following: If the Minister makes an announcement in the national annual budget that the VAT rate specified in this section is to be altered, that alteration will be effective from a date determined by the Minister in that announcement, and continues to apply for a period of 12 months from that date subject to Parliament passing legislation giving effect to that announcement within that period of 12 months. This stipulation was inserted to provide for a possible increase in the VAT rate during the next fiscal year. Section 16(2)(g) has been replaced with the following: (i) a ruling requested no later than two months prior to the expiry of the five-year period referred to in subsection (3) and issued in terms of section 41B of this Act or Chapter 7 of the Tax Administration Act confirms that the document in the vendor s possession is acceptable for the purpose of making a deduction; and (ii) the ruling and document are held by the vendor at the time a return in respect of the deduction is furnished: Provided that the Commissioner may only issue a ruling in terms of this paragraph if satisfied that (aa) the vendor has taken reasonable steps to obtain a document required in terms of paragraph (a), (b), (c), (d), (da), (e) or (f) and is unable to obtain such a document due to circumstances beyond the vendor s control; and (bb) no other provision of this Act can be applied to satisfy the Commissioner that the document in the vendor s possession is acceptable for purposes of making a deduction. This stipulation provides for situations where vendors cannot obtain valid tax invoices under specific circumstances. 3.6 ADDITIONAL NOTES Mind map representing an overview of VAT In order to provide you with an overview of VAT and to use it as a useful study tool, we include a mind map of the output and input tax provisions in the VAT Act on the following page.

27 27 TAX4862/103/0/2018 Mind map with overview of VAT Final consumer NO Person carrying on an enterprise YES Supply goods and services No output tax levied OUTPUT TAX (section 7(a)) Exempt supplies (sections 12 and 2) Standard rated supplies (14%) (section 7(a)) Taxable supplies (sections 1 and 7) Adjustments (sections 18, 18(2), 18A, 18B and 22(2) (3A)) Deemed supplies (sections 8 and 18(3)) Zero-rated supplies (0%) (section 11) LESS Mixed supplies (section 17) Apportionment Adjustments (sections 18(4), 18(5), 18(9), 16(3)(h), 22, 22(1A), 22(4) and 22(6)) Time and value of supplies (sections 9 and 10) Input tax deduction denied (section 17(2)) INPUT TAX (section 7 & section 1) Notional input tax second-hand goods (also fixed property) (section 1, definition of input tax, sub-par (b)) AMOUNT DUE TO OR BY SARS Imported goods and services (sections 7(b), 13 & 14))

28 28 TAX4862/103/0/ Mind map of the supply of goods and services OUTPUT TAX Supply of goods and services by a vendor No output tax charged Exempt supplies (sections 12 and 2) Taxable supplies (sections 1 and 7) Standard rated supplies (14%) (section 7(a)) OUTPUT TAX (section 7(a)) Zero-rated supplies (0%) (section 11) Deemed supplies (sections 8 and 18(3)) Adjustments (sections 18, 18(2), 18A, 18B and 22(2) (3A)) Time and value of supplies (sections 9 and 10) Services - SILKE par The definition of services is very wide and the supply of services typically include (without being limited to) the following: royalties granting the right to use intellectual property, that is, patents, trademarks and copyrights sale of intellectual property assignment, waiver or abandonment of a right to someone else, including the right of legal action acceptance of a restraint, including agreeing not to act or to act in a particular way acceptance of damages or compensation, including the cancellation of agreements provision of professional services, including construction, legal, accounting and other similar services provision of facilities by clubs, churches, charities and other non-profit organisations Please note that this does not mean that all of the above services are taxable supplies; merely that they will constitute services for the purposes of the VAT Act. The exclusion of money from the definitions of goods and services means that no VAT implications will arise in respect of its supply. This is important because it means that when goods are purchased from a vendor, the initial supply of the item will attract VAT, whereas the subsequent payment will not attract VAT Zero rating of exported services - SILKE par Exported services are dealt with in SILKE paragraphs , but in addition we would like to provide you with the following information and examples