2017 Tax Issues for Small Businesses Seminar

Transcription

1 2017 Tax Issues for Small Businesses Seminar Presented by Piet Nel CA(SA) Piet is the Head of the School of Applied Tax at the Tax Faculty. He formerly lectured in taxation at UNISA and the University of Pretoria at postgraduate level and acted as study supervisor to master s students. Prior to joining the Tax Faculty, Piet was the project director for tax at SAICA. Over a period of more than two decades, Piet presented numerous tax seminars and workshops to tax practitioners. Piet is also well known in the media, regularly appearing on radio and TV talk shows. He actively contributes to the tax thought in South Africa and regularly publishes articles in professional journals and other magazines.

2 Programme: 08:15 08:55 Registration 09:00 10: Tax Issues of Small Businesses 10:30 10:50 Tea Break (20 mins) 10:50 13: Tax Issues of Small Businesses 13:00 Conclusion

3 Course Content Micro business and turnover tax (bi-annual returns) o When to advise someone to register as a micro business o The benefits of being a registered micro business o The registration process o Qualifying persons emphasis on the professional service requirements o The exclusion available on the disposal of micro business assets o Administrative issues filing of the TT02 Small business corporations o Personal liability companies and changes in the Act and practice generally prevailing o Common questions relating to shareholders in a company o The requirement for 20% of the total of all receipts and accruals Investment income Income from rendering of a personal service The full-time engaged safe harbour provision o The R1.8 million capital gain exclusion on disposal o The election regarding depreciation allowances Section 11(e) or section 12E(1A) o Allowances for assets used to produce biodiesel, bioethanol or assets used in the generation of electricity from wind power or solar energy o Remunerating owners of the small business Variable remuneration Debit loans o The dividends tax and losing the normal tax exemption in respect of dividends o IT14 and IT14SD issues (not dealt with above) Changes in resident status Changes in financial year end Dormant companies Common reconciliation issues IRP5 data will be pre-populated and locked IT14 small businesses Supporting material to be submitted with the ITR14 o Qualifying companies operating within Special Economic Zones Value-added tax issues o Registration as a vendor o Supplies prior to registration o Zero rating of services o Input tax meeting supporting documentary requirements and responding to requests from SARS in this regard.

4 2017 Tax Issues for Small Businesses Presented by PJ Nel CA (SA) Upcoming CPD Events 1

5 Upcoming CPD Events Refer to our website for all upcoming events July Taxation of Individuals and Individual Tax Return August Entrepreneurial & Medium Enterprises September Trust and Deceased Estates 2017 SAIT CPD Requirements: SARS Registered Tax Practitioners: 15 verifiable output Tax CPD hours 5 verifiable output Ethics and Standards CPD hours 10 non-verifiable Tax CPD hours Commerce, Industry, Academia and Public Sector: 15 verifiable input Tax CPD hours 5 verifiable output Ethics and Standards CPD hours 10 non-verifiable Tax CPD hours 2

6 2017 Tax Issues for Small Businesses When would you advise someone to register as a micro business? 3

7 The benefits of being a registered micro business A registered micro business pays a tax, known as the turnover tax, in respect of its taxable turnover for a year of assessment. The rates of tax chargeable is fixed annually by Parliament. The rate of tax to be levied in respect of the taxable turnover of a person that is a registered micro business in respect of any year of assessment ending during the period of 12 months ending on 28 February 2017 is set out in the table below: The turnover tax replaces normal income tax. The tax rate, on the amount of turnover that exceeds R , is relatively low. Exempt from normal tax. The dividends tax exemption (company) Reduced record keeping requirements. But the tax is then payable even when the person made a loss for the year. Any capital gain or capital loss in respect of the disposal by a micro business of any asset used mainly for business purposes is disregarded. R aggregate for the year of assessment section 64F(h) See next slide 4

8 amounts received required for taxable turnover. Notwithstanding the provisions of Part A of Chapter 4 of the Tax Administration Act, a registered micro business must only retain a record of (a) amounts received by that registered micro business during a year of assessment; (b) dividends declared by that registered micro business during a year of assessment; (c) each asset of that registered micro business as at the end of a year of assessment with a cost price of more than R10 000; and (d) each liability of that registered micro business as at the end of a year of assessment that exceeded R The Act refers to a registered micro business. That means that a person is not automatically a micro business. A person, that meets the requirements set out in Part II of the Sixth Schedule may elect to be registered as a micro business. This election must be made before the beginning of a year of assessment and is then registered by SARS with effect from the beginning of that year of assessment. Please read the questions on the TT01 form. Register/Pages/Quick-test-for-individuals-andcompanies.aspx 5

9 A registered micro business may elect to be deregistered before the beginning of a year of assessment. SARS must deregister a registered micro business with effect from the beginning of the month following the month during which the turnover amount is exceeded or the person no longer qualifies as a micro business. Who qualifies as a micro business? A person qualifies as a micro business if that person is a natural person a company where the qualifying turnover of that person for the year of assessment does not exceed an amount of R1 million. The deceased or insolvent estate of a natural person that was a registered micro business at the time of death or insolvency Every holder of shares in that micro business must be a natural person. Its year of assessment must end on the last day of February. 6

10 Who qualifies as a micro business? Can a partnership be one? All the partners must be natural persons. The person is not a partner in more than one partnership at any time during that year of assessment. The qualifying turnover of the partnership for that year of assessment must not exceed the R1 million amount. Who does not qualify as a micro business? A person does not qualify as a micro business for a year of assessment where that person at any time during that year of assessment holds any shares or has any interest in the equity of a company other than a share or interest in the ones listed on the next slide. at any time during that year of assessment that person is a personal service provider or a labour broker, it is a public benefit organisation, recreational club, a section 30B association or a small business funding entity approved by SARS 7

11 Permissible shares and interests The disqualification does not apply to a share or interest in a listed company (paragraph (a) of the definition thereof) in a portfolio in a collective investment scheme in a body corporate, a share block company (section 10(1)(e)) in a venture capital company in a any friendly society that constitutes less than 5 per cent of the interest in a social or consumer cooperative or a cooperative burial society a primary savings cooperative bank or a primary savings and loans cooperative bank Who does not qualify as a micro business? A person does not qualify as a micro business for a year of assessment where more than 20% of that person s total receipts during that year of assessment consists of where that person is a natural person a company income from the rendering of a professional service investment income and income from the rendering of a professional service 8

12 professional service means a service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science The wording is, from accounting to veterinary science, the same as the wording of personal service for a small business corporation. We will cover it in the part on small business corporations. investment income means: any income in the form of: any proceeds derived from annuities, dividends, interest, rental derived in respect of immovable property, royalties, the disposal of financial instruments or income of a similar nature; The wording here differs from the wording of investment income for a small business corporation. 9

13 What is qualifying turnover? qualifying turnover means the total receipts from carrying on business activities, excluding any (a) amount of a capital nature; and (b) amount exempt from normal tax in terms of section 12P; The term qualifying turnover must not be confused with taxable turnover. A person can only be a micro business if the qualifying turnover of that person for the year of assessment does not exceed an amount of R1 million. It is only relevant for registration (or deregistration) purposes. Start Add Less: all amounts not of a capital nature received by the registered micro business during that year of assessment from carrying on business activities in the RSA 50 per cent of all receipts of a capital nature from the disposal of (i) immovable property mainly used for business purposes, other than trading stock; and (ii) any other asset used mainly for business purposes, other than any financial instrument; and in the case of a company, investment income (other than dividends and foreign dividends). in the case of a natural person, investment income; any amount exempt from normal tax in terms of section 12P Taxable turnover Apply the tax rate 10

14 Paying the turnover tax A registered micro business must, within six calendar months from the first day of the year of assessment: estimate the taxable turnover for the year of assessment; may not be less than the taxable turnover of the previous year of assessment unless SARS, on application by the taxpayer approves a lower estimate. calculate the amount of tax payable on the estimated taxable turnover; pay an amount equal to 50% of the amount of tax so calculated. The same is required by the last day of the year of assessment. The amount paid in August is then deducted. 11

15 Employment related For the purposes of paragraph 2(1) of the Fourth Schedule, section 89bis(2), section 6 of the Skills Development Levies Act, 1999, and section 8 of the Unemployment Insurance Contributions Act, 2002, a registered micro business may elect to pay the amounts deducted or withheld in terms of that paragraph or those sections to the Commissioner: (i) with regard to amounts deducted or withheld during the first six calendar months from the first day of the year of assessment, within seven days after the end of such period; and (ii) with regard to amounts deducted or withheld within the next six calendar months following the period in item (i), within seven days after the end of such period. Capital gains Paragraph 57A of the Eighth Schedule allows for a registered micro business to disregard any capital gain or capital loss in respect of the disposal by that business of any asset used mainly for business purposes. This of course is necessary to avoid taxing the same amount due to the inclusion in taxable turnover. It doesn t, as the law allows for a small business owner, include the sale of the shares of the company. 12

16 Small business corporations The taxpayer requirement Can a trust qualify as a small business corporation? And an "Incorporated" (or "Inc. ) - where certain professional bodies requires that professionals can t incorporate other than in an Inc.? 13

17 The taxpayer requirement Is the taxpayer or or a close corporation? a co-operative? a private company? Yes Yes Yes No No No Section 12E(4)(a) or section 1 of the Companies Act a personal liability company? Yes No section 8(2)(c) of the Companies Act Personal liability companies 14

18 The taxpayer requirement Comments: Personal liability companies This is deemed to have come into operation on 1 May 2011 and applies in respect of years of assessment ending on or after that date. Trusts (and others persons) It is not listed in section 12(4)(a) and will therefore not qualify as a small business corporation. A sole trader, or partnership, will therefore also not qualify as one. The holders of shares requirement Family trust 100% The shares are beneficially held by the trust. An individual, a trustee of the Family Trust, is also the director of the private company. Section 12E(4)(a) Private company Is the private company a small business corporation? 15

19 The holders of shares requirement The law: Section 12E(4)(a) if at all times during the year of assessment all the holders of shares in that company, co-operative, close corporation or personal liability company are natural persons Comments: Because the trust is not a natural person, the private company can t be a small business corporation. The current practice generally prevailing: A contravention of this requirement, even if for one day during the year of assessment, will disqualify a qualifying entity from being an SBC for the year of assessment The holders of shares requirement looks at the beneficial ownership of the shares or members interest. The interest in the equity of any other company requirement The law: where at any time during the year of assessment, Section 12E(4)(a)(ii) no holder of shares in the company or member of the close corporation or co-operative holds any shares or has any interest in the equity of any other company as defined in section 1, other than The current practice generally prevailing: Any shares or interest in any company not specifically permitted, even if held for one day during the relevant year of assessment, will lead to the qualifying entity being disqualified as an SBC for that year of assessment. For the ones specifically permitted refer to section 12E(4)(a)(ii) (aa) (ii) or Annexure B (Interpretation Note 9). 16

20 The interest in the equity of any other company requirement Question: Can Company still be classed as "Small Business Corporation" if the director is a director of a NPC ("non-profit company )? Comments: The requirement relates to the holder of shares the fact the individual may or may not, be a director is irrelevant. In the Companies Act the word shareholder means to the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register. "shareholder" has the meaning set out in section 1, but also includes a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached. (section 57) The interest in the equity of any other company requirement Comments: "director" means a member of the board of a company, "member", when used in reference to a non-profit company, means a person who holds membership in, and specified rights in respect of, that non-profit company, as contemplated in Schedule 1 Section 10(4) With respect to a non-profit company that has voting members, a reference in this Act to "a shareholder", "the holders of a company's securities", "holders of issued securities of that company" or "a holder of voting rights entitled to be voted' is a reference to the voting members of the non-profit company. 17

21 The interest in the equity of any other company requirement Conclusion: A "non-profit company" is a company as defined. If the director is holder of shares in the company at any time during the year of assessment held any shares or has any interest in the equity of any other company as defined in section 1, other than the company would not be a small business corporation. Certain holdings are permitted, but doesn t apply in this instance. This is unless the non-profit company is an association of persons (including a non-profit company as defined) formed solely to manage the collective interests common to all its members and that is not permitted to distribute its funds to any person other than to a similar association - for example, a homeowners association. The interest in the equity of any other company requirement other than: (hh) any company, close corporation or co-operative if the company, close corporation or co-operative (A) has not during any year of assessment carried on any trade; and (B) has not during any year of assessment owned assets, the total market value of which exceeds R5 000; or (ii) any company, co-operative or close corporation if the company, co-operative or close corporation has taken the steps contemplated in section 41(4) to liquidate, wind up or deregister: 18

22 The not more than 20 per cent of the total of all receipts and accruals requirements Facts: We have a client who is a close corporation and all its members are natural persons. The client is in the cash loan industry and provides micro and term loans to the public. The gross income for the financial year consists of the following: Administration fees charged R Interest income R Total for the year R ? Does it qualify for the lower tax rates available to a small business corporation (under section 12E)? The not more than 20 per cent of the total of all receipts and accruals requirements The law: Section 12E(4)(a)(iii) where not more than 20 per cent of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains of the company, close corporation or co-operative consists collectively of investment income and income from the rendering of a personal service 20% of the total of all receipts and accruals and all the capital gains investment income income from the rendering of a personal service collectively 19

23 investment income means any income in the form of dividends, foreign dividends, royalties, rental derived in respect of immovable property, annuities or income of a similar nature any interest as contemplated in section 24J (or income from money lent) any proceeds derived from investment in or trading in Section 12E(4)(c) financial instruments (including futures, options and other derivatives), marketable securities or immovable property Applying the law: The investment income (the interest of R ) exceeds 20% of the total receipts and accruals (of the R ). Facts: Conclusion the company (CC) is not a small business corporation. My clients are currently engaged in medical practice. They practice a partnership. The client has asked advise on whether the practice should be conducted within the auspices of a company and if this is better than as a partnership from a tax savings perspective. Comment: Let s assume they will be able to rebut the presumption of purpose (section 80G) and consider whether the company qualifies as a small business corporation. as a director of a company established in terms of section 54A of the Health Professions Act 20

24 company is not a personal service provider The first consideration is to test for personal service provider Company any service rendered on behalf of such company to a client of such company is rendered personally by any person A client of the company who is a connected person in relation to such company AND regarded as an employee of (or) duties must be performed mainly at the premises of AND subject to the control or supervision of (or) more than 80% of the income of such company directly or indirectly from from the rendering of a personal service Section 12E(4)(d) 'personal service means any service in relation to a company, cooperative or close corporation, in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if that service is performed personally by any person who holds an interest in that company, co-operative or close corporation 21

25 from the rendering of a personal service Comments made by Judge Mbha (in tax case 12860) It is accepted generally that the meaning of words in a statute is derived from the common law. The basic rule of interpretation is that the meaning must, unless a statute provides otherwise, or unless it would result in an absurdity, be taken to be the ordinary meaning of the word which can be found in a dictionary of established authority. If there is any doubt about the ordinary meaning of a word used in a particular context, certain rules must be applied. There are two rules relevant to this matter: A word included in the group of words must be regarded as being of the same type as the other words in that group (eiusdem generis); on the other hand, if a word is not included in the group, it must not be regarded as subject to the same prescriptions as that group (exclusio alteris). from the rendering of a personal service Comments made by Judge Mbha (in tax case 12860) The term 'consulting' as used in section 12E(4)(d) is not defined in the Act or in any other applicable law in South Africa. Since there are no definitions of "consulting" in the Act, or in any other statute or judicial ruling, the rules that I have referred to above that are applicable to the definition of terms used in a statute, must be applied. These rules are well-established in our law... As I have pointed out, the basic rule is that in the absence of any legislated manner or binding judicial ruling, the meaning attributable to any word must be the meaning of the word as generally used which can be ascertained by referring to a dictionary... 22

26 Applying the law: Conclusion the company (CC) is not a small business corporation. The company will be rendering services in the field of health. The current practice generally prevailing: In general, a personal service refers to a service rendered for which the income derived is mainly a reward for the personal efforts or skills of an individual. In determining whether a service falls within the ambit of a personal service as defined, the ordinary grammatical meaning is given to each word in that definition. The words any service in the field of preceding the categories of services listed in the definition suggest that a wide interpretation must be applied to these categories. Therefore, the list must be interpreted to include every service in the specified field irrespective of whether it is of a professional nature. In example 5: The services rendered by the dermatologists and pathologists fall within the health category listed in section 12E(4)(d). Applying the law:? Does it not qualify as one because it employs three persons? Conclusion the company (CC) is not a small business corporation. employ three or more full-time employees... Not available where the company derives investment income. throughout the year of assessment employ three or more fulltime employees other than any employee who is a holder of a share in the company or a member, or who is a connected person in relation to a holder of a share in the company or a member) Thus, for example, an employee who holds one share cannot be included in the three or more full-time employee count. who are on a full-time basis engaged in the business of that company, or close corporation of rendering that service. 23

27 Facts:? A receptionist in an accounting firm does not directly perform the accounting and tax related services for which a client of the firm is invoiced. She is involved on a full-time basis in the support services which allow that accounting service to be provided. Will this individual be considered to be involved in the business of performing that service? The current practice generally prevailing: A person who does not directly perform the accounting services for which a client is invoiced but is involved on a full-time basis in the support services which allow that accounting service to be provided, will be considered to be involved in the business of performing that service. The receptionist would be included in the three or more full-time employee count because he or she is engaged in the business of the qualifying entity of rendering that service, that service meaning the accounting service falling in one of the categories listed in section 12E(4)(d).? Is an individual, who is employed by a company on a permanent basis, but who only works 5 hours every day, in full-time employment. Applying the law: who are on a full-time basis engaged in the business of that company, co-operative or close corporation of rendering that service. It is not defined in section 12E or the Fourth Schedule to the Income Tax Act. It must therefore take its ordinary meaning. The current practice generally prevailing: working the full number of hours considered normal or standard requiring all of or a large amount of your time. occupying or using the whole of someone s available working time. 24

28 The current practice generally prevailing: Casual, temporary or part-time employees are not employed on a full-time basis since they work less than the standard full number of hours and they are therefore not taken into account when determining the employee count in the personal service definition. Although not directly relevant to section 12E, the definition of part-time employee in section 198C(1) of the Labour Relations Act No. 66 of 1995 is consistent with the interpretation above. The Business Dictionary defines employee as follows:25 An individual who works part-time or full-time under a contract of employment, whether oral or written, express or implied, and has recognised rights and duties. Also called worker. Under common law, an employee does not include an independent contractor since this type of contract does not generally result in an employer-employee relationship. Labour Relations Act 198C. Part-time employment of employees earning below earnings threshold (1) For the purpose of this section (a) a part-time employee is an employee who is remunerated wholly or partly by reference to the time that the employee works and who works less hours than a comparable fulltime employee; and (b) a comparable full-time employee (i) is an employee who is remunerated wholly or partly by reference to the time that the employee works and who is identifiable as a full-time employee in terms of the custom and practice of the employer of that employee; and (ii) does not include a full-time employee whose hours of work are temporarily reduced for operational requirements as a result of an agreement. 25

29 Facts: The R1.8 million capital gain exclusion on disposal Taxpayer is 70 years old. She bought a guesthouse in 2004 for R1,851,360. She then registered for VAT. She is a sole proprietor of the business with a turnover of less than R10 million per annum. She occupies 1 of the 11 rooms in the guesthouse permanently as her residence. She sold the guesthouse, as a going concern, for R4,800,000 plus VAT. Agent commission and other costs with sale is R328,320. Can the taxpayer disregard R1,8 million of the gain made on this disposal? The taxpayer A natural person The asset an active business asset for a continuous period of at least five years AND has attained the age of 55 years The relevant requirements of a small business an interest in each of the active business assets an entire direct interest in a company (at least 10% of the equity of that company) Not an SDC!!! owned by that natural person as a sole proprietor upon withdrawal from that partnership to the extent that the interest relates to an active business asset of that company substantially involved in the operations of in consequence of ill-health, other infirmity, superannuation or death 26

30 Remember: Applying the law: From the facts, the taxpayer is older than 55. The assets were held for a continuous period of at least five years prior to the date of the disposal thereof. The taxpayer was substantially involved in the operations of the business of the small business corporation during that period. A small business (as defined) means a business of which the market value of all its assets, as at the date of the disposal of the asset does not exceed R10 million. The gross income of the business is therefore not relevant. It is important to note that paragraph 57(6) provides that the paragraph does not apply when a person owns more than one business either by way of a sole proprietorship, a partnership interest or a direct interest in the equity of a company consisting of at least 10%, and the total market value of all assets in respect of all those businesses exceeds R10 million. Applying the law: The only issue then is whether the sale of the guesthouse as a going concern, where a part was not used for business purposes, constitutes the disposal of an active business asset. For purposes of paragraph 57, active business asset means an asset which constitutes immovable property, to the extent that it is used for business purposes. The Act then doesn t require the immovable property to be used 100%, or mainly, for business purposes. The SARS guide explains it as follows: This requirement means that the exclusion will not apply to the part of the immovable property used for non-business purposes, and an apportionment will be required. It follows that the presence of a farmhouse on a farm will not debar the farmer from claiming the exclusion in respect of the rest of the farm. A person who operates a shop on the ground floor of a double-storey building and lives on the first floor will be entitled to the exclusion in respect of the gain attributable to the area used for the shop. 27

31 Applying the law: The question is often asked, what if the company held the assets and sold them as a going concern. The answer is simply no, the company doesn t qualify for the paragraph 57 exclusion. The reasons are: The person disposing of the asset is not a natural person. The natural person is also not disposing of an direct interest in a company. Comment: The natural person will typically, after the disposal and payment of the taxes and the dividends tax, liquidate or deregister the company no paragraph 57 relief then as it doesn t relate to an active business asset. The election regarding depreciation allowances Section 12E provides for deductions in respect assets used by a small business corporation. The section provides that, the amount allowed to be deducted in respect of certain assets is at the election of the small business corporation. In essence, the small business corporation can elect to make the deduction under section 11(e) or under section 12E. I think the election would generally be made on the basis of which one gives the greater deduction. For instance, where the assets are loose tools, not used in manufacturing, with a cost of less than R7 000, section 11(e), read with binding ruling 7, would give a full deduction, whereas section 12E would give the 50:30:20 allowance. 28

32 The election regarding depreciation allowances Section 12B and 12E Section 12B assets don t qualify for section wear and tear 11(e) they are specifically excluded in the subsection. So, the taxpayer doesn t have an election in this instance. Does that mean the deduction can only be made at the 50:30:20? Section 12B(1)(h) is relevant: in the case of an asset used to generate electricity from photovoltaic solar energy not exceeding 1 megawatt subsection (1)(h)(ii)(bb), 100 per cent of such cost Or does the specific override? Depreciation allowances What happens to the allowances if a small business corporation ceases to be one or commences to be? The deduction must be made in the year of assessment when the asset is first brought into use by the taxpayer. SARS: The election is made once for each asset on an assetby-asset basis with the consequences of the election following automatically. It is then binding on the taxpayer. if a qualifying entity qualifies as an SBC in year one when the asset was acquired, but does not qualify in year two when the asset is first brought into use, the election is not available to it and section 12E(1A) cannot apply. What happens to the allowances if a small business corporation sold the assets? SARS: But if the asset was not used during the third year the taxpayer would not be allowed to claim the 20% allowance. Not correct 29

33 Companies Act: section 66 (8) Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the company may pay remuneration to its directors for their service as directors, subject to subsection (9). (9) Remuneration contemplated in subsection (8) may be paid only in accordance with a special resolution approved by the shareholders within the previous two years. Is there a marginal rate after which it will be more beneficial to draw a salary rather than distribute profits by way of dividends? Ordinary company, i.e. not a micro business or small business corporation. The Rates and Monetary Amounts and Amendment of Revenue Laws Act,

34 Calculating the point where the average rate of 28% applies in the individual s hands. Above R the marginal rate (31%) exceeds 28%. What is the average rate, before rebates? R R R R ,00 % 20,88 % At a taxable income of R the average tax rate is 28% The tax rate consequences in the company To the extent the profit is extracted by way of remuneration the company saves tax at 28%. The dividend tax payable by the individual raises the effective tax rate (increased to 20% on 22/2/2017). If the income is not extracted by way of remuneration, the taxable income is subject to tax at 28%. Let s start with a taxable income of: Normal tax at 28% R100 R(28) Dividend declared R(72) Dividends tax withheld by company R(14,4) Amount received by shareholder R57,6 Effective tax rate 42,4% 31

35 Presumption of purpose Because there is a tax benefit. An avoidance arrangement is presumed to have been entered into or carried out for the sole or main purpose of obtaining a tax benefit unless and until the party obtaining a tax benefit proves that, reasonably considered in light of the relevant facts and circumstances, obtaining a tax benefit was not the sole or main purpose of the avoidance arrangement. The law: Dividend in lieu of remuneration Assume the parties will be able to rebut the onus of proof. Provided that this exemption shall not apply Section 10(1)((k)(i) (ii) to any dividend received by or accrued to a person in respect of services rendered or to be rendered or in respect of or by virtue of employment or the holding of any office, other than a dividend received or accrued in respect of a restricted equity instrument as defined in section 8C held by that person or in respect of a share held by that person; This normally applies where the dividend accrues to an employee share trust. If the distribution is in respect of services rendered is can t be a dividend. It is not in respect of a share in the company. If the distribution is a dividend and also in respect of a services the exemption is lost. 32

36 Facts: Private company (typically an Inc.). Its financial year ends on the last day of February of each year. The holders of shares in the company are all natural persons who also renders services to clients of the company (directors). They individually agreed with the company that they will take monthly drawings from the company which are debited to a ledger account used for this purpose only. The balance on these accounts carries no interest. It can be seen as an advance on remuneration, but there is no entitlement. In fact, if no remuneration accrues, the amount drawn, will be owing to the company. The company considered this to be financial assistance as envisaged under section 45 of the Companies Act and passed the required special resolution of the shareholders. Facts: Remuneration fees for services rendered as directors (as employees) to the company are fixed at monthly amount. They are paid monthly and employees tax are deducted. In the first week of August and February of each year, the individuals meet, and based on the management accounts drawn up for the period (the first 5 months or the 11 months) the board then agrees their remuneration for the six months ending on the last day of August and February. Immediately after the meeting a journal entry is passed to credit each account with the agreed on remuneration. If the account is in credit, the amount is paid out to the individual before the end of August (or February), after withholding employees tax. If a balance on an account is in debit, it is transferred to the individuals loan account and carries interest at the prescribed rate or overdraft rate. 33

37 Facts: In April each year, the individuals would consider the accounts, after review or audit, and then agree on a bonus to be paid. The accounts are then amended to reflect the bonus. The bonus is then paid to the individuals at the end of April. Bonus for 2017 = R Drawings for March 2017 R Drawings for April 2017 R Drawings for May 2017 R Drawings for June 2017 R Drawings for July 2017 R Remuneration agreed on in August R1,5 million. Because paragraph 11C was repealed (see below), the company no longer paid an amount of employees tax, based on the formula, to SARS on a monthly basis. Section 11 of Act No. 16 of 2016: Paragraph 11C of the Fourth Schedule to the Income Tax Act is hereby repealed comes into operation on 1 March 2017 and applies in respect of years of assessment commencing on or after that date. Applying the law: The obligation, of an employer who is a resident to withhold employees tax arises when the employer pays or becomes liable to pay any amount by way of remuneration to any employee. any amount by way of remuneration 34

38 "remuneration" means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered, including any amount referred to in paragraph (a), (c), (ca), (cb), (d), (e), (ea) or (f) of the definition of "gross income" in section 1 of this Act; But, with regard to variable remuneration, the employer must deduct or withhold employees tax in respect of any amount payable in respect of variable remuneration on the date on which the amount is paid to the employee by the employer. Employees tax must therefore be withheld from the bonus of R when it is paid to the individual. The fact that the bonus is accounted for in the previous year s financials, is irrelevant. The deduction is only allowed in the current year. Applying the law: The monthly drawings do not accrue (as envisaged in paragraph (c) of the definition of gross income) and is therefore not remuneration. No obligation to withhold employees tax arises in this respect. Whilst the amounts agreed on as remuneration (in August and February) may vary, they are not variable remuneration as defined in section 7B. (It is not really relevant here because the amounts accrue and are payable during the current year of assessment.) Conclusion, the company (as employer) must withhold employees tax based on this amount. Crediting the amount to the loan account is constructive payment. 35

39 Other considerations: Is this a loan? Does a taxable benefit or dividend arise? Is this a debt incurred by the employee in favour of the employer and no interest is payable by the employee in respect of such debt? Was, during any year of assessment, any amount owing to a company by a resident; and a connected person in relation to that company in respect of a debt? AND, did that debt arise by virtue of any share held in that company by a person? Is this a debt According to the Oxford Dictionary a debt is a sum of money that is owed or due. Conclusion a taxable benefit arises paragraph 11 of the Seventh Schedule to the Income Tax Act. No deemed dividend arises under section 64E(4). Variable remuneration Employees tax implications Paragraph 2(1B) It suspends the general rule in paragraph 2(1) A person must deduct or withhold employees tax in respect of any amount payable in respect of variable remuneration as defined in section 7B(1) on the date on which the amount is paid to the employee by the employer as contemplated in section 7B(2) It applies in respect of amounts received or accrued on or after 1 March

40 variable remuneration means: What is variable remuneration? overtime pay, bonus or commission contemplated in the definition of remuneration in paragraph 1 of the Fourth Schedule an allowance or advance paid in respect of transport expenses as contemplated in section 8(1)(b)(ii) any amount which an employer has during any year of assessment become liable to pay to an employee in consequence of the employee having during such year become entitled to any period of leave which had not been taken by the employee during that year. Section 7B(1) The normal tax consequences of variable remuneration? In determining the taxable income derived by any person during a year of assessment, any amount to which an employee becomes entitled from an employer in respect of variable remuneration is deemed to accrue to the employee and constitute expenditure incurred by the employer on the date during the year of assessment on which the amount is paid to the employee by the employer Section 7B(2) 37

41 Debit loans Facts: The board of directors, at a board meeting and following a request from one of the directors, agreed to provide financial assistance to this director. This director purchased a new primary residence and needed money for the deposit until the sale of his old residence was finalised. From the minutes of this meeting it was clear that the financial assistance was granted because he was a shareholder of the company who happens to also be a director of the company. No interest was payable on this. The company s accountant made an electronic transfer of R on 5 January 2017 to the trust account of the attorney handling the transaction relating to the acquisition of the new property. The director / shareholder repaid the amount to the company on 30 April

42 Applying the law: In this instance an amount is owing to a company by a resident and a connected person in relation to that company in respect of a debt The debt also arose by virtue of any share held in that company by a person. The company is therefore, for the purposes of the dividends tax, deemed to have paid a dividend. The amount of the dividend is R * 10,5% (53 days) The dividend tax is R3 049,31 * 20% = R609,86. This dividend is deemed to have been paid on the last day of that year of assessment. It is deemed to consist of a distribution of an asset in specie. The rate of 20% applies because the company s financial year ends on the last day of February (2017). The dividends tax relevant to the deemed dividend for the period 1 March 2017 to 30 April 2017, must be included in the dividends tax return submitted in March IT14 and IT14SD issues 39

43 Resident The rules relating to when an individual is a resident of the RSA differs from the ones applying when the taxpayer is a company. In terms of the definition (in section 1(1)), resident means any person (other than a natural person) which is incorporated, established or formed or which has its place of effective management in the Republic but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any agreement entered into between the governments of the Republic and that other country for the avoidance of double taxation 26 February

44 When will a company (or trust, etc.) have its place of effective management in the RSA? Practice generally prevailing: A company s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made. From CSARS v Tradehold Ltd (Judge Boruchowitz) On 2 July 2002, at a meeting of Tradehold s board of directors in Luxembourg, it was resolved that all further board meetings would be held in that country. This had the effect that, as from 2 July 2002, Tradehold became effectively managed in Luxembourg. It nevertheless remained a resident in the Republic notwithstanding the relocation of the seat of its effective management to Luxembourg by reason of the definition, at that time, of the term resident in s 2 of the Act. When will a company (or trust, etc.) have its place of effective management in the RSA? Extract from the Luxembourg / RSA treaty: Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated. Based on the treaty, Tradehold is then deemed to be exclusively a resident of Luxembourg for purposes of the treaty. Consequently, it is not a resident of the RSA. Section 9HA(3) 41

45 Section 9HA(3) The company is treated as having disposed of each of that company s assets to a person that is a resident on the date immediately before the day on which that company so ceased to be a resident. Section 66(13) Where a company ceases to be a resident, a return (for normal tax) must be made for the period commencing on the first day of that financial year and ending on the day preceding the date that the company ceases to be a resident. 2 July March February 2003 Change in financial year end date Facts: Our client changed their year-end from February to May effectively 14/07/2016. I would like to know how the provisional tax and income tax deadlines are now seen by SARS? We submitted the 2017/01 at the end of August, but now that the year-end has changed to May, the 2017/02 should normally have been submitted 28/02/2016. Can you please assist me with the deadlines for 2017/02 provisional tax, 2016 income tax and 2018/01 provisional tax deadlines. When are due? 42

46 The relevant law: A company s year of assessment is its financial year (refer to the relevant definitions in section 1(1) of the Income Tax Act). In terms of the Companies Act (section 27) the first financial year of a company begins on the date that the incorporation of the company is registered, as stated in its registration certificate and ends on the date set out in the Notice of Incorporation, which may not be more than 15 months after the date as stated in its registration certificate. The Companies Act, section 27(4) (as does the Close Corporation Act), allows for the board of a company to change its financial year end at any time, by filing a notice of that change, but- (a) it may not do so more than once during any financial year; (b) the newly established financial year end must be later than the date on which the notice is filed; and (c) the date as changed may not result in a financial year ending more than 15 months after the end of the preceding financial year. The relevant law: In terms of the Income Tax Act, the definition of financial year in section 1(1), the company needed approval from SARS to end its financial year on 31 December. It is not clear if this was done approval by CIPC is not sufficient. In addition to this approval the company must also specifically request SARS to change the provisional tax dates / returns to 30 June (and 31 December). If this was not done SARS will not be able to process the IRP6 s as it will not have issued one. If the change was approved by SARS, it will require two IT14 s to be submitted in (possibly) the 2016 year of assessment. The current SARS practice is to ask the company to submit a combined return where two IT14 s are required. 43

47 The current practice generally prevailing: The discretionary power of the Commissioner under the definition of financial year is not subject to the Companies Act. The Commissioner is, therefore, not bound to accept a notice of change in financial year filed under the Companies Act. If the Commissioner does not agree to the change in financial year end for a specific year of assessment, a company may draw up separate sets of financial statements for that period, one for Income Tax purposes and one for Companies Act purposes. Non-approval can happen, for example, if an application carries negative consequences for the fiscus, such as a decrease in tax rates or enhanced capital allowances. The Commissioner will approve such an application only in exceptional circumstances or may approve it subject to the change taking effect in the following fiscal year. IT14SD employment cost Remember the change in the law regarding provident funds and company contributions. The IRP5 information will be overwritten and replaced with the IRP5 information available to SARS from our 3rd Party Data system 44

48 IT14 financials For Small Businesses and Medium to Large Businesses, the submission of the signed off Annual Financial Statements (AFS) is compulsory on first time submission of the ITR14, The AFS must as a minimum contain the following: Income Statement Balance Sheet and Notes to the AFS. The submission of financial statements is optional if the company is classified as: Dormant; Body Corporate / Share Block; Micro business; The AFS must be signed by the Company Representative or Public Officer. IT14 financials If SARS does not identify any risk when the return is submitted, with the draft AFS attached, the company can submit a correction and attach the final AFS without having to lodge an objection. If SARS identifies any risk when the return is submitted, with the draft AFS attached, the company has one opportunity to submit a correction with the final AFS attached. It is only where SARS identifies any risk on the final return (correction) and the subsequent IT14SD that the company must follow the formal objection process should the company disagree with the final assessment. 45

49 Fixing of rates of normal tax any company which qualifies as a small business corporation as defined in section 12E in respect of any year of assessment ending during the period of 12 months ending on 31 March 2017 It is proposed that the legislation be amended to make it clear that small business corporations in special economic zones are subject to corporate income tax at either the applicable graduated rate or 15 per cent, whichever is lower. To be eligible for the 15 per cent rate, the small business corporation will still need to comply with the provisions of section 12R of the Income Tax Act. Fixing of rates of normal tax a qualifying company within a special economic zone The rate of tax to be levied on taxable income attributable to income derived by a qualifying company within a special economic zone (as contemplated in section 12R of the Income Tax Act, 1962), is 15 cents on each Rand of taxable income. 46

50 Requirement to register as a vendor Section 23(1) of the Value-Added Tax Act Every person who carries on any enterprise becomes liable to be registered Section 1(1) of the Value-Added Tax Act "person" includes any public authority, any municipality, any company, any body of persons (corporate or unincorporate), the estate of any deceased or insolvent person, any trust fund and any foreign donor funded project; Section 1(1) of the Value-Added Tax Act VAT registration number, in relation to any vendor, means the number allocated to that vendor by the Commissioner in terms of section 24 of the Tax Administration Act; 47

51 Every person We will only deal with companies, individuals, partnerships and trusts carrying on an enterprise. who carries on any enterprise Paragraph (a) of the definition in section 1(1) enterprise means any enterprise or any activity which is carried on and in the course or furtherance of which goods or services are supplied to enterprise is a defined term (section 1(1)) continuously or regularly by any person in the RSA or partly in the RSA any other person whether or not for profit for a consideration 48

52 Enterprise Paragraph (a) of the definition in section 1(1) goods or services are supplied to Supplier (Vendor) continuously or regularly Any other person Recipient for a consideration The person supplying the goods or services The person to whom the supply is made We will discuss the in the course or furtherance of requirement later. Applying the law: Mrs C inherited a smallholding, situate in the RSA, from her deceased mother on which there is a house and some stables. Mrs C decides to subdivide the property into two parts. She will retain the portion on which the house is situated and plans to sell off the remaining portion with the stables for a total selling price of R2 million. Does Mrs C carry on an enterprise by subdividing and selling part of the smallholding? There is an activity which is (or will be) carried on in the RSA. There will also be a supply of goods to another for a consideration. The issue is therefore whether there will an activity carried on continuously or regularly. 49

53 Applying the law: continuously or regularly The words continuously' and 'regularly' are not defined and must therefore take their normal meaning. As an adverb: 1 Without interruption or gaps: 1.1 Repeatedly without exceptions or reversals: As an adverb: 2 At uniform intervals of time: 2.1 Frequently: 3 On a habitual basis; usually: Applying the law: continuously or regularly The words continuously' and 'regularly' are not defined and must therefore take their normal meaning. 'An activity is "continuous" if there is no significant cessation or interruption of the activity. In other words, it is carried on all the time. Temporary interruptions in the activity for holiday or health reasons, for example, will not generally mean that the activity is not "continuous". An activity is "regular" if it is repeated at reasonably fixed intervals.' 'continuously or regularly' refers to the activity which will culminate in the supply of goods or services, rather than to the actual supply of those goods or services. Therefore, where a one-off supply has a continuous background it may still constitute an enterprise 50

54 continuously or regularly The definition also contemplates that the enterprise activity is carried on all the time (continuously), or it must be carried on at reasonably short intervals (regularly). Continuously is generally interpreted as ongoing, i.e. the duration of the activity has neither ceased in a permanent sense, nor has it been interrupted in a substantial way. The term regular refers to an activity that takes place repeatedly. Therefore, an activity can be regular if it is repeated at reasonably fixed intervals taking into consideration the type of supply and the time taken to complete the activities associated with making the supply. continuously or regularly The mere subdivision and sale of the subdivided portion of the smallholding in this case is more indicative of a once-off transaction by Mrs C to realise part of the property which she has inherited to her best advantage, rather than being an activity which is to be carried on continuously or regularly. Mrs C is therefore not regarded as carrying on an enterprise and will not be required to register for VAT or charge VAT on the sale. The purchaser will be required to pay transfer duty in this case. Do we like (or agree with) SARS s answer? 51

55 Enterprise The definition specifically includes Paragraph (a) of the definition in section 1(1) any enterprise or activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing, municipal or professional concern or any other concern of a continuing nature or in the form of an association or club The activity carried on in the form of a commercial, financial, industrial, mining, farming, fishing or professional concern (included in paragraph (a)) is then further expanded in paragraph (b). a private or recreational pursuit or hobby Enterprise - special the making of supplies by (i) the activities of (ii) (iii) any public authority of goods or services which... SARS, in pursuance of a decision of the Minister, has notified such public authority that its supplies of such goods or services are to be treated as supplies made in the course or furtherance of an enterprise any welfare organisation any share block company What about home owners associations? Paragraph (b) of the definition in section 1(1) activities referred to in the definition of welfare organization other than the services in respect of which section 12(f) applies registered as a vendor section 23(3) 52

56 Enterprise - special the activities of the supply of (vi) (v) of electronic services a foreign donor funded project; by a person from a place in an export country, Paragraph (b) of the definition in section 1(1) where at least two of the following circumstances are present: The recipient of those electronic services is a resident of the RSA any payment to that person in respect of such electronic services originates from a bank registered or authorised in terms of the Banks Act, the recipient of those electronic services has a business address, residential address or postal address in the RSA Exempt supplies There is an important principle that is relevant to whether or not there is an enterprise - exempt supplies (being a supply that is exempt under section 12 of the Act). In terms of proviso (v), to the definition of enterprise, any activity, to the extent to which it involves the making of exempt supplies, is not be deemed to be the carrying on of an enterprise. The implication of this is that the activities of a person who only makes exempt supplies doesn t constitute an enterprise and the person can therefore not be a vendor. The use of the words to the extent of course means that a person that carries on exempt and other activities will only be carrying on an enterprise in respect of the other (or taxable activities. 53

57 When must the vendor apply? The Value-Added Tax Act, in section 23, prescribes when a person must be registered as a vendor see later. It doesn t prescribe when the person must actually do the application, in other words, when the VAT101 must be submitted to SARS. Note: the application can now also be done electronically the efiling system caters for that. Conclusion: Because the relevant tax Act doesn t provide for a period, it must be done by the person within 21 business days of becoming obliged to do so. Effective date The VAT101 refers to a liability date. When is a person then required to register under the Value-Added Tax Act? The relevant law is found in section 23 of the Act. 54

58 Requirement to register as a vendor Every person who carries on any enterprise becomes liable to be registered What is the best example of where a person would voluntarily apply for registration? Requirement to register as a vendor Every person who carries on any enterprise becomes liable to be registered Looking back end of the month total value of taxable supplies has exceeded Looking forward commencement of the month total value of taxable supplies will exceed 55

59 Special cases commercial accommodation Where a person carries on or intends carrying on an enterprise or activity supplying commercial accommodation as contemplated in paragraph (a) of the definition of commercial accommodation in section 1(1), and the total value of taxable supplies made by that person in respect of that enterprise or activity in the preceding period of 12 months or which it can reasonably be expected that that person will make in a period of 12 months, as the case may be, will not exceed, R the person is deemed not to be the carrying on of that enterprise Special cases non-executive directors What does the Act say in this regard? by an employee to his employer in the course of his (or her) employment The rendering of services by the holder of any office in performing the duties of his office, is not deemed to be the carrying on of an enterprise to the extent that any amount constituting remuneration is paid or is payable to such employee or office holder, Non-executive directors BGR 41 (Value-Added Tax) for VAT purposes an NED is treated as an independent contractor as contemplated in proviso (iii)(bb) to the definition of enterprise in section 1(1) in respect of those NED activities. 56

60 Example: A response to a request for reasons for an assessment (VAT217) I changed the wording a bit. The input tax as reflected on invoice XXX was not allowed as a deduction. The consideration in money for the supply exceeded R The tax invoice must then be a full tax invoice and the VAT registration number of the recipient must appear on the tax invoice. The understatement penalty of 25% applies as reasonable care was not taken in completing return. The deduction of the input tax was made when a tax invoice (provided in accordance with section 20 or 21) in relation to that supply was not held by the vendor making that deduction at the time when the return in respect of that supply was furnished. The invoice relates to the acquisition of a computer which was acquired from a registered vendor. Example: At the time of acquisition the recipient was not registered as a vendor. SARS informed the recipient that it was registered a vendor two months later. The tax on this invoice was claimed in the first return submitted after the effective date of registration as a vendor. Computer acquired Effective date of registration as a vendor Deduction made Was the vendor entitled to make the deduction in respect of the computer? 57

61 The law: Documentary proof No deduction of input tax in respect of a supply of goods or services, the importation of any goods into the RSA any other deduction shall be made in terms of this Act, unless Section 16(2) (a) a tax invoice or debit note or credit note in relation to that supply has been provided in accordance with section 20 or 21 and is held by the vendor making that deduction at the time that any return in respect of that supply is furnished The law: 0% Must be in the currency of the RSA A full tax invoice and must contain the following particulars: The words tax invoice, VAT invoice or invoice ; the name, address and VAT registration number of the supplier the name, address and, where the recipient is a registered vendor, the VAT registration number an individual serialized number and the date upon which the tax invoice is issued Section 20(4) of the recipient full and proper description of the goods (indicating, where applicable, that the goods are second-hand goods) or services supplied the quantity or volume of the goods or services supplied the value of the supply, the amount of tax charged and the consideration for the supply 58

62 The law: Goods or services have been Section 18(4)(b) deemed supplied to a person imported by Goods and manufactured, assembled, constructed or produced by tax has been charged second-hand goods situated in the RSA and and have been no deduction has been made supplied to such goods or services are subsequent applied in any tax period a person by that person or the partnership wholly or partly for The law: And then, what? Effective date of registration as a vendor Good or services acquired Entertainment Good or services still on hand Good or services applied The Act deems those goods or services to be supplied in that tax period to that person And tells SARS to allow that person to make a deduction in terms of section 16(3). The deduction (or amount thereof) is determined in accordance with the formula. 59

63 Example: Vendors often find that SARS adds back input tax and then issues a VAT217. SARS then also advise them to make a deduction of the input tax in the next period. The law: Documentary proof by deducting from the sum of the amounts of output tax of the vendor which are attributable to that period, the following amounts, namely (g) any amount of input tax in relation to any supply or other deduction in respect of which subsection (2) of this section has operated to deny a deduction and the vendor has obtained, during the tax period, the prescribed documents or records in relation to that supply; Comment: By agreeing to make the deduction in a subsequent period, the vendor will effectively be admitting that the deduction was incorrectly made in the original return. The vendor will then find it difficult to request SARS to remit the penalties (late and understatement). 60

64 The law: Documentary proof... where any vendor is entitled to deduct any amount in respect of any tax period the vendor may deduct that amount from the amount of output tax attributable to a later tax period which ends no later than five years after the end of the tax period during which the tax invoice for that supply should have been issued as contemplated in section 20(1); goods were entered for home consumption in terms of the Customs and Excise Act; second-hand goods were acquired or goods as contemplated in section 8(10) were repossessed; the agent should have notified the principal as contemplated in section 54 (3); or in any other case, the vendor for the first time became entitled to such deduction, notwithstanding the documentary proof that the vendor must be in possession of... Section 18(4) When can a service be zero-rated? The RSA doesn t have pure place of supply rules (yet). A supply of service can only be charged with the tax at the rate of zero per cent in the instances set out in section 11(2) of the Value-Added Tax Act. Relevant to our discussion today there are two instances where the rate of zero per cent can be charged. One looks at the place where the service is supplied. The other looks at whether or not the recipient is a resident. 61

65 The place where the service will be (was) supplied A supply of services shall be charged subject to compliance with section 11(3) with tax at the rate of zero per cent where: where: the services are physically rendered elsewhere than in the RSA Section 11(2)(k) to a customs controlled area enterprise To an SEZ operator in a customs controlled area customs controlled area enterprise and Special Economic Zone or SEZ the meaning assigned thereto in section 21A of the Customs and Excise Act, 1964 The recipient is not a resident of the RSA A supply of services shall be charged subject to compliance with section 11(3) Section 11(2)(l) General rule with tax at the rate of zero per cent where: where: the services are supplied to a person who is not a resident of the RSA resident of the RSA see later Supplier: RSA vendor Supply Recipient: not a resident of the RSA 62

66 When is a person a resident of the Republic? resident of the Republic means a resident as defined in section 1(1) of the Income Tax Act any other person or any other company shall be deemed to be a resident of the Republic to the extent that such person or company carries on in the Republic any enterprise or other activity Section 1(1) has a fixed or permanent place in the Republic relating to such enterprise or other activity; The use of the word other in any other person or any other company indicates that the person or company will not be a resident if only the Income Tax definition is applied. Services: Exceptions to the general rule A supply of services shall be charged with tax at the rate of zero per cent where the services are supplied Section 11(2)(l)(i) to a person who is not a resident of the RSA not being services which are supplied directly: The word "directly" in the subsection ensures that an incidental benefit will not affect the zero rating of the supply. in connection with land or any improvement thereto situated inside the RSA Supplier: RSA vendor Supply land inside the RSA Recipient: not a resident of the RSA 63

67 Services: Exceptions to the general rule A supply of services shall be charged with tax at the rate of zero per cent where the services are supplied Section 11(2)(l)(ii) to a person who is not a resident of the RSA not being services which are supplied directly: in connection with movable property situated inside the RSA at the time the services are rendered An example of another exclusion to the general rule A non-resident insurance company requested a medical practitioner (a South African resident and vendor) to test blood samples of a non-resident for malaria. The insured was a tourist in South Africa and the blood sample was obtained by the doctor from the tourist whilst in South Africa. Can the medical practitioner apply the rate of zero percent when he (or she) invoices the non-resident insurer? The supply is to a non-resident who is in South Africa at the time the service is rendered and is subject to tax at the standard rate of 14%. The service is rendered to a non resident (the insurer) and accordingly qualifies for the rate of zero percent. A B 64

68 Applying the law: is in the RSA at the time A supply of services shall be charged with tax at the rate of zero per cent where the services are supplied Section 11(2)(l)(iii) to a person who is not a resident of the RSA not being services which are supplied directly: The person who is not a resident of the RSA to the said person or any other person if the said person or such other person is in the RSA at the time the services are rendered Section 11(2)(l)(iii) Applying the law: is in the RSA at the time Supplier: Supply Recipient: not a resident of the RSA other person not in the RSA at the time the services are rendered in the RSA at the time the services are rendered The law requires the services to be supplied directly... to... the... (any) other person... 65

69 Documentary proof Critical is the fact that the vendor can only apply the rate of zero per cent if the vendor obtain and retain documentary proof (as is acceptable to SARS) substantiating (the vendor s) entitlement to apply the rate under the provisions of section 11(2). The documentary and other requirements are found in Interpretation Note 31. The vendor s copy of the zero-rated tax invoice; The recipient s order or the contract between the recipient and the vendor; Written confirmation from the recipient that the recipient is not a resident of the Republic, where not stated in the recipient s order or contract between the recipient and the vendor; and The additional requirements where section 11(2)(l)(ii)(aa) or section 11(2)(l)(ii)(bb) applies. 66