Bad debts and VAT

Tax , ,

While there is currently a focus on the income tax considerations of bad and doubtful debts (given that National Treasury has proposed changes to section 11(j) of the Income Tax Act[1] to allow for an allowance of 25% of impairments in respect of doubtful debts), the Value Added Tax (VAT) aspect of bad debts is often overlooked.

 

Section 22 of the Value Added Tax Act[2] determines that a VAT vendor who accounts for VAT on the invoice basis may deduct input tax in respect of debts which have become irrecoverable and written off. To be able to claim the input tax deduction, three requirements should be met:

 

  1. There must have been a taxable supply for a consideration in money;
  2. The vendor must have already properly accounted for the output VAT on that supply; and
  3. The vendor must have written off the amount of the consideration that has become irrecoverable.

 

The first two requirements should be relatively easy to meet since they generally occur in the ordinary course of business. The final requirement may potentially be more difficult to substantiate.

 

The VAT Act does not provide any further guidance on what constitutes “irrecoverable” or “written off”. A similar hurdle is present in the Income Tax Act, that does not elaborate on what the meaning is of debt that has become “doubtful” and debt that has “become bad”. Arguably, the requirements in the VAT Act stating that the debt must be “written off”, goes a step further than debt that is merely “doubtful” or that has “become bad”. It is also not certain to what extent the South African Revenue Service could draw comparisons between how a taxpayer treated the same debt for income tax and VAT purposes. Taxpayers should, therefore, exercise caution when they attempt to claim the allowable input tax and ensure that the facts support a case for a debt that has been written off. The input tax that can be claimed is equal to the tax fraction (15/115) applied to the amount actually written off.

 

Importantly though, if a vendor has success in recovering a portion of the debt previously written off, this must again be accounted for as output tax. Taxpayers that form part of a group of companies should also note that if the debt has been written off between wholly-owned members, the additional input tax is not allowed.

 

[1] 58 of 1962 (the Income Tax Act)

[2] 89 of 1991 (the VAT Act)

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The accountant’s new dawn

Accounting , ,

By Jerry Schuitema.

 

Seeing the numbers through a different lens.

 

Few professions have been through as much scrutiny and criticism as the accountants have in recent times. This in the wake of a number of high-profile scandals that not only questioned their lack of oversight, but whether they were indeed part of the malfeasance in some cases.

 

It may have been somewhat overdone, but not unexpected. When things go wrong, it is fashionable to blame the watchdog rather than the perpetrator: especially when there is a popular perception that the accountant’s primary role is oversight and compliance. Coupled with the concept that the main purpose of corporate capital is to maximize capital- and tax efficiencies in a highly complex maze of multinational structures; and constantly expanding and differing legislation and rules around ethics, governance and sustainability; the accountant’s role in reconciling all of these with financial performance has become far more critical and exposed to public scrutiny and accountability.

 

This has placed them firmly as standard bearers in a particular camp that seeks to defend and protect the classic “institutional” and metric-driven understanding of business. That understanding gave birth in the 80’s to the “shareholder-value” model and is still largely followed today. At the same time, however, some notable thought leaders have baulked at this “dehumanizing” of business and new organisational theories such as the Stakeholder approach; Triple Bottom Line; the Balanced Scorecard, Servant leadership and more recently our own King IV governance prescriptions, tried to redefine business’s role in society and counter the exploitive institutional profit driven view.

 

So there are basically two perspectives of business:

  • Institutions driven by maximum gain for shareholders or
  • Collectives fostering meaningful and mutually enabling relationships between people.

 

It is too simplistic to categorise this as “people versus profits”. That is 19th century ideological rhetoric and ignores the fact that the two are not mutually exclusive. Nor are they irreconcilable and contradictory. It is purely a matter of changing perceptions around purpose — from reward to contribution; from profit to service (which most companies do anyway in their mission and vision statements). There is also an existential reality that to create tangible value, business has to make a difference to others; has to add value to people’s lives through the service or product they provide. An obsession with numbers, costs and profits, will be to no avail if that existential reality is not met in the first place.

 

Can the accounting profession awaken to that new dawn? With some recalibration of their current accounting lens, I believe they not only can, but could become a critical contributor in ensuring not only profitability and sustainability for their institutions or clients, but take a huge leap in improving their current image as well as becoming the most important catalyst in enhancing the understanding of business as collectives creating value for all.

 

Most of what is out there in 3BL, BS and King IV is seen to be burdensome additions; as collateral to the narrow purpose of enhancing shareholder value. I have yet to witness any of these highly costly and cumbersome processes have any effect on popular perceptions of business. In addition, there is little, if any proof that they have indeed specifically contributed to greater shareholder value.

 

What is needed is an accounting lens that aligns all participating parties to a single common purpose of value or wealth creation and a common fate in wealth distribution. The King IV creed of “creating value for all” cannot be captured in a single measurement such as profit. But it can in value-added, or wealth creation which is not only the oldest economic principle known to mankind, but also the most powerful that sustains all other benefits. I have referred to it as the “magnificent metric.”

 

Over many years, I have examined and researched the value added statement as the most suitable lens that can do that. I came to the conclusion that both the VAS and the Cash-Vas were still looking at the numbers from a shareholder perspective and after many discussions with leading practising accountants, I came up with a format called the Contribution Account©. It is neutral in stakeholder priorities and palatable to and understandable by all the participants.

 

Working with this format automatically draws one into the “meaningful relationships” perspective of business. It should, but need not be the main strategic driver but can become a highly effective operational process in transforming perceptions and behaviour. It is the ideal method of sharing financial information with all in the company: and through many different media: print, electronic, social and even role play. It also offers accounting practitioners the opportunity to become communicators, teachers and enablers on a much broader scale.

 

They then take a significant step in becoming part of a new understanding of business in society.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Changes to Income Tax returns for trusts

Tax , ,

The South African Revenue Service (“SARS”) implemented several changes to the income tax returns for trusts (the ITR12T) on 26 February 2018. These changes apply in respect of the year of assessment ending on or after 28 February 2017, unless taxpayers have already saved or submitted the relevant 2017 ITR12T prior to the implementation of these latest changes.

 

One of the important changes includes the updating of the supporting trust participant schedule to the ITR12T in order to identify loans granted to the trust that are subject to the provisions of the newly introduced section 7C of the Income Tax Act.[1] This section deals with interest-free or low-interest loans to a trust that are made directly or indirectly by a natural person or a company in certain specific circumstances. Should these provisions apply, section 7C deems the interest foregone on the loan to be a continuing annual donation that attracts donations tax. This donation is deemed to be made on the last day of the year of assessment of the trust[2] (which is generally the last day of February) and is payable by the end of the month following the month during which the donation takes effect (which would then be the end of March).[3]

 

Also, trusts that are collective investment schemes or employee share incentive schemes are no longer required to disclose information relating to the details of persons that transacted with the trust. However, all other trusts must ensure that income distributed by the trust to other persons are fully disclosed. Additional validations in this regard were therefore also introduced.

 

Other amendments to the ITR12T include the introduction of a new local income type which relates to dividends that are deemed to be income in terms of section 8E and section 8EA of the Income Tax Act. (These provisions are aimed at penalising debt instruments that have been disguised as equity in order to avoid tax.)

 

The ITR12T also includes a new detailed schedule relating to learnerships for purposes of claiming the deduction in terms of section 12H of the Income Tax Act. Separate disclosure is required for learners with a disability and learners without a disability for both NQF levels 1 to 6 and NQF levels 7 to 10. Also, the number of learners and the allowance amount for each of these fields must be completed.

 

The take away is that trusts should carefully consider these new requirements in order to ensure that the new ITR12T is completed correctly.

 

[1] No. 58 of 1962

[2] Section 7C of the Income Tax Act

[3] Section 60(1) of the Income Tax Act

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Valid Tax Invoice Requirements for VAT Vendors

Tax , ,

When making a purchase for your business, you should always ensure you receive a valid VAT invoice. This enables you to claim input VAT from SARS. With the change in VAT rate from 14% to 15%, VAT has come under the spotlight. This brings more focus on VAT compliance and more specifically on when we can claim input VAT on an invoice, and what constitutes a valid VAT invoice. This is something small that is very much neglected when it comes to monthly bookkeeping. It is very important to pay attention to the invoices that are sent to your accountants as these invoices need to be “valid” before the input VAT can be claimed from the South African Revenue Service (SARS).

 

Please read through the following crucial information carefully with regard to valid VAT invoices.

 

South Africa operates on a VAT system whereby VAT registered businesses are allowed to claim the VAT (input VAT) incurred on business expenses from the VAT collected (output VAT) on the supplies made by the business. The most crucial document in such a system is the tax invoice. Without a valid tax invoice, a business cannot deduct input tax paid on business expenses.

 

The VAT Act prescribes that a tax invoice must contain certain details about the taxable supply made by the business as well as the parties to the transaction. The VAT Act also prescribes the timeframe within which a tax invoice must be issued (i.e. 21 days from the time the supply was made).

 

A business is required to issue a full tax invoice when the price is more than R5 000 and may issue an abridged tax invoice when the consideration for the supply is R 5 000 or less than R5 000. No tax invoice is needed for a supply of R50 or less. However, a document such as a till slip or sales docket indicating the VAT charged by the supplier will still be required to verify the tax deducted.

 

As from 8 January 2016, the following information must be present on a tax invoice for it to be considered valid by SARS:

  • Contains the words “Tax Invoice”, “VAT Invoice” or “Invoice”;
  • Name, address and VAT registration number of the supplier;
  • Name, address and where the recipient is a vendor, the recipient’s VAT registration number;
  • Serial number and date of issue of invoice;
  • Correct description of goods and /or services (indicating where the applicable goods are second hand);
  • Quantity or volume of goods or services supplied; and
  • Value of the supply, the amount of tax charged and the consideration of the supply.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Is it possible to backdate an agreement?

Contracts , ,

A popular question which comes up during a consultation with a client when the drafting of commercial documents is discussed is, “what is the effective date of the transaction?” It is common practice that the effective date be expressly defined in the agreement, this is to indicate when the agreement will come into force and effect. The effective date of a transaction is of great importance especially when there are certain conditions which must be adhered to prior and/or after the date on which the agreement was signed by the relevant parties.

 

In some instances, the effective date of an agreement will either be set on an earlier or later date than on which the agreement was signed by the parties. It is often found that the effective date of an agreement is earlier than the signature date, which can also be referred to as backdating of an agreement. Despite the fact the aforesaid is permissible, the effect of backdating any agreement must not be overlooked by parties. Backdating any agreement means that the agreement binds the parties retrospectively from the earlier date.

 

Due to the retrospective effect of the agreement, it is necessary that the parties ensure that no representations are made during negotiation stages and/or signature of the agreement which they know to be untrue and/or not possible to adhere to. In cases where a misrepresentation is made and lead to certain losses, it can result in one party instituting civil procedures against the other. Parties must declare all facts known to them which may affect the transaction between the signature and effective date to avoid situations where a party to the agreement suffer losses which could result to civil and/or criminal liability. Furthermore, should all obligations and terms of the agreement be of such nature that they have been executed timeously and the effective date is earlier than the signature date, same must be properly recorded in the agreement which will only be signed at a later stage.

 

Although it is possible to backdate an agreement, it is advisable to ensure that parties timeously approach professionals which specialise in the drafting and implementing of commercial documentation to properly record the agreement between the parties.

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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