Customs for individuals travelling abroad and returning to South Africa

Finance News , ,

The South African Revenue Service (SARS) recently published a media release to clarify the confusion about the customs requirements for South African travellers returning from abroad regarding their personal effects (such as laptops and other electronic equipment). The confusion stems from various media reports on the inconsistent treatment of returning travellers by customs officials, some having to pay a fine when they could not produce a proof of purchase.

 

SARS confirms that in terms of current customs legislation, travellers are not required to declare their personal effects when leaving the country and they cannot be penalised for not doing so. The practical difficulty that travellers face, however, if they do not declare their personal effects on departure is that upon return, customs officials may require that they produce proof of local purchase to prove that the goods are not ‘new or used goods acquired whilst abroad’ and which could attract duty implications. Customs officials have discretionary powers of what would constitute sufficient proof. There is, however, an option available to travellers if they want to ensure that the proof they produce is sufficient for the customs official, and which exists in terms of the ‘registration for re-importation’ framework.

 

Travellers can complete a TC-01 Traveller Card indicating their intent to register goods for re-importation (the TC-01 form is available on the SARS website for download). The form is very user-friendly and only requires minimum information to be completed, including personal and travel details. A customs official captures the details from the TC-01 form on an online traveller declaration system at a port of departure. After digital authentication, the traveller is presented with a copy to retain the proof of registration. This registration can remain valid for a period of up to six months.

 

The TC-01 form is also a useful guideline on the goods that may be imported duty-free into South Africa, including 2 litres of wine, 1 litre of other alcoholic beverages, 200 cigarettes and up to 50ml of perfume. Importantly, this allowance is available once every 30 days, and only after 48 hours of absence from South Africa.

 

SARS has also confirmed that customs officials have been provided with the new guidelines, as well as reinforcing its internal procedures. Although it is likely that there could be some practical issues with the traveller card system initially, it is important that travellers are aware of their rights and start using the system. Travellers are encouraged to download and complete the TC-01 form well in advance of travel and confirm the operating times of the customs desk at the airport where they depart from and return to, to ensure a smoother transition through customs on return.

 

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)

Tax allowances against assets used for purposes of trade

Business , ,
The Income Tax Act[1] allows for various income tax allowances to be claimed in respect of moveable assets used for purposes of a taxpayer’s trade.

 

Most commonly, section 11(e) provides for a deduction equal to the amount by which the value of any machinery, plant, implements, utensils and articles have diminished by reason of wear and tear during the tax year. Typically, these assets must be owned by the taxpayer, or must be in the process of being acquired. Where an asset was acquired during the year, the allowance provided for in section 11(e) is proportionally reduced according to the period of use during the year.

 

There are however various other specific asset allowances which may rather regulate whether a wear and tear allowance is available for tax purposes, depending on the nature of the specific asset or which specific industry the taxpayer operates in. Should the relevant requirements for these provisions rather be applicable, the section 11(e) allowance will not apply.

 

For example, section 12B provides for an accelerated allowance (generally split over three years on a 50/30/20 ratio) for certain plant, equipment and machinery used for farming purposes, the production of renewable energy such as bio-diesel or bio-ethanol products or the generation of electricity from wind, sunlight, etc. Section 12C again provides for a tax allowance in respect of assets used for manufacturing, co-operatives, hotels, ships and aircraft. Section 12E allows for a 100% write off of the cost of plant and machinery brought into use by a “small business corporation” in certain circumstances. Other (maybe lesser known) tax allowances include section 12F (providing for an allowance for qualifying airport and port assets) and section 12I (an additional investment and training allowance in respect of industrial policy projects). There are also various provisions in the Income Tax Act providing specifically for an allowance against which the value of buildings owned by a taxpayer and used for purposes of trade can be written down for tax purposes.

 

It is important to note that each of these provisions has very specific requirements regarding the type of qualifying assets that could potentially qualify for the allowance. This includes whether or not the specific asset is new and unused and if any improvements to the qualifying assets may also be taken into account. Other important considerations include who the relevant taxpayer is, when the asset was brought into use by that taxpayer for the first time and the costs to be taken into account in calculating the relevant allowance.

 

The take away is that taxpayers must continuously evaluate their asset registers to confirm that all assets are correctly classified for income tax purposes and that the correct tax allowances are claimed in respect of these assets. The most important consideration of all though is to ensure that available allowances provided for in the Income Tax Act are utilised where appropriate to do so.

 

[1] No. 58 of 1962

 

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 interpretative value of SARS interpretation notes

Finance News , ,
In terms of section 4 of the South African Revenue Service (SARS) Act,[1] one of the objectives of SARS is to secure the efficient, effective and widest possible enforcement of tax and related acts. One of the methods employed by SARS in this mandate is through the publication of official documents on the application, or SARS’s interpretation, of the acts which they administer – namely Interpretation Notes, which are generally available to taxpayers.

 

In a unanimous judgment on 25 April 2018, in the matter of Marshall and Others v Commissioner, South African Revenue Service,[2] the role of Interpretation Notes in the interpretation of statutes was considered. The judgment is of particular importance, since it has been generally accepted that Interpretation Notes provide context to legislation and “constitute persuasive explanations in relation to the interpretation and application of the statutory provision in question”,[3] but the weight that should be attached to Interpretation Notes during statutory interpretation, was unclear.

 

The case involved the interpretation of two sections of the Value-Added Tax Act,[4] dealing with the VAT treatment of payments received by the South African Red Cross Air Mercy Service Trust for services rendered to provincial health departments. The applicant was of the view that the SCA placed undue reliance on SARS’ Interpretation Note 39 in formulating its interpretation of the relevant sections, since it gives “rise to unequal treatment of the litigating parties and fly in the face of the right to a fair hearing.”

 

The Constitutional Court found that, in the context of statutory interpretation, an approach whereby reliance is placed on an interpretation which accords with a consistent application by those responsible for the administration of the legislation requires re-examination, especially in a constitutional democracy.

 

In arriving at a conclusion, Justice Froneman indicated the following:

 

Why should a unilateral practice of one part of the executive arm of government play a role in the determination of the reasonable meaning to be given to a statutory provision? It might conceivably be justified where the practice is evidence of an impartial application of a custom recognised by all concerned, but not where the practice is unilaterally established by one of the litigating parties. In those circumstances it is difficult to see what advantage evidence of the unilateral practice will have for the objective and independent interpretation by the courts of the meaning of legislation, in accordance with constitutionally compliant precepts. It is best avoided.

 

This makes it clear that courts should make an objective and independent interpretation of legislation and that Interpretation Notes (and arguably other interpretative materials), should be irrelevant to such an interpretation. Since SARS is often a party to tax litigation, Interpretation Notes containing their interpretation of legislation, cannot be considered independent. Despite the appeal being dismissed based on the finding that the SCA indeed interpreted the legislation independently and objectively, the judgment provides clear indication of the role of Interpretation Notes in fiscal interpretation. In short, it carries no value.

 

[1] 34 of 1997.

[2] [2018] ZACC 11.

[3] Dambuza JA in Commissioner, South African Revenue Service v Marshall NO [2016] ZASCA 158; 2017 (1) SA 114 (SCA) (SCA judgment).

[4] 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)

“Booking” capital losses on shares is not that easy

Accounting , ,
There is a number of techniques that taxpayers use to reduce their capital gains tax (CGT) exposure on long-term share investments. A common practice is to utilise the annual exclusion of R40 000 provided for in paragraph 5 of the Eighth Schedule of the Income Tax Act[1] by selling shares that have been bought at a low base cost, at a higher market value and then immediately reacquiring those shares at the same higher value, thereby ensuring that the investments’ base cost is increased by as much as R40 000 per year. If the gain on those shares is managed and kept below the annual R40 000 exclusion, taxpayers receive the benefit of a ‘step-up’ in the base cost of the shares to the higher value for future CGT purposes, without having incurred any tax cost.

 

A reverse scenario is to build up capital losses for off-set against any future capital gains and taxpayers are often advised, especially during times of market volatility, to ‘lock-in’ capital losses created by the expected temporary reduction in share prices. This involves selling shares at a loss and then immediately reacquiring the same shares at the lower base cost, but with the advantage of having created a capital loss – a technique known as ‘bed-and-breakfasting’.

 

Without placing an absolute restriction on ‘bed-and-breakfasting’, paragraph 42 of the Eighth Schedule limits the benefit that could have been obtained from the ‘locked-in’ capital loss. The limitations of paragraph 42 apply if, during a 45-day period either before or after the sale of the shares, a taxpayer acquires shares (or enters into a contract to acquire shares) of the same kind and of the same or equivalent quality. ‘Same kind’ and ‘same or equivalent quality’ includes the company in which the shares are held, the nature of the shares (ordinary shares vs preference shares) and the rights attached thereto.

 

The effect of paragraph 42 is twofold. Firstly, the seller is treated as having sold the shares at the same amount as its base cost, effectively disregarding any loss that it would otherwise have been able to book on the sale of the shares and utilise against other capital gains. Secondly, the purchaser must add the seller’s realised capital loss to the purchase price of the reacquired shares. The loss is therefore not totally foregone, but the benefit thereof (being an increased base cost of the shares acquired) is postponed to a future date when paragraph 42-time limitations do not apply.

 

Unfortunately, taxpayers do not receive guidance on complex matters such as these on yearly IT3C certificates or broker notes, since these are generally very generic. Therefore, taxpayers wishing to fully capitalise CGT exposure on market fluctuations are advised to consult with their tax practitioners prior to the sale of shares.

 

[1] No. 58 of 1962

 

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)

Buying out shareholders

Finance News , ,
We are often approached by clients to advise on the most tax efficient manner in which a shareholder can sell an investment in a private company. Typically, the parties involve a majority shareholder of a company that is interested in buying out the minority shareholders in the company and which will ensure that that majority shareholder becomes the single remaining shareholder of that company.

 

In essence, two options are available through which a shareholder may dispose of a share in a company to achieve the above goal: it could either sell its shares to the purchasing shareholder, or it could sell the shares owned back to the company (i.e. a so-called “share buyback”). These two different options have varying tax consequences, and taxpayers should take care that these (often material) transactions are structured in the most tax appropriate manner possible.

 

Where a share is sold to another shareholder, the selling shareholder will simply pay a capital gains tax related cost. For companies, such capital gains tax related cost will effectively be 22.4% of the gains realised, whereas the rate for trusts is 36% (if gains are not distributed to beneficiaries), or up to 18% if the seller is an individual.

 

Where shares are however sold back to the company whose shares are being traded, that share buyback constitutes a dividend for tax purposes (to the extent that contributed tax capital is not used to fund that repurchase). Capital gains tax is therefore no longer relevant, but rather the dividends tax. Dividends would typically attract dividends tax (levied at 20%), rather than capital gains taxes.

 

It may therefore be beneficial for an existing shareholder (that is itself a company) to opt for its shares to be sold back to the company whose shares are held (and which shares are therefore effectively cancelled), rather than to sell these to the remaining shareholders and pay capital gains tax. This is because if the shares are sold to the remaining shareholders, a 22.4% capital gains tax related cost arises. However, where the shares are bought back, the “dividend” received by the company will be exempt from dividends tax and therefore no dividends tax should arise, since SA resident companies are exempt from the dividends tax altogether. A company selling its shares back to the entity in which it held the shares may therefore dispose of its investment without paying any tax whatsoever: no capital gains are realised since the shareholder receives a “dividend” for tax purposes, and the dividend itself is also exempt from dividends tax.

 

Share buybacks have become a hot topic recently and National Treasury has now moved to introduce certain specific anti-avoidance measures and reporting requirements that apply in certain circumstances. Still, there are perfectly legitimate ways in which to structure many corporate restructures where a buyout of shareholders takes place, and taxpayers will be well-advised to seek professional advice to ensure that such transactions are structured in as tax effective manner as possible.

 

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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