The de-merging of companies amid unbundling

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Introduction

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue Binding Class Rulings (“BCR”) in response to an application by a class or group of persons and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction. BCR70 deals with the tax consequences of recipients of listed shares in a company after an unbundling of its shares from the holding company. Although the ruling only applies to members of a specific class, it is relevant to take note thereof, since it offers guidance on how SARS interprets relevant provisions of tax acts. The ruling refers to the interpretation and application of section 46 of the Income Tax Act (the ITA) and section 8(1)(a)(iv) of the Securities Transfer Tax Act (the STT Act).

Class

The class members to which this ruling applies are all resident and non-resident shareholders of listed shares in the applicant company and reflected as such on the applicant’s securities register on the last day to trade.

Parties to the proposed transaction

In the current instance, the applicant was a resident listed company and an entity referred to as “ListCo” was a resident company and a wholly-owned subsidiary of the applicant, which is to be listed in due course.

Description of the proposed transaction

The applicant company comprises of three main business units. The purpose of the proposed transaction is to demerge one of these business units and separately list the unit on a recognised stock exchange. ListCo will have a primary listing on the JSE, whilst the listing of the applicant will be retained (i.e. the applicant will not de-list). To implement the transaction, the applicant will take several transaction steps, being the following:

  • The applicant establishes ListCo;
  • The applicant will distribute all its shares in ListCo to its shareholders (class members) as a distribution in specie as contemplated in section 46 of the ITA. This will happen after market closure on the last day to trade;
  • ListCo will be admitted to trade on the JSE and will make an initial public offering of shares on the listing date; and
  • The applicant will distribute its shares in ListCo to the class members who will be recorded and finalised on the record date.

Ruling

Although not a comprehensive list, the following are some of the more pertinent rulings that SARS made, which will bind the class members:

  • The distribution of the ListCo shares to the class members will constitute an “unbundling transaction”, as defined in the ITA.
  • Each class member must reduce the expenditure and market value attributable to its applicant shares by the amount so allocated to the ListCo shares. In other words, a proportionate allocation of costs needs to be made from the base cost of the Class’s share previously held.
  • No dividends tax will apply to the transaction.
  • The transfer of the ListCo shares to the class members or realisation agent will be exempt from STT under section 8(1)(a)(iv) of the STT Act.

Although taxpayers might not be members of the relevant class, it is always insightful to consider SARS’s interpretation of tax acts, as it could similarly apply in their circumstances.

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)

Working from home can work for you

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As the old adage goes, change is as good as a holiday. But the way that the novel coronavirus has shaken up the world we live in, has, to the contrary, been extremely disruptive and stress-inducing. For many people, the disruption has come in the form of shifting from the traditional office space to working from home.

People who had been working flexi-hours or may have been self-employed and working from a home office might be very familiar with claiming business-related expenses from their personal income tax as a tax-deductible expense. For the everyday worker, though, the shift to working from home may incur costs that would not have been necessary had they been able to safely work from their traditional office. If the COVID-19 pandemic has meant that you need to work from home, you may be able to claim some of your business expenses back when submitting your next tax return.

What then are the prerequisites for filing a tax return that includes your home office expenses as a tax-deductible expense?

  • You need to have an agreement with your employer that allows you to work from home. Especially since working from home has been necessitated during the pandemic, some of these agreements may have been assumed without due communication. To cover your bases, have the agreement made in writing.
  • You need to spend at least 50% of your working hours working from your home office. Since the tax year runs from the start of March through to the end of February the following year, it means that 50% of your time spent working in the tax year must be from your home office. Generally speaking, the necessitated use of the home for work purposes during the COVID-19 pandemic makes this somewhat tricky because it would require you to work 6 months of the tax year in the home office if you were to make a full return to your business office’s premises later (based on maintaining the same hours). For instance, working 3 months from home and 9 from the office will disqualify you from claiming your home-office as a tax-deductible expense, as you would only have spent about 25% of your working hours from your home office.
  • Home office expenses are only tax-deductible if you have an area set aside exclusively for work purposes. Hammering away at your keyboard from your living room sofa, unfortunately, does not qualify you for a home office tax deduction. Makeshift offices or rooms that have a purpose apart from dedicated work do not qualify.
  • Additionally, your home office specifically has to be fitted out for the purpose of your work. If there are specific tools or equipment that your work requires, your home office has to be set up with these readily available.

What can you deduct as a business expense?

For anyone who earns more than 50% of their income from a traditional salary, pro-rated tax deductions can be made as it relates to interest on your home loan or rent, as well as the repair and maintenance of your home. That is to say that the tax-deduction is directly related to the portion of your property that is dedicated as a home office and is calculated as a percentage of the whole.

For anyone who earns more than 50% of their income from commission (or income other than that which is earned from a salary) can claim for the same expenses as mentioned above, but can also claim business-related expenses from commission-based activity.

What if you don’t qualify for a tax return on business expenses?

For those who do not qualify for a tax deduction on their home office space, it shouldn’t necessarily mean that you need to take on all of the burdens of your business-related expenses yourself. Where previously you could rely on company internet, for instance, now you would need to use more data per month and incur an additional cost.

The best solution in this regard would be to see if an agreement can be made with your employer to carry some of the costs by reimbursing you for the personal loss suffered. If done amicably, it could only serve to strengthen the relationship with your employer.
While the change brought about from the COVID-19 virus may not be as good as a holiday, it may well be able to pay for one once you are recompensed for your tax-deductible expenses.

Reference list

  • https://www.thesait.org.za/news/460951/Deducting-your-home-office-expenditure.htm
  • https://www.businessinsider.co.za/how-to-claim-the-cost-of-setting-up-a-home-office-against-tax-in-south-africa-2020-5
  • https://www.news24.com/fin24/money/tax/lesser-known-tax-incentives-20180524

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)

Extending Export Regulations

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Interpretation Note 30 (“IN 30”) by the South African Revenue Service (“SARS”) explains the requirements that need to be adhered to and prescribes the documentary proof, acceptable to the Commissioner, that must be obtained and retained by a vendor in order to levy value-added tax (“VAT”) at zero rate on a supply of movable goods, where those goods are consigned or delivered to a recipient at an address in an export country. Should these requirements not be adhered to, exports could potentially be accounted for at the standard VAT rate of 15%, which will result in adverse tax (and commercial) consequences for vendors.

Binding General Ruling 52 (“the BGR”) extends the periods to export movables, apply for a VAT refund and obtain relevant documentary proof of export as per the Export Regulations and IN 30.

The default position

The Export Regulations and IN 30 prescribe specific periods for exportation of goods, applications for VAT refunds and obtaining the relevant documentary proof of export for the process. The Export Regulations and IN 30 allow for an extension of the periods where they cannot be met due to circumstances beyond the control of the vendor. These circumstances include, amongst others, natural or human-made disasters and serious illness of a vendor, a qualifying purchaser, or a person duly authorised to represent these parties.

In light of the global Covid-19 pandemic, many vendors will have difficulty in meeting the timeframes as required. This is a situation that is considered to be beyond the control of the vendor, or qualifying purchaser or duly authorised representative as per the Export Regulations and IN 30.

The BGR

The BGR only applies to supplies of movable goods in respect of which the original timeframes in the Export Regulations and IN 30 have not been exceeded and prescribe for extended periods as follows:

  • Indirect exports

The time periods prescribed under regulation 3(a) of the Export Regulations have been extended by an additional three months.

The time period to apply for a refund as prescribed in regulation 3 of the Export Regulations is extended by 6 months from the date of export.

  • Direct exports

The time period to export movable goods is extended by an additional 3 months.

Period for which ruling is valid

The ruling applies from the date of issue on 26 March 2020, and is valid until it is withdrawn, amended or the relevant legislation is amended.

If the BGR does not provide for a specific scenario in respect of exporting movable goods, vendors or qualifying purchasers may apply for a VAT ruling.

This article is a general information sheet and should not be used or relied upon as 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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Surviving the disaster of job loss

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As COVID-19 has ravaged the economy and stripped it bare of tens of thousands of jobs, there is a real threat to the livelihoods of many ordinary working South Africans. As happens during a time of economic recession, some businesses are unable to pay full salaries, have to scale down and have to let workers go in order to survive the results of stunted economic activity in their industry.

Job loss is never easy. When found in such a precarious position, one difficulty is knowing where one might find the resources to stay afloat and get ready to re-enter the job market. In any case, it is advisable to speak to a registered financial advisor regarding your best course of action as your circumstances require.

Below is an incomplete catalogue of the financial sources that you might be able to utilise during this time:

The Unemployment Insurance Fund (UIF) is specifically set up to aid in these kinds of situations, subject to a few conditions being met. If you had been formally employed, you will probably be a regular contributor to the fund (All employers are required by Labor Law to register themselves and their staff with the UIF and pay their monthly contributions). Apart from the UIF, there are other sources of funds you might consider accessing so that your financial difficulty doesn’t cause irreparable damage.

One of the first considerations when looking for funds is to see where money is still owed to you, and collect any outstanding funds. A common mistake that people make (not only those who are struggling financially) is to wave any money owed to them for the sake of avoiding conflict. While it may lead to some slightly awkward conversations, the place to start is with immediate family and friends. Not only are your family and friends people with whom you have an established rapport, but they are probably the ones most willing to want to help you out of your situation.
You might, however, have available funds or assets that you could free up. Start where that your money and assets act as a surplus to your needs. If you have money in an emergency fund – great, you’ve already planned well for a situation like this.

You might have funds in a savings account that has not been allocated towards a specific purpose and that might be something to consider, although some of these accounts may have a notice period with an exorbitant penalty fee for early withdrawal.

Medical aid saving accounts, although technically being an accessible source of funds, often requires two things – that you resign as a member of the scheme, and wait out the four-month period in which you can still make claims to your medical aid. Not only do you lose your long-term coverage in case of a health emergency, but you will also have to pay a late-joiner fee when joining again and you won’t be able to access the money with immediate effect.

One should be careful of taking out any loans in a time of unemployment or financial distress. Even though a loan might help you get back on your feet, it might be something that will weigh you down for a long time to come.

A vital rule to abide by is not to use funds from a credit facility in order to pay off debt. If you use credit to pay off credit, you’ll be accumulating two sets of interests on the money owed, which leaves you extremely vulnerable.

Lastly, accessing pension funds and other long-term investments should be your last consideration. Any funds that might affect your retirement or the futures of your dependents should, as far as possible, stay untouched. Re-accumulating the wealth necessary for retirement, as well as recuperating the value lost on the interest you would have received, is extremely difficult.

While there are a lot of options to consider when you do find yourself in a tricky financial situation, there are definitely some avenues that will work better for you than others. Knowing exactly what to do requires concentrated research. For this reason, consulting with a financial advisor can ease the process and set you in the right direction to get out with minimal damage.

This article is a general information sheet and should not be used or relied upon as 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 adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

Rescission of judgments by SARS: Barnard Labuschagne Inc v SARS

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The judgment deals with an application for rescission of a judgment by Barnard Labuschagne (Applicant), where SARS took judgment under the provisions of chapter 11 of the Tax Administration Act (TAA).

SARS filed a certified statement in terms of Section 172 of the TAA with the Registrar of the Court, setting out an amount of liquid debt due by the Applicant in respect of PAYE, VAT, UIF and SDL, and payable to SARS.

The Applicant is a law practice in the Western Cape and brought an application to rescind, based on various contentions. Over an extended time, the Applicant had various issues with incorrect allocations of taxes paid to the correct accounts. The dispute occurred over the years, and it was evident that the Applicant left this dispute unresolved. This occurred various times between 2009 and 2017. SARS had issued penalties and raised interest, and threatened judgment on various occasions. SARS even went as far as to make employees available to the Applicant, to allocate funds correctly. SARS eventually applied for judgment, based on a tax debt owed by the Applicant from the Applicant’s self-assessment.

The Applicant refused to object to the assessment, as it contended that SARS had not issued an objectionable assessment, and stressed that it was entitled to bring these proceedings, in terms of section 105 of the TAA, for a rescission of the judgment granted in terms of section 172 and 174 of the TAA. The Applicant further tested the constitutionality of the sections, if the Court did not find agreement with the Applicant, as these sections would then infringe his Constitutional rights to approach a court for relief when a judgment is granted. SARS countered this, stating that the judgment in terms of these sections was not judicially granted, as it lacks determining characters of judicially issued judgments.

In its judgment, the Court refuted the Applicant’s constitutionality arguments, stating that they held no weight. The High Court further confirmed that there must be a civil judgment in existence and that sections 172 and 174 constitute law enforcement mechanisms. These statements can be filed irrespective of whether an objection or appeal is in play, or an amount has been suspended. The benefit to the Applicant. Though. is that it is not a formal civil judgment and cannot be accorded the status of such.

In finality, the Court found that as this is not a civil judgment ordered by a court, one could not follow this route to have the judgment rescinded and as a result dismissed the application for rescission of judgment, and declared that the relevant provisions are not unconstitutional.

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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