Smart accounting, the smart way

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The last several years have seen an increase in “smart accounting systems” that have online capabilities and that can integrate with various other business solutions. These smart accounting systems have revolutionised traditional accounting, and there can be no question that many businesses run a more organised and financially sound operation as a result of the availabilities of these programs and applications.

While the benefits of using these systems speak for themselves, businesses should ensure that the data processing and back-end of these systems (which is often based overseas) are compliant with local value-added tax (VAT) legislation. A prevalent example is where Point of Sale systems integrate with these accounting packages – when customers swipe their cards or make online payments using the Point of Sale systems, they often get email notifications confirming they have paid. These confirmations are presented in the form of a “tax invoice”.

Subsequently, when the Point of Sale system integrates with the smart accounting package, the bulk sales of a day are imported into the accounting package by means of an invoice posting in the accounting package. Therefore, one sits with a situation where a customer has received a tax invoice from the Point of Sale application system and a second invoice, in respect of the same supply, which is generated when the Point of Sale system integrates with the accounting package. This results in two tax invoices having been generated in respect of the same supply. This is specifically prohibited in terms of section 20 of the Value Added Tax Act, which only allows one tax invoice to be issued in respect of each supply. The mischief that the legislature is trying to prevent is clear – when multiple tax invoices are issued in respect of the same supply, multiple VAT input claims can be claimed by vendors in respect of the same supply.

There are also various other smaller challenges with using smart accounting packages and ensuring that its operations are VAT compliant (including the requirements for a valid tax invoice, the circumstances under which you are allowed to issue credit notes, and certain default settings in respect of VAT percentages applied to certain transactions). Fortunately, these smart accounting systems allow for specific customisation and certain transaction flows to be conducted in a different way.

Compliance with local VAT legislation should therefore by no means be an impediment in using these systems, as long as businesses ensure compliance. The use of these systems should be promoted, but should be done with professional assistance and persons who have a keen grasp of both the accounting side of the systems, as well as tax legislation, especially during the set-up phase of the systems and new applications.

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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Bursaries and scholarships: The tax rules are changing

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Over the past several years, many employers and employees have made use of the beneficial tax treatment of bursary and scholarship schemes, as provided for in the Income Tax Act. The Act contains provisions that provide an exemption in respect of bona fide bursaries or scholarships granted by employers to employees or relatives of qualifying employees, subject to certain monetary limits and requirements stipulated in the Act. Essentially, an employee is not taxed on an amount granted to him/her when it meets the criteria as set out in the Act. 

In the case of a bona fide bursary or scholarship granted to a relative of the employee without a disability, the Act makes provision for the exemption from tax to apply only if the employee’s remuneration does not exceed R600 000 during the year of assessment. In addition, the amount of the bursary or scholarship will only be exempted up to a limit of R20 000 for studies from Grade R to 12, including qualifications at NQF levels 1 to 4, and R60 000 for qualifications at NQF levels 5 to 10. These levels are increased where the bursary or scholarship is made to a person with a disability. 

National Treasury has noted that it has come to Government’s attention that a number of schemes have emerged in respect of employer bursaries granted to the employees or relatives of employees. These bursary schemes are developed by an institution other than the employer and marketed to the employer as a means of providing tax–exempt bursaries to their employees or relatives at no additional cost to the employer. These schemes seek to reclassify ordinary taxable remuneration received by the employee as a tax-exempt bursary granted to the relatives of employees. As a result, an employee can cater to their relative’s studies by way of salary sacrifice. The portion of the salary sacrificed by the employee is paid directly by the employer to the respective school and is treated as a tax-exempt bursary in the employee’s or relative’s hands.  

It is proposed that the exemption, in respect of a bona fide bursary or scholarship granted by the employer to the relatives of the employee, should only apply if that bona fide bursary or scholarship granted by the employer is not restricted only to the relatives of the employee, but is an open bursary or scholarship available and provided to members of the general public. Furthermore, it is proposed that the requirement that the applicability of the exemption is dependent on the fact that the employee’s remuneration package is not subject to an element of salary sacrifice, be reinstated. 

Lastly, it is proposed that, as a means of further encouraging employers to grant bursaries to relatives of employees without subjecting such bursary to an element of salary sacrifice, that the employer deduction in relation to said bursaries is only afforded if the bursary to the employee’s relative is not subject to an element of salary sacrifice. 

The above proposals are currently open for public debate, and it is yet unclear whether the proposals will be enacted as is currently suggested. We expect the final bill which contained the proposals to be made available during November 2020. 

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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Tax residency and deemed disposals

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In 2001, South Africa, like many other countries, introduced capital gains tax aimed at levying capital gains tax on the gain made from the disposal of certain assets. When a South African tax resident company redomiciles abroad and changes its tax residency to another tax jurisdiction, such a company ceases to be a tax resident for South African income tax purposes (regardless of whether the assets of such a company are still located in South Africa or whether the company still continues to do business in South Africa or not).  

Generally, the cessation of South African tax residency is deemed to be a disposal for capital gains tax purposes and triggers capital gains tax. The Act deems the South African tax resident company to have disposed of all its assets for a consideration equal to their market value. As a result, the deemed disposal is subject to CGT at the prevailing tax rates. 

In 2003, South Africa introduced so-called “participation exemptions”, which exempts any foreign dividends declared by non-resident companies to a South African tax resident holding at least 10 per cent of the equity shares and voting rights in such companies from income tax, and includes the exemption from CGT gain on the disposal of equity shares held by a South African tax resident holding a least 10 per cent of the equity shares and voting rights in a non-resident company. The policy rationale for participation exemptions is where a South African tax resident has a meaningful interest in the non-resident company paying the dividend was to encourage capital inflows and to provide an incentive for South African tax residents to repatriate foreign dividends to South Africa. 

The issue 

Government has noticed an increased use of participation exemptions by South African tax resident shareholders. These erode the South African tax base in instances where a South African tax resident company changes its tax residency to another tax jurisdiction and shares in that company are subsequently sold by South African shareholders, which qualify for a participation exemption. Allowing South African resident shareholders to benefit from a participation exemption on disposal of the shares in a non-resident company that was a resident company when the shares were acquired is against the intended purpose of the participation exemption. It was aimed at encouraging capital inflows and to provide an incentive for South African tax residents to repatriate foreign dividends or capital gains back to South Africa on a tax neutral basis. 

Proposed amendments effective 1 January 2021 

It is proposed that changes be made in section 9H of the Act to deem a South African tax resident shareholder who holds shares in a South African tax resident company that changes its tax residency to another tax jurisdiction to be deemed to have disposed of all its assets at market value on the day before it ceased to be a South African tax resident and to have reacquired the assets at market value on the day of the exit. 

It is currently unknown how the Government proposes to monitor compliance in this regard. 

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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Interest on delayed VAT refunds: The “materiality” question

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Section 45 of the Value-Added Tax Act makes provision for the payment of interest on delayed VAT refunds. In terms of section 45(1) of the Act, the South African Revenue Service (“SARS”) must, within 21 business days after the date on which the vendor’s return in respect of a tax period is received, refund the vendor. This is provided that the VAT return is complete and not defective in any material respect.  

The Tax Court recently considered the concept of “materiality” in such cases in the case of ABC Trading CC v the Commissioner for the South African Revenue Service (VAT case no 1712). SARS was liable to refund the vendor an amount of R71 229 183. ABC instituted legal proceedings against SARS in the Johannesburg High Court, applying for an order compelling SARS to pay the refund relating to the second period as well as interest on the outstanding capital refund amount. The interest component came to R3 570 115. Judgement was granted in favour of ABC. 

However, SARS continued with an audit relating to the relevant VAT period and issued a finding that ABC failed to declare deemed output tax on the use of a motor vehicle by its member. The VAT amounted to R200.36 per month, for three months. Based on this deficiency, SARS tried to recall the interest refunded to the taxpayer. ABC objected and appealed SARS’s decision to recall the interest on the basis that the quantum of the output tax relating to fringe benefits (R601,09 in total) was “trifling and clearly immaterial”, and did not constitute “material incompleteness or defectiveness.” 

The question before the court was whether ABC’s failure to declare the output tax on the fringe benefit rendered the returns that ABC had provided “incomplete or defective in any material respect” as provided for in section 45(1)(i) of the Act, and whether SARS’s decision to “write back” the interest by affecting an “adjustment” was justified. To put it differently: Were the jurisdictional factors, i.e. that ABC’s returns were “incomplete or defective in any material aspect”, present for SARS to invoke the provisions of section 45(1)(i)?  

The court found that section 45 is a pragmatic provision not concerned with principle but with materiality. It recognises the fact that vendors may render returns that are incomplete or defective. If it were a matter of principle, then any defective or incomplete return would carry the consequence of SARS not having to pay interest. However, the Legislature, in its wisdom, determined that expedience trumps principle insofar as the payment of interest by SARS is concerned. The court further noted that in relation to one another, the “defect” and the amount owed by SARS is immaterial and the attempt by SARS to rely on the fringe benefit errors is a transparent attempt for SARS to ex post facto wriggle out of its obligations vis-à-vis ABC.  

The important takeaway from the judgement is that SARS is liable for interest on delayed VAT refunds where there are no material deficiencies, and taxpayers should exercise their rights in this regard. 

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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The unfortunate timing of BGR55 for developers

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In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue Binding General Rulings (“BGR“) on matters of general interest or importance and clarifies the Commissioner’s application or interpretation of the tax law relating to these matters. BGR55 (issued on 10 September 2020) clarifies the VAT consequences of the sale of fixed property consisting of dwellings, by a developer, pursuant to such dwellings being deemed to have been supplied by the developer under section 18(1) or 18B(3) of the VAT Act. 

The issue 

As a result of so-called “change in use adjustments” catered for in the VAT Act, property developers that applied their fixed property for letting as a result of adverse economic factors (thus, letting the properties as opposed to selling it) became liable for an output tax adjustment where input tax was previously deducted – since they will no longer sell the buildings, but will lease it for residential purposes, which is an exempt activity from a VAT perspective. 

Previously, SARS provided some temporary relief where dwellings were constructed, extended or improved for the purpose of sale; and subsequently rather used for exempt supplies, namely, supplying accommodation in a dwelling under an agreement for the letting and hiring thereof on a temporary basis. The temporary relief was initially intended to expire on 1 January 2015. However, the relief period was extended until 31 December 2017. Any dwelling that is temporarily let for the first time from 1 January 2018 will not qualify for the relief. Developers that let dwellings for the first time, in terms of an agreement entered into on or after 1 January 2018, are required to account for the output tax adjustments. 

The ruling 

SARS have now confirmed, in BGR55, that developers that have not accounted for the aforementioned output tax adjustments in the relevant tax periods are liable to be assessed for VAT, penalties and interest. To ensure compliance, developers are encouraged to remedy their tax affairs by means of voluntary disclosure where they have failed to make the required VAT adjustment in past tax periods. 

In the current challenging economic climate, this ruling is unfortunate, and developers would have likely wanted a reintroduction of the relief previously granted. Fortunately, there has been an increased level of response from the SARS VDP unit in recent times, and taxpayers will likely be able to sort out their affairs quicker than before.  

Requests for reasons for an assessment can be made on the eFiling system under the dispute section, as part of a taxpayer’s profile. When there is even the slightest uncertainty as to the reasons for an assessment, taxpayers are strongly advised to request reasons to ensure that they provide themselves with the best possible chance of success in a dispute.

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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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