Capital gain: Calculating your foreign currency

Tax , ,

With the fast approaching 2019 tax season, taxpayers who have realised a capital gain in a foreign currency should take note of the special rules that apply to the translation of those gains to Rand.

 

Generally, there are two ways of translating a capital gain or loss into Rand – a “simple method” and a more “comprehensive method”. Under the simple method, the capital gain or loss is determined in the foreign currency and then translated to Rand at the time of disposal. Under the comprehensive method, the expenditure (when acquiring the assets) is converted to Rand at the time it is incurred while the proceeds are translated to Rand at the time the asset is disposed of. The comprehensive method picks up the effect of currency appreciation or depreciation on the cost of the asset.

 

Paragraph 43(1) of the Eighth Schedule to the Income Tax Act applies when an individual disposes of an asset for proceeds in foreign currency after having incurred expenditure in respect of the asset in the same foreign currency. In these circumstances, the individual must translate the capital gain or loss into the local currency by applying the average exchange rate for the year of assessment in which the asset was disposed of or by using the spot rate on the date of disposal of the asset.

 

An individual that buys an asset in one foreign currency and disposes of it in another foreign currency must use paragraph 43(1A) to translate the proceeds and expenditure to the local currency as follows:

 

  • the proceeds into the local currency at the average exchange rate for the year of assessment in which that asset was disposed of or at the spot rate on the date of disposal of that asset; and
  • the expenditure incurred in respect of that asset into the local currency at the average exchange rate for the year of assessment during which that expenditure was incurred or at the spot rate on the date on which that expenditure was incurred.

 

The term “average exchange rate” (in relation to a year of assessment) is defined in the Income Tax Act as the average exchange rate determined by using the closing spot rates at the end of daily or monthly intervals during a year of assessment. This rate must be applied consistently within that year of assessment.

 

For ease of reference (although the use of these exchange rates are not compulsory) SARS provides average exchange rates for years of assessment ending on each month since December 2003 for the following currencies: Australian Dollar, Canadian Dollar; Euro, Hong Kong Dollar, Indian Rupee, Japanse Yen, Swiss Franc, UK Pound and US Dollar. (you can get these at the following link:  https://www.sars.gov.za/Legal/Legal-Publications/Pages/Average-Exchange-Rates.aspx).

 

“Spot rate”, in turn, is defined as the appropriate quoted exchange rate at a specific time by any authorised dealer in foreign exchange for the delivery of currency. For spot rates, as well, SARS has a handy tool for rate conversions: https://tools.sars.gov.za/rex/rates/MultipleDefault.aspx.

 

The conversion of foreign currency gains and losses (primarily when incurred in different currencies), can present a practical difficulty, especially given the volatility of the Rand. Taxpayers are advised to consult with their tax practitioners on the conversion of gains and losses in foreign currency, particularly where these gains and losses are material. Making errors in this regard could lead to substantial penalties.

 

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 2019 Tax legislative amendment cycle kicks-off

Tax , ,

The 2019 tax legislation amendment cycle commenced on 25 June, when National Treasury issued the initial batch of the Draft Taxation Laws Amendment Bill which covers specific provisions that require further consultation. National Treasury will be publishing the full text of the 2019 Draft Taxation Laws Amendment Bill for public comment in mid-July 2019. One of the topics for amendment in the first batch deals with apparent abusive arrangements aimed at avoiding the anti-dividend stripping provisions.

 

Anti-avoidance rules dealing with dividend stripping were first introduced in 2009. Dividend stripping occurs when a shareholder company intending to divest from a target company avoids capital gains tax that would ordinarily arise on the sale of shares. This is achieved by the target company declaring a large dividend (to the shareholder company) before the sale of its shares to a prospective purchaser. This pre-sale dividend (normally exempt from dividends tax in the case of a company-to-company declaration) decreases the value of shares in the target company. As a result, the shareholder company sells the shares at a lower amount, avoiding the burden of capital gains tax in respect of the sale of shares.

 

In 2017 and 2018, several amendments were made to strengthen the anti-avoidance rules dealing with dividend stripping. Currently, certain exempt dividends (called extra-ordinary dividends), received by a shareholder company are treated as taxable proceeds in the hands of the shareholder company, as long as the shares in respect of which extra-ordinary dividends are received, are disposed of within a certain period, thereby eliminating the planning opportunities that dividend stripping presented.

 

National Treasury has indicated that it has come to Government’s attention that specific alleged abusive tax schemes aimed at circumventing the anti-avoidance rules dealing with dividend stripping arrangements are currently in the market. Essentially, a substantial dividend distribution by the target company to the shareholder company is done, combined with the issuance (by the target company) of its shares to the purchaser. The result is a dilution of the shareholder company’s effective interest in the shares of the target company that does not involve the disposal of those shares by the shareholder company. The shareholder company retains a negligible stake in the shares of the target company without triggering the current anti-avoidance rules.

 

In terms of the proposed amendments, the anti-avoidance rules will no longer apply only at the time when a shareholder company disposes of shares in a target company, as is currently the case. Furthermore, if a target company issues shares to another party and the market value of the shares held by the (current) shareholder company in the target company are reduced by reason of the shares issued by the target company, the shareholder company will be deemed to have disposed of and immediately reacquired its shares in the target company, thus creating value-shifting. This happens despite actual disposal not taking place, which could lead to adverse capital gains tax consequences.

 

It is expected that the proposed amendments, currently open for public comment, will be met with some severe criticism from the industry, especially since several legitimate BEE schemes could be impacted if the proposals are accepted as currently proposed.

 

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 season 2019: What can you expect?

Tax , ,

SARS recently released two media statements, in which it notes several improvements made to eFiling for the 2019 tax season, including the issue of customised notices indicating specific documents required in the event of an audit or verification and a simulated outcome issued before a taxpayer has filed.

 

What is the tax season?

 

Tax season is the period in which individual taxpayers file their income tax returns to ensure that their affairs are in order. Although the majority of taxpayers who earn a salary have already paid tax through monthly pay-as-you-earn tax (PAYE), which was deducted from their salary by their employer and paid over to SARS, employees may still have an obligation to file a tax return if they earn above the filing threshold (see in more detail below). Once SARS reconciles what was paid over by the employer with what a taxpayer declares on their tax return, an assessment is issued which may result in the taxpayer needing to pay an additional tax to SARS, or is due a refund, or neither.

 

Taxpayers who are natural persons and meet all of the following criteria need not submit a tax return for the 2019 filing season:

 

  • Your total employment income for the year before tax is not more than R500 000;
  • Your remuneration is paid from one employer or one source (if you changed jobs during the tax year, or have more than one employer or income source, you must file);
  • You have no car or travel allowance, a company car fringe benefit, which is considered as additional income;
  • You do not have any other form of income such as interest, rental income or extra money from a side business; and
  • Employees tax (i.e. PAYE) has been deducted or withheld

 

Although you are not required to submit a tax return if you meet the above criteria, it is always good practice to ensure that you have a complete filing history with SARS. If your tax records do ever become important in future (such as in the case of remission of penalties, tax clearance certificates, etc.), you do not want to be in a position to have to prove that you were not liable to file a return in a particular year. The administrative burden in the current year certainly outweighs the potential issues down the line.

 

Important filing dates

 

  • eFiling opens on 1 July 2019 and closes on 4 December 2019.
  • Manual filing at branches opens on 1 August 2019 and closes 31 October 2019.
  • Provisional taxpayers have until 31 January 2020 to file via eFiling.

 

There is already a steady increase in the number of taxpayers in queues at SARS branches – it is therefore advised that you engage with your tax practitioner as soon as possible, to plan for tax season 2019.

 

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)

Rendering of transport services by employers

Finance News, Tax , , ,

Paragraph 2(e) of the Seventh Schedule to the Income Tax Act[1] deems an employer to grant a taxable benefit to an employee if any service has, at the expense of the employer, been rendered to the employee for his or her private or domestic use.

 

The taxable benefit which arises in this instance is valued under paragraph 10 of the Seventh Schedule and is included in paragraph (i) of the definition of “gross income” and therefore subject to income tax.[2] The taxable benefit will further be included in the employee’s remuneration[3] and the employer will be obliged to withhold employees’ tax on these amounts.[4]

 

Where an employer, that is engaged in the business of conveying passengers for reward by sea or air, enables an employee (or relative) to travel overseas for private or domestic purposes, the cash value of the taxable benefit is an amount equal to the lowest fare less any consideration payable by the employee or relative.[5]

 

The cash value of a taxable benefit with regards to the rendering of any other service is the cost to the employer in rendering that service or having that service rendered.[6] These services may, therefore, be rendered by the employer or some other person.

 

Paragraph 10(2)(b) of the Seventh Schedule, however, states that the taxable benefit will attract no value if a transport service is rendered by the employer to its employees in general for the conveyance of such employees from their homes to the place of their employment (and vice versa).

 

Some uncertainty existed as to the application of the no-value provision. The South African Revenue Service (“SARS”) therefore issued two binding general rulings under section 89 of the Tax Administration Act[7] as well as the recent Interpretation Note 111 to provide clarity on these issues.

 

In BGR 42 (issued on 22 March 2017) it was considered whether the word “homes” should be restricted to the exact position of an employee’s specific dwelling or whether an employer may arrange for employees living within a certain radius to be collected from or dropped off at a common area or central point between the employees’ homes and place of employment.

 

In this regard, it was confirmed that the no-value provision would apply to transport services provided to employees to and from any collection or drop-off point en route to or from the employees’ homes and place of employment or any part of that trip.

 

[1] No 58 of 1962

[2] Section 5(1) of the Income Tax Act.

[3] Paragraph (b) of the definition of “remuneration” in paragraph 1 of the Fourth Schedule.

[4] Paragraph 2(1) of the Fourth Schedule.

[5] Paragraph 10(1)(a) of the Seventh Schedule.

[6] Paragraph 10(1)(b) of the Seventh Schedule.

[7] No 28 of 2011

 

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)

Depreciation vs wear & tear

Tax , , , , ,

Deterioration, obsolescence and wear and tear are among the reasons why assets decrease in value. By realising a deduction on depreciation for tax purposes, your company can recover the costs of certain moveable assets that are used in the production of income.

 

Generally, businesses won’t be able to make use of assets like heavy machinery or computer equipment, for example, for an indefinite period. As assets work together to generate an income for your business, over time these assets will have to be replaced with newer, more efficient ones. This article briefly looks at the basic concepts of depreciation for accounting purposes and wear and tear allowances for taxation purposes.

 

Depreciation – Accounting

 

Depreciation is essentially the decline in the value of an asset over time due to the wear and tear that occurs as a result of the normal use of that asset. For accounting purposes, a company’s assets should be depreciated on a systematic basis over the assets’ useful life. In addition, the depreciation method used should reflect the way in which assets’ economic benefits are utilised by the company and should also be reviewed regularly. The different methods of depreciation include: the straight-line method, reducing balance method as well as the production unit method.

 

For accounting purposes, depreciation is charged as an expense in a company’s income statement and is not deductible for tax.

 

Wear & Tear – Taxation

 

Wear and tear refers to the method in which the South African Revenue Services (SARS) allows companies to write off an asset for taxation purposes over a predetermined period. This wear and tear allowance permits companies to deduct, over a period of time, the amount that was paid for the movable goods that are used in the production of income. This deduction will result in a reduction of your company’s tax liability.

 

The period over which wear and tear can be claimed depends on the type of asset, as each asset will have a different write-off period. SARS has a prescribed schedule (Annexure A of Interpretation Note 47) for all assets, as well as predetermined rates at which companies can claim ‘depreciation’ for taxation purposes.

 

Any assets purchased for less than R7 000 may be deducted in full in the year in which the asset is purchased.

 

Recovering Wear & Tear Allowances

 

When an asset is sold, the wear and tear allowances claimed need to be recouped for that asset. The wear and tear claimed for the periods that the asset was in use is then added back to the taxpayer’s taxable income in the year in which the asset was sold.

 

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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