Taxpayers’ right to have disputes resolved

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In a recent Tax Court decision[1], the Tax Court confirmed that taxpayers have a right to have their disputes resolved in a court of law as enunciated in section 34 of the Constitution. However, they cannot rely on this right when they are using delaying tactics to prevent the matter from being heard.

 

In this regard, the South African Revenue Service (“SARS”) issued a revised assessment to the taxpayer in 2013 based on the under-declaration of income. The taxpayer’s objection to this assessment was disallowed and the taxpayer filed a notice of appeal at the end of 2014.

 

An appeal meeting was then held at the beginning of 2017 and in July 2017 SARS filed its statement of grounds of assessment.[2] The taxpayer appointed a representative and requested an extension to April 2018 to file his statement of grounds of appeal.[3] SARS, however, only granted extension until middle December 2017.

 

No further extension was requested by the taxpayer and by February 2018 SARS informed the taxpayer of its intention to apply for a default judgement against the taxpayer and thereafter obtained a date for the hearing in November 2018.

 

Days before the hearing the taxpayer (via a new representative) requested that the matter be postponed in order for him to obtain all relevant information. The Tax Court granted such postponement until the end of February 2019 and ordered the taxpayer to file his grounds of appeal on or before the date of the hearing. No such grounds were filed. Also, on the date of the hearing, the taxpayer applied for condonation and a further postponement to obtain information.

 

The Tax Court found that the taxpayer had sufficient information to lodge the objection (in 2014 already) and that he was also not entitled to expand on his grounds of appeal beyond that contained in his objection. The taxpayer also did not make use of the proper rules for discovery of information[4] if he believed that he needed additional information for his grounds of appeal.

 

The Tax Court held that the taxpayer was intentionally delaying the legal process in order to prevent it from being finalised and disobeyed a court order without providing substantial reasons for his non-compliance. SARS’ request for a default judgement was therefore granted.

 

The takeaway is that taxpayers must duly take note of the rules and timelines provided for with regards to dispute resolution and that the courts (and likely SARS) will not tolerate any unnecessary delaying tactics.

 

[1] TCIT 13868 BLF 27 February 2019.

 

[2] In terms of Rule 31(2) of the rules promulgated under section 103 of the Tax Administration Act, No. 28 of 2011. See Public Notice 550 (GG37819 of 11 July 2014).

 

[3] In terms of Rule 32.

 

[4] Rule 36.

 

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)

Value-added Remarks on Value-added Tax (VAT)

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VAT is an integral part of our economic society and is something that influences everyone, especially businesses in South Africa. In this article, we will discuss a few do’s and don’ts regarding VAT.

 

  1. Valid tax invoices

 

In South Africa’s current tax system, vendors that are registered for VAT are allowed a deduction for the tax they pay on eligible goods or services (input tax) from the tax you collect on the sales made (output tax). Tax invoices are therefore very important to vendors as failure to provide valid documentation during VAT audits will cause the vendor to lose all the input tax being claimed on the invoice. The following requirements will overcome the challenges that may be encountered because of SARS scrutinising the validity of VAT invoices.

 

When the tax invoices exceed R5 000, a full tax invoice needs to be provided. For invoices of  R5 000 or below they may issue an abridged tax invoice. There will be no tax invoice needed if the consideration is R50 or less. However, documents such as a sales docket or till slip will be necessary to verify the input tax deducted.

 

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

 

  1. Contains the words “Tax Invoice”, “VAT Invoice” or “Invoice”
  2. Name, address and VAT registration number of the supplier
  3. Serial number and date of issue of invoice
  4. Accurate description of goods and/or services (indicating where applicable that the goods are second-hand goods)
  5. Value of the supply, the amount of tax charged and the consideration of the supply
  6. Name, address and where the recipient is a vendor, the recipient’s VAT registration number
  7. Quantity or volume of goods or services supplied

 

Note that an abridged tax invoice will only need to meet criteria 1 to 5, whereas the full tax invoice (tax invoices exceeding R5 000) must meet all criteria.

 

  1. When to declare output VAT/claim input VAT

 

The date on which VAT becomes due on a transaction is the earliest of either the payment date or the invoice date. For example, if a payment is received in advance of the invoice issued for the supply, the VAT will be due on the date of receipt of payment. It is important to note that output VAT should be declared in the period in which the invoice has been issued or the payment has been received. With regards to input VAT, here the 5-year rule applies.

 

This rule provides that any amount of input tax which was deductible and has not yet been deducted can be claimed in a following period but is limited to a tax period 5 years after which the tax invoice should have been issued.

 

  1. Overpayments by the customer

 

When a vendor receives an overpayment from a customer, that vendor will not declare VAT on the overpayment. If a vendor fails to refund the overpayment within 4 months of the date of the invoice, the excess amount is deemed to be a consideration and therefore output VAT should be declared on the last day of the VAT period during which the 4-month period ends at a tax fraction of 15/115.

 

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)

VAT Regulations dealing with the supply of electronic services

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Since 2015, foreign suppliers of electronic services (such as audio-visual content, e-books etc.) in South Africa are deemed to operate an enterprise for VAT locally. Although the regime has been in place for several years, new regulations in this regard are continuously published, the latest being on 18 March 2019, with an effective date of 1 April 2019. Along with the new regulations, SARS has published a “FAQ” document that addresses some of the questions that vendors and the public at large are likely to have about the implications of the updated regulations and recent legislative amendments. Below, we explore some of the more pertinent matters that SARS addresses in the “FAQ” document. 

What are electronic services? Electronic services mean any services supplied by a non-resident for consideration using –

·         an electronic agent;

·         an electronic communication; or

·         the internet.

 

Electronic services are therefore services, the supply of which –

·         is dependent on information technology;

·         is automated, and

·         involves minimal human intervention.

 

Simply put, this means that from 1 April 2019, you will have to pay VAT on a much wider scope of electronic services. The regulations now include any services that qualify as “electronic services” (other than a few exceptions) whether supplied directly by the non-resident business or via an “intermediary”.

 

Some examples include:

·         Auction services;

·         Online advertising or provision of advertising space;

·         Online shopping portals;

·         Access to blogs, journals, magazines, newspapers, games, publications, social networking, webcasts, webinars, websites, web applications, web series; and

·         Software applications downloaded by users on mobile devices.

 
What is specifically excluded from the ambit of electronic services in the updated regulations?

 

 Excluded from the updated regulations are –

·         telecommunications services;

·         educational services supplied from an export country (a country other than South Africa), which services are regulated by an education authority under the laws of the export country; and

·         certain supplies of services where the supplier and recipient belong to the same group of companies.
What is the reason for the updated regulations?

 

 The original regulations limited the scope of services that qualified as electronic services, and which must be charged with VAT at the standard rate. The intention of the updated regulations is to substantially widen the scope of services that qualify as electronic services, so that all services supplied for a consideration (subject to a few exceptions), which are provided by means of an electronic agent, electronic communication or the internet, are electronic services and must be charged with VAT at the standard rate.

 
Do the updated Regulations make a distinction between Business-to-Business (B2B) and Business-to-Consumer (B2C) supplies?

 

 No, there is no distinction between B2B and B2C supplies, therefore, B2B supplies will be charged with VAT at the standard rate. This outcome was intentional as the South African VAT system does not fully subscribe to the B2B and B2C concepts.

 
What are some examples of supplies that are not electronic services?

 

 ·         Certain educational services

·         Certain financial services for which a fee is charged

·         Telecommunications services

·         Certain supplies made in a group of companies

·         The online supply of tangible goods such as books or clothing

·         Certain supplies or services that are not electronic services by their nature, but where the output and conveyance of the services are merely communicated by electronic means, for example:

o    a legal opinion prepared in an export country, sent by e-mail; and

o    an architect’s plan drawn up in an export country and sent to the client by e-mail.

 

Given the much wider scope of application for electronic services, both local and foreign vendors need to ensure that VAT is levied at the appropriate rate on the supply of electronic services – and local vendors, where relevant, need to retain the necessary supporting documents to substantiate any input tax claims.

 

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)

Ring-fencing of assessed losses of certain trades – Part 2

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Section 20A of the Income Tax Act[1]ring-fences losses incurred by natural persons from certain trades under specific circumstances. If applicable, the natural person will not be able to set off the loss incurred from that trade against the income from any other trade (such as salary or other professional income) and may only set off the loss against future income derived from the trade to which the loss relates.

 

The first requirement for section 20A to apply, is that the natural person must fall within the highest income tax bracket during the relevant year of assessment.[2] The second requirement relates to the nature of the trade carried on by the natural person and the fact that the person has incurred losses in respect of that trade for at least three of the last preceding five years of assessment.[3]

 

There is, however, an exemption to section 20A. The losses incurred in respect of the specific trade will therefore not be ring-fenced if the natural person can prove that the trade constitutes a business in respect of which there is a reasonable prospect of deriving taxable income (other than a taxable capital gain) within a reasonable period of time.

 

The factors to take into consideration include the proportion of gross income derived in relation to the allowable deductions for the relevant year of assessment, the level of activity and the amount of expenses incurred in respect of advertising or promoting the trade and whether or not the trade is carried on in a commercial manner.  In respect of the latter requirement, consideration must be given to the number of full-time employees, the commercial setting of the premises where the trade is carried on, the extent of the equipment used exclusively for purposes of carrying on that trade and the time the natural person spends at the premises conducting the business.

 

Other factors include the number of years during which losses were incurred in proportion to the period in which the trade was carried on (considering unexpected events giving rise to the losses and the nature of the business involved), business plans and changes to ensure taxable income in future and the extent to which assets of the business are available for recreational or personal use.

 

Please note that the exemption in section 20A(3) will not apply if the trade is listed in section 20A(2)(b)  and in carrying on the trade the natural person has incurred losses in at least six of the last ten years of assessment (ending on the last day of the relevant year of assessment).

 

[1] No. 58 of 1962

[2] Section 20A(2)

[3] Section 20A(2)(a) and (b)

 

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)

Admin penalties for outstanding corporate income tax returns

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In general, all registered companies must submit corporate income tax (“CIT”) returns within 12 months of the end of the company’s financial year-end. This is applicable to all companies that are resident in South Africa, that receive source income in South Africa, or that maintain a permanent establishment or a branch in South Africa.

 

On 29 November 2018, the South African Revenue Service (“SARS”) issued a media release confirming that SARS will soon start imposing administrative non-compliance penalties as provided for in Chapter 15 of the Tax Administration Act[1] for outstanding CIT returns. To date, these penalties were only imposed on individuals with outstanding income tax returns.

 

This announcement follows a media release earlier in November 2018 which stated that SARS is once again embarking on a nationwide awareness campaign to reinforce taxpayers’ obligations to submit outstanding tax returns, specifically targeting companies.

 

In this regard, the fixed amount penalties in terms of section 211 of the Tax Administration Act range from R250 (where the company is in an assessed loss position) to R16,000 (in instances where the company’s taxable income exceeds R50 million) for each outstanding return. Once the penalty has been imposed, the penalty will increase by the same amount for every month that the non-compliance continues.

 

In order to determine the amount of the penalty to be imposed, SARS will consider the year of assessment immediately prior to the year of assessment during which the penalty is assessed.

 

The penalties will furthermore be imposed by way of a penalty assessment. Any unpaid penalties will be recovered by means of the debt recovery steps.

 

According to the media release, the administrative non-compliance penalties will be imposed for outstanding CIT returns for years of assessment ending during the 2009 and subsequent calendar years. Please note that this will also apply to dormant companies with no receipts or assets.

 

SARS will, however, issue the relevant company with a final demand which will grant the company 21 business days from the date of the final demand to submit the outstanding returns before the penalties will be imposed.

 

Companies may request remittance of the penalties imposed from SARS and have the right to lodge an objection via eFiling should the request for remittance be unsuccessful.

 

The takeaway is that all companies with outstanding CIT returns (whether these companies have assessed losses for those outstanding years or not) should complete and submit these returns as soon as possible in order to avoid the administrative non-compliance penalties being imposed.

 

[1] 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)

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