Simulation

Tax , ,

In addition to specific anti-avoidance provisions and the general anti-avoidance provisions (GAAR) in the Income Tax Act,[1] the South African Revenue Service can apply another established principle to attack the validity of transactions and arrangements, namely the common law doctrine of simulation, or the plus valet doctrine. This is a fundamental principle of the South African common law that concerns itself with the true legal nature rather than the outward form of a transaction, essentially considering the substance of a transaction, rather than its form.

 

Application of the doctrine was recently under the spotlight again in the Supreme Court of Appeal in the matter of Sasol Oil v CSARS (923/2017) [2018] ZASCA 153 (9 November 2018). Sasol successfully appealed a judgment by the Gauteng Tax Court, which found that certain back-to-back transactions by entities in the Sasol Group were simulated and not genuine. Instead of Sasol in South Africa purchasing oil directly from a Sasol company incorporated in the Isle of Man, a UK company was interposed between the local entity and the Ilse of Man entity, the effect of which was that certain controlled foreign company rules in South Africa did not apply.

 

The court analysed statements from witnesses in the Sasol Group to determine what the reasons and commercial rationale were for the interposed UK entity. These witness accounts appear to have been crucial (if not the deciding factor) in the decision of the court that the transactions were not simulated or dishonest. In writing for the majority, Lewis JA found that:

 

“The transactions had a legitimate purpose. There was nothing impermissible about following…advice, and so reducing Sasol Oil’s tax liability. The transactions were not false constructs created solely to avoid…taxation.”

 

What is arguably more interesting, is the basis on which the minority found that the transactions were indeed simulated. Mothle JA, considering the same evidence, found that the transactions lacked commercial rationale, and this appears to be one of the main reasons for his dissent, demonstrated by the quotes below:

 

“At the risk of repetition, the…structure perpetuated duplication, with the identified inherent risk of absence of a commercial justification.”

 

“I would find that Sasol Oil failed to demonstrate to the Tax Court the commercial justification for interposing SISL (UK company) in the supply chain.”

 

“The failure to provide commercial justification for SISL revealed the absence of bona fides behind the transactions and as such, the additional assessments were justified.”

 

In the present case, Sasol was successful in proving the commercial rationale for their arrangement to the court. The important takeaway for taxpayers from the judgement is that the facts and circumstances of arrangements should be carefully documented when entering into transactions. Supporting documents, such as minutes of meetings, business plans and even internal notes could all prove to be vital in the assessment if a transaction is genuine, and not simulated.

 

[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)

Ring-fencing of assessed losses of certain trades – part 1

Tax , ,

Persons are generally allowed to set off any losses incurred in respect of one trade against the income derived from another trade, thereby reducing their overall tax liability.

 

However, 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, but may only set off the loss against future income derived from the trade to which the loss relates.

 

The rationale for this provision was to disallow natural persons to conduct hobbies disguised as trades in order to set off expenses from that hobby against other income such as salary income or professional income.

 

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] For the 2019 year of assessment, the person’s taxable income and any assessed loss or balance of assessed loss of the taxpayer must be equal to or exceed R1.5 million.

 

The second requirement relates to the nature of the trade carried on by the natural person.[3] In this regard, he or she (or any relative of that person) must be engaged in one of the following trades. These include the practising of any sporting activity, any dealing in collectables, any animal showing by that person, any form of performing or creative arts or any form of gambling or betting performed.

 

Also included are the rental of residential accommodation or vehicles, aircraft or boats (unless at least 80% of the accommodation, vehicle, aircraft or boat is used by persons who are not relatives of the natural person for at least half of the year). Farming or animal breeding will also fall within section 20A unless such activities are engaged in on a full-time basis.

 

Furthermore, he or she must have incurred an assessed loss in at least three of the preceding five years of assessment, ending on the last day of the relevant year of assessment.[4]

 

Both these requirements must be met in order for the loss in respect of the specific trade to be ring-fenced.

 

The take away is that taxpayers with additional income sources should carefully consider the provisions of section 20A to the extent that the current ITR12 income tax return for individuals require taxpayers to indicate whether or not the losses are ring-fenced. Taxpayers may also be requested by the South African Revenue Service to confirm why section 20A should not apply in instances where that question was answered ‘no’.

 

[1] No. 58 of 1962

[2] Section 20A(2)

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

[4] Section 20A(2)(a)

 

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)

SARS releases new ruling on documentary requirements for VAT purposes

Tax , ,

In February 2015 the South Atlantic Jazz Festival (Pty) Ltd successfully appealed a judgment of the Tax Court to the Full Bench of the Western Cape High Court (reported as ABC (Pty) Ltd v CSARS [2015] ZAWCHC 8). That judgment dealt with documentary proof required by the Commissioner for SARS to substantiate input tax claims submitted by taxpayers for VAT purposes, and specifically the scope of the provisions of section 16(2)(f) of the Value-Added Tax Act, 89 of 1991.

 

Since the judgment documentary proof linked to VAT input claims have been a focus of Government, with both the subsequent amendment of section 16(2)(f) as well as the introduction of section 16(2)(g). Especially the latter provision is important here and deals primarily with what documentary evidence will suffice as substantiating proof for VAT input claims submitted by a VAT vendor in the absence of for example an invoice received from the supplier, a bill of entry or credit note. The question in ABC above for example was whether a signed agreement could under these circumstances suffice as substantiating proof for an input tax claim submitted.

 

Section 16(2)(g) now reads that “… in the case where the vendor, under such circumstances prescribed by the Commissioner, is unable to obtain any document required in terms of [section 16(2)] (a), (b), (c), (d), (e) or (f), the vendor is in possession of documentary proof, containing such information as is acceptable to the Commissioner, substantiating the vendor’s entitlement to the deduction at the time a return in respect of the deduction is furnished…”

 

SARS has now released a binding general ruling (BGR36) on 24 October 2016 dealing with those circumstances under which the Commissioner will allow a VAT vendor to use alternative documentary proof to substantiate the vendor’s entitlement to an input tax deduction as contemplated in section 16(2)(g). In order to obtain the Commissioner’s approval to use alternative documentary proof in substantiating a deduction under section 16(2)(g), a VAT vendor must apply for a VAT ruling or VAT class ruling.

 

In terms of the ruling, a VAT vendor may only apply for approval under section 16(2)(g) to rely on documentary proof, other than the documents prescribed under section 16(2)(a) to (f), if the vendor

 

  • has sufficient proof that it made reasonable attempts to obtain the documentary proof required by the Commissioner under section 16(2)(a) to (f);
  • was unable to obtain and maintain the documentation prescribed under section 16(2)(a) to (f) due to circumstances beyond the vendor’s control (see below); and
  • no other provision of the VAT Act allows for a deduction based on the particular document in the vendor’s possession.

 

BGR36 continues to list those circumstances when it would be considered to have been beyond the VAT vendor’s control to provide the otherwise required documentation:

 

  • When the supplier has failed to issue a tax invoice, debit note or credit note to the VAT vendor;
  • Where the supplier was contacted but failed to respond to the vendor’s request to be furnished with a complete tax invoice or correct document;
  • The supplier or vendor’s place of business has suffered damage as a result of for example a natural disaster, causing damage to its accounting records, with no possibility of the said records being retrieved or re-issued; or

 

(d) The supplier has been deregistered as a vendor.

 

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)

Wenke om geregistreerde besonderhede op datum te hou

Tax , ,

Voordat u jaarlikse opgawe voltooi word, is dit belangrik om seker te maak dat kontak-, adres-, bank- en openbare offisiersbesonderhede van die entiteit (hetsy vir ’n individu, maatskappy, trust of enige ander entiteit) korrek is, deur dit te bevestig en op te dateer met gebruik van die RAV01-vorm. Die RAV01-besonderhede kan op twee maniere bevestig en opdateer word, naamlik via eFiling of deur ’n SAID-tak te besoek.

 

Veranderinge wat via eFiling kan geskied:

  • sekere identiteitsinligting (bv. naam en van);
  • bankbesonderhede;
  • adresbesonderhede;
  • kontakbesonderhede; en
  • handelsnaam van ’n entiteit.

 

Indien die validering van u bankbesonderhede onsuksesvol is op eFiling, sal u versoek word om ’n SAID-tak te besoek om u bankbesonderhede persoonlik te bevestig. Sekere besonderhede soos registrasienommers en ID-nommers sal gesluit wees en die opdatering van hierdie velde kan slegs by ’n SAID-tak gedoen word.

 

Veranderinge wat slegs by ’n SAID-tak aangebring kan word:

 

  • Die aard van die entiteit (bv. maatskappy, trust en BK)
  • Identiteitsnommer / paspoortnommer / ondernemingsregistrasienommer (bv. ID-nommer, CIPC nommer of trust nommer ens.)
  • Bankbesonderhede – slegs onder die volgende voorwaardes:
    • wanneer ’n derdeparty se bankbesonderhede betrokke is;
    • wanneer die entiteit ’n trust is;
    • wanneer die entiteit gekodeer as bestorwe boedel; en
    • wanneer bankbesonderhede via eFiling verander word en addisionele validering benodig word.

 

Opdatering van bankbesonderhede:

 

Slegs die spesifieke belastingbetalers (individue), publieke amptenare (maatskappye en trusts) en geregistreerde belastingpraktisyns is by magte om bankbesonderhede te wysig. Dokumente wat nodig is om geregistreerde besonderhede op te dateer sluit in:

 

  • getekende volmag (waar u van ’n belastingpraktisyn gebruik maak);
  • resolusie vir die aanstelling van die publieke amptenaar (in gevalle anders as ’n individu);
  • gesertifiseerde afskrifte van identiteitsdokumente van belastingbetaler en alle direkteure (in gevalle anders as ’n individu);
  • nuutste registrasie dokumente en akte van oprigting van die entiteit (in gevalle anders as ’n individu);
  • bewys van die fisiese adres van publieke amptenaar asook die entiteit (in gevalle anders as ’n individu); en
  • oorspronklike bankstaat, in die naam van die belastingbetaler, nie ouer as drie maande vanaf die datum van die afspraak nie.

 

Om enige onnodige besoeke aan ’n SAID-tak te verhoed, beveel ons u aan om ons as u geregistreerde belastingpraktisyn so spoedig moontlik van enige veranderinge aan u geregistreerde besonderhede in kennis te stel, om ons sodoende die kans te gee om u besonderhede te wysig voordat u volgende opgawe ingedien word.

 

Hierdie artikel is ʼn algemene inligtingsblad en moet nie as professionele advies beskou word nie. Geen verantwoordelikheid word aanvaar vir enige foute, verlies of skade wat ondervind word as gevolg  van die gebruik van enige inligting vervat in hierdie artikel nie. Kontak altyd ʼn finansiële raadgewer vir spesifieke en gedetailleerde advies. (E&OE)

Bad debts and VAT

Tax , ,

While there is currently a focus on the income tax considerations of bad and doubtful debts (given that National Treasury has proposed changes to section 11(j) of the Income Tax Act[1] to allow for an allowance of 25% of impairments in respect of doubtful debts), the Value Added Tax (VAT) aspect of bad debts is often overlooked.

 

Section 22 of the Value Added Tax Act[2] determines that a VAT vendor who accounts for VAT on the invoice basis may deduct input tax in respect of debts which have become irrecoverable and written off. To be able to claim the input tax deduction, three requirements should be met:

 

  1. There must have been a taxable supply for a consideration in money;
  2. The vendor must have already properly accounted for the output VAT on that supply; and
  3. The vendor must have written off the amount of the consideration that has become irrecoverable.

 

The first two requirements should be relatively easy to meet since they generally occur in the ordinary course of business. The final requirement may potentially be more difficult to substantiate.

 

The VAT Act does not provide any further guidance on what constitutes “irrecoverable” or “written off”. A similar hurdle is present in the Income Tax Act, that does not elaborate on what the meaning is of debt that has become “doubtful” and debt that has “become bad”. Arguably, the requirements in the VAT Act stating that the debt must be “written off”, goes a step further than debt that is merely “doubtful” or that has “become bad”. It is also not certain to what extent the South African Revenue Service could draw comparisons between how a taxpayer treated the same debt for income tax and VAT purposes. Taxpayers should, therefore, exercise caution when they attempt to claim the allowable input tax and ensure that the facts support a case for a debt that has been written off. The input tax that can be claimed is equal to the tax fraction (15/115) applied to the amount actually written off.

 

Importantly though, if a vendor has success in recovering a portion of the debt previously written off, this must again be accounted for as output tax. Taxpayers that form part of a group of companies should also note that if the debt has been written off between wholly-owned members, the additional input tax is not allowed.

 

[1] 58 of 1962 (the Income Tax Act)

[2] 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)

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