Bad debts and VAT

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)

Valid Tax Invoice Requirements for VAT Vendors

When making a purchase for your business, you should always ensure you receive a valid VAT invoice. This enables you to claim input VAT from SARS. With the change in VAT rate from 14% to 15%, VAT has come under the spotlight. This brings more focus on VAT compliance and more specifically on when we can claim input VAT on an invoice, and what constitutes a valid VAT invoice. This is something small that is very much neglected when it comes to monthly bookkeeping. It is very important to pay attention to the invoices that are sent to your accountants as these invoices need to be “valid” before the input VAT can be claimed from the South African Revenue Service (SARS).

 

Please read through the following crucial information carefully with regard to valid VAT invoices.

 

South Africa operates on a VAT system whereby VAT registered businesses are allowed to claim the VAT (input VAT) incurred on business expenses from the VAT collected (output VAT) on the supplies made by the business. The most crucial document in such a system is the tax invoice. Without a valid tax invoice, a business cannot deduct input tax paid on business expenses.

 

The VAT Act prescribes that a tax invoice must contain certain details about the taxable supply made by the business as well as the parties to the transaction. The VAT Act also prescribes the timeframe within which a tax invoice must be issued (i.e. 21 days from the time the supply was made).

 

A business is required to issue a full tax invoice when the price is more than R5 000 and may issue an abridged tax invoice when the consideration for the supply is R 5 000 or less than R5 000. No tax invoice is needed for a supply of R50 or less. However, a document such as a till slip or sales docket indicating the VAT charged by the supplier will still be required to verify the tax deducted.

 

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

  • Contains the words “Tax Invoice”, “VAT Invoice” or “Invoice”;
  • Name, address and VAT registration number of the supplier;
  • Name, address and where the recipient is a vendor, the recipient’s VAT registration number;
  • Serial number and date of issue of invoice;
  • Correct description of goods and /or services (indicating where the applicable goods are second hand);
  • Quantity or volume of goods or services supplied; and
  • Value of the supply, the amount of tax charged and the consideration of the supply.

 

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)

2018 Tax Season: SARS shortens submission period

The annual tax filing season is upon us and acting SARS Commissioner, Mark Kingon, announced that the season will open on 1 July 2018 for eFilers. SARS branches will assist taxpayers from 2 July 2018. The filing season will then end on 31 October.

 

To improve efficiency, the season will be shortened by three weeks, which will allow additional time for SARS, taxpayers, and the tax fraternity in general, to deal with all tax verifications before the December holiday break.

 

Manual and provisional taxpayers submission deadlines:

 

Type of Taxpayer Channel Deadline
Non-provisional and provisional Manual – post or at SARS branch drop boxes 21 September 2018
Non-provisional eFiling or electronic filing at SARS branch 31 October 2018
Provisional eFiling 31 January 2019

 

Who does this shortened filing season impact?

 

  • All individual non-provisional taxpayers
  • Provisional taxpayers who opt to file at a branch
  • Provisional taxpayers who use eFiling

 

A taxpayer is completely exempt from submitting a tax return if all the following criteria apply:

 

  • The taxpayer’s total employment income/salary for the year of assessment (March 2017-February 2018) before tax was no more than R350 000.
  • Employment income/salary for the year of assessment was received from one employer.
  • The taxpayer has no other form of income, e.g.:
  • car allowance or company car fringe benefit
  • business income
  • taxable interest
  • rental income
  • income from another job.
  • The taxpayer does not want to claim for any additional allowable tax related deductions or rebates (e.g. medical expenses, retirement annuity contributions, travel expenses, etc).

 

Should you have any questions related to the 2018 tax return season, please feel free to contact us.

 

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)

 

References:

 

Sars.gov.za. (2018). Tax Season. [online] Available at: http://www.sars.gov.za/TaxTypes/PIT/Tax-Season/Pages/default.aspx [Accessed 5 Jun. 2018].

 

Fin24. (2018). SARS cuts deadline for tax returns. [online] Available at: https://www.fin24.com/Money/Tax/sars-cuts-deadline-for-tax-returns-20180604 [Accessed 5 Jun. 2018].

 

Sars.gov.za. (2018). 4 June 2018 – Tax Season 2018. [online] Available at: http://www.sars.gov.za/Media/MediaReleases/Pages/4-June-2018—Tax-Season-2018.aspx [Accessed 5 Jun. 2018].

CGT exit charge

In terms of section 1 of the Income Tax Act[1] a natural person will be a “resident” for tax purposes if that person is ordinarily resident in the Republic of South Africa (“the Republic”). Persons who are not at any time during the relevant year of assessment ordinarily resident in the Republic, will also qualify as “residents” if they meet the so-called physical presence test. The definition of “resident” furthermore specifically excludes any person who is deemed to be exclusively resident of another country for purposes of the application of any double tax agreement entered into between South Africa and that other country.

 

When leaving the Republic to go work and live in another country, it may therefore result in such person ceasing to be a “resident”. In these circumstances, careful consideration should be given to the possible capital gains tax (“CGT”) consequences which may arise.

 

Section 9H of the Income Tax Act provides that where a person ceases to be a resident for tax purposes, the person must be treated as having disposed of his/her assets for an amount equal to the market value of such assets (the so-called “CGT exit charge”), in other words, a price which would be obtained between a willing buyer and a willing seller on an arm’s length basis. This disposal is deemed to take place the day immediately before the individual ceases to be a tax resident. The person is furthermore deemed to immediately reacquire such assets at a cost equal to this same market value, which expenditure must be treated as an amount of expenditure actually incurred for the purposes of paragraph 20(1)(a) of the Eighth Schedule. In other words, the market value of the assets at the time of the exit will be treated as the base cost of such assets in the future.

 

The CGT exit charge does not apply to immovable property situated in the Republic held by that person or any asset which after cessation of residence becomes attributable to a permanent establishment of that person in the Republic. Also excluded are certain qualifying equity shares received in terms of broad-based employee share plans,[2] as well as qualifying equity instruments or rights to acquire certain “marketable securities”.[3]

 

Persons leaving the Republic either permanently or for extended periods should therefore consider whether or not they cease to be residents in the Republic for tax purposes and whether the CGT exit charges may apply to them.

 

[1] No. 58 of 1962

[2] See section 8B

[3] See sections 8A and 8C respectively

 

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)

Additional medical expenses tax credit

Section 6B of the Income Tax Act[1] provides for an additional medical expenses tax credit (“AMTC”) which is calculated against qualifying “out of pocket” medical expenses. This tax credit reduces the amount of income tax a natural person (hereinafter referred to as the “taxpayer”) is liable to pay. The AMTC is granted in addition to the medical scheme fees tax credit (“MTC”) in respect of fees paid to a registered medical scheme.[2]

 

The AMTC can be claimed by a taxpayer in respect of medical expenses incurred by that individual towards the medical expenses of that taxpayer as well as any of his or her dependants as defined. A “dependant” includes the spouse or partner of the taxpayer, any dependent children of the taxpayer or spouse, any other members of the taxpayer’s immediate family in respect of whom the taxpayer is liable for family care and support as well as any other person who is recognised as a dependant of the taxpayer under the rules of the relevant medical scheme.

 

In order for the expenses to qualify for the AMTC, the expenses must not have been recoverable by the taxpayer from any person (e.g. from the taxpayer’s medical scheme or an insurer under a medical gap cover insurance plan). Qualifying medical expenses can furthermore only be claimed in the year of assessment during which they are actually paid.

 

The types of expenses that would qualify for the AMTC include amounts paid for services rendered and medicines supplied by any duly registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopaedist. Costs incurred for hospitalisation in a registered hospital or nursing home or home nursing by a registered nurse, midwife or nursing assistant will also qualify.

 

Any “over the counter” medicine will not qualify unless it is prescribed by any duly registered physician (as listed above) and acquired from a registered pharmacist. Medical expenses incurred and paid outside South Africa will qualify if it relates to services and medicines which are substantially similar to those listed above. Furthermore, the Commissioner may also prescribe qualifying expenses in respect of physical impairment or disability that could qualify for tax relief.

 

The AMTC amount is based on specific formulas and will depend on the taxpayer’s age (i.e. whether or not the taxpayer is 65 and older) and whether the taxpayer, his or her spouse or any of the taxpayer of his or her spouse’s children has a disability as defined.

 

[1] No. 58 of 1962

[2] Section 6A of the Income Tax 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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