Taxpayers – Rust Gold

12 Feb

Since the introduction of the Tax Administration Act in 2011, which aimed to consolidate most of the administrative matters in tax acts, taxpayers have become ever more aware of their rights in dealing with the South African Revenue Service (SARS). There has also been a significant increase in the number of cases in the Tax Court (as well as in our High Courts) that relate not to substantive tax matters, but rather to the exercise of taxpayers’ rights. We briefly highlight below some of the rights that taxpayers have in terms of the Tax Administration Act, and which they may wish to enforce at some stage.

You are entitled to receive reasons for any assessment that SARS raises and any taxes it imposes. Therefore, SARS is not allowed to simply raise assessments without giving you (when called on in terms of the dispute resolution rules) a full understanding of their justification and their interpretation of the law, which underlies the specific matter.
SARS is not allowed to appoint a third party to deduct money from your account (for example, a bank) without providing you with the proper notice at least ten days in advance, as well as providing you with remedies to address the matter.
SARS is not entitled to divulge your information (except as required by law) to any third parties.
Provided that your returns were free of material deficiencies, SARS must pay interest on delayed VAT refunds. This is a matter that is often overlooked in practice since taxpayers are all too happy to receive the actual VAT amount – do not forget about your interest!
SARS must provide you with a tax clearance certificate within 21 business days after the submission of an application. More and more institutions require the issuance of tax clearance certificates for general business purposes.

Although taxpayers have many rights afforded to them, one often finds a practical challenge in exercising those rights. The legislation provides for relief in certain circumstances but does not prescribe a form and manner in which taxpayers must utilise that relief (for example, an application for a reduced assessment where there has been an undisputed factual error). Although the law provides for relief, the Act does not prescribe how that relief must be exercised.

This is one of the clear shortcomings within our system of tax administration and one hopes that in due course, National Treasury and the Minister of Finance will identify these fallibilities as a systemic issue within the administration of our tax system, in order to approach the Tax Ombud to make recommendations on how taxpayers can exercise their rights afforded to them daily.

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)

27 Aug

The importance of requesting reasons for an assessment by SARS

Kirsten Van Tonder

Tax Assessment, South African Revenue Service (SARS), Taxpayers

Generally, disputes with the South African Revenue Service (SARS) are the result of an assessment which has been issued by SARS to a taxpayer. An assessment is the determination of an amount of a tax liability or refund, by way of self-assessment by the taxpayer (such as in the case of VAT) or assessment by SARS (such as in the case of income tax). If taxpayers are not satisfied with an assessment, the Tax Administration Act provides for dispute resolution mechanisms, in terms of which taxpayers can object to the assessment, and subsequently appeal, if objections are not maintained.

Although objection to an assessment is the correct procedure to dispute a tax amount, taxpayers often lodge objections against assessments, without knowing exactly what they are objecting to. This could seriously jeopardise a taxpayer’s case, since taxpayers may not appeal on a ground that constitutes a new objection against a disputed assessment. If a valid ground of objection is therefore not addressed in the objection itself, taxpayers may lose the opportunity to object to a specific ground.

For example: when an assessment is raised by SARS because “expenses are not allowed as a deduction” it could be as a result of, among others, the following:

SARS considers the taxpayer not to carry on a trade;
SARS considers the expense not to have been incurred in the production of income;
SARS considers the expense not to have been actually incurred; or
SARS considers the expense to be of a capital nature.

Without having reasons for the assessment, the taxpayer cannot properly formulate its grounds of objection and may, therefore, find itself in a position where the real grounds for the assessment, may not be challenged on appeal.

In terms of Rule 6 of the dispute resolution rules, a taxpayer who is aggrieved by an assessment may request that SARS provide reasons for an assessment. The reasons provided by SARS must enable the taxpayer to formulate its grounds of objection. The reasons for any administrative action must include the reasons for the conclusion reached, and it is not enough to merely state the statutory grounds on which the decision is based or repeat the wording of the legislation. The decision-maker should furthermore set out his understanding of the relevant law.

A request for reasons for an assessment must be made within 30 business days from the date of assessment. Taxpayers (and their practitioners) are therefore encouraged to consider assessments as soon as they are issued by SARS. If there is any doubt as to why the assessment has been issued, a formal request for reasons should be issued without delay.

This article is a general information sheet and should not be used or relied upon as 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)

15 Jul

Capital gain: Calculating your foreign currency

Kirsten Van Tonder

Tax Income Tax Act, Tax, Taxpayers

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.

13 Jun

Tax deductions against salary earnings

Kirsten Van Tonder

Tax Home office, Income Tax Act, Taxpayers

Our clients who earn only a salary will know that very few tax deductions are available against salary income for income tax purposes and whereby they may reduce the taxable income derived ultimately from such remunerations. Section 23(m) of the Income Tax Act^[1] provides that none of the deductions ordinarily available to taxpayers in terms of section 11 are allowed against salary income, other than for a limited few. We set out these deductions which are available below:

Contributions made by taxpayers to a pension fund, provident fund or retirement annuity fund may be deducted against salary income in accordance with the provisions of section 11F;
To the extent that an individual incurs legal fees, wear and tear-related costs or bad or doubtful debts as part of his/her employment, such expenditure will be deductible.[2] (Although it is possible that a wear and tear-related allowance may be available against a laptop or textbooks acquired as example, it is in our experience practically highly unlikely for legal fees, bad debts and doubtful debts to arise from an employment trade);
Where amounts received, either as a restraint of trade payment or as ordinary remuneration for employment services rendered, are refunded by the employee, those amounts refunded may be legitimately claimed as an income tax deduction;[3] and
Expenses incurred towards rent of, cost of repairs[4] of or expenses in connection with any dwelling, house or domestic premises, those costs may be claimed as deductions, to the extent that it is incurred as part of the individual’s employment and on condition that it does not offend the provisions of section 23(b) which deal with “home office” expenses.

Other than for the above, very few other deductions are available for individual taxpayers earning only a salary. Outside the ambit of section 11, the only other deductions which we typically encounter are medical aid contributions incurred, amounts claimed against travel allowances received or donations made to qualifying public benefit organisations. Of late, investments in section 12J “venture capital companies” may also be claimed as income tax deductions against salary income.

The above limitations only apply to salaried income received from employment though. Where an individual is also engaged in another trade (such as the renting out of an apartment), the above limitations do not apply to that separate trade. In such case, section 23(m) will not make the deductions in section 11 unavailable, although this is only as relates to the separate (rental) trade.

[1] No. 58 of 1962.

[2] Sections 11(a), (c), (i) and (j) respectively.

[3] Sections 11(nA) and (nB) respectively.

[4] In terms of section 11(d).