Blog Archives

Knocking On The (Rental Property) Door

Knock knock!  Who’s there?  SARS! SARS who? Oh….SARS!!!!

SARS regularly conducts random “reviews” or “requests for additional information”, as they call it, but it really feels like an audit.

Do you own a second property? Do you rent it out?  SARS may have a question (or twenty) for you.

Recent questions relating to rental properties from SARS’s pen in a “request of additional information” letter include:

  1. Explain why the gross rental income is so low in comparison to the fixed property value.
  2. Supply the physical address of the property.
  3. Are the rentals charged market related, please explain in detail?
  4. Was the property let for the full tax year? If not provide reasons.
  5. State whether the property is a holiday home of flat.
  6. Is there any relationship between you and the present or previous tenants? Provide the names & identity numbers of the tenants.
  7. Submit the lease agreements.
  8. Reasons why you consider it to be carrying on a bona fide trade.
  9. What is the nature of the repairs expenses claim of R XXX XXX,00? Submit a detailed schedule reflecting each repair with the documentary proof.

In another request from SARS (“Operations Audit”) relating to investment properties, some of the questions were:

  1. Date of purchase and purchase price.
  2. Provide a copy of the deed of sale.
  3. State the method and source of finance, if by means of a mortgage bond or loan, indicate whether the full amount was utilized in the acquisition of the property.
  4. State your intention when acquiring the property and explain how this was realized.
  5. What prompted you to purchase the property and how did you become aware of its availability?
  6. If your intention has since changed please elaborate on the factors which influenced this change.
  7. Was a feasibility study conducted at the time you decided to make the property available for letting? If so, what was the result of the study? Provide copies of the relevant documents in support of your statements.
  8. What factors convinced you that a profit could be realized?
  9. Does the lease contract stipulate an escalation in rentals charged?
  10. Are the rentals charged market related and how do they compare with similar properties in the same neighbourhood?
  11. When did the property initially become available for letting?
  12. If the property was unlet for any period during tax year, please state the periods and the reasons as well as what steps were taken to find a suitable tenant.
  13. If any of the expenses claimed in the tax year relate to a period prior to letting the property submit particulars of such periods and the relevant expenses.
  14. If any of the rental expenses claimed in the tax return relate to a period prior to letting or to a period when it was not available for letting, submit particulars of such periods and the relevant expenses incurred.
  15. Was the bond or loan increased subsequent to your purchase of the property and how was such capital utilised?
  16. Proof of the interest paid on borrowed funds utilised to finance the property. Provide monthly bond statements for the full period, showing interest and capital redeemed separately.
  17. Please advise of your past, present and future plans concerning development, re-development, sub-division, sale in respect of this property.
  18. Have you entrusted the letting of the property to an agent?
  19. Are you the owner of the house you are now living in?
  20. Kindly submit full particulars of all property transactions (purchases and sales) concluded by or on behalf of yourself, you wife and minor children during the past 5 years.

Further questions carry on in the same vein.  Furthermore, SARS required proof of almost ALL the expenses before allowing it as a tax deductible expense.

Guessing why SARS asks these specific questions, the following comes to mind:

  • SARS wants the schedule of repairs to ensure that the expenses are truly repairs that are claimed in the production of taxable income, and not improvements which are non-deductible capital expenditure.
  • If the property was not available for letting throughout the entire tax year, the expenses for the months the property was not rented out may not be deductible.
  • As far as the interest on the bond is concerned, SARS wants to ensure that taxpayers claim only the interest incurred in respect of the rental property and related income. They also want to make sure that the bond registered over the rental property is not used to finance other assets or expenses, for example to purchase a motor vehicle.
  • SARS wants to establish if the taxpayer a carrying on a bona fade trade, especially if there is a rental loss. Some taxpayers rent the property to a friend of family member, or for a monthly rental that is not market related in order to create a rental loss for tax purposes.  When the taxpayer’s income tax return is submitted, this loss is set off against other taxable income.  This reduce the taxpayer’s total liability for tax. SARS may in certain circumstances disallow such a set-off.

If you have a rental or investment property, you can expect SARS to knock at your door sooner or later.  Don’t let them take you by surprise.  Be sure to keep the necessary supporting documentation and information, bearing in mind the kind of questions SARS loves to ask.

Petro van Deventer

Senior Manager

 

 

 

 

 

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Do You Receive a Travel Allowance?

Some employees receive a travel allowance where they are allowed to claim the actual kilometres travelled on behalf of the employer.  This is a reimbursive travel allowance.

With a “normal” travel allowance, 80% of the amount is included in the employee’s monthly income for tax purposes.  In other words, 20% of the allowance is received (temporarily) tax free until the income tax return is submitted and the taxpayer is able to meet all the requirements. In a previous newsletter I wrote about the taxpayer’s burden of proof, the duty to keep a logbook and exactly what information SARS requires to be reflected in the logbook.

The reimbursive travel allowance, on the other hand, is completely tax free if it meets the requirements regarding the rate of reimbursement. No one knows when SARS will tighten the belt on the requirements and taxation of the reimbursive travel allowance.

There is good news if you are not good with keeping a logbook and you only receive a reimbursive allowance:

Previously, the reimbursive allowance was capped at 12 000 kilometres per tax year, and the tax-free amount was R3,55 per kilometre. As from the 2019 tax year, the kilometres are no longer capped, and the rate has increased to R3,61.

So, if your reimbursive travel allowance pays you R3,61 per kilometre or less, the full amount of your allowance is tax free!  If your rate per kilometre is higher (let’s say you receive R3,70) the balance of R0,09 is taxable.  In this case, you only need the logbook for your employer.

A caveat: When it comes to the annual tax return, if you receive both types of travel allowances, BOTH amounts are taxed.  This often result in dire consequences for the taxpayer who receives a nasty tax bill surprise.

Employers must make sure that they use the correct IRP5 code for these allowances.

Petro van Deventer

Senior Manager

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Our team of superwomen

 

Anchen Rabie

Annelize Duvenage

Chanelle Cloete

Chanelle Cloete

Christine Hartley

Christine Hartley

Chrissie Demas

Chrissie Demas

Daleen Louw

Daleen Louw

Henriette Bester

Petro van Deventer

Elmolene Goliath

Jo-marie Relihan

Hes-maré van der Vyver

Hilmari Mouton

Hester Bestbier

Lewiesa Markus

Kayla de Beer

Jayd Wasmuth

Lizè-Mariè Coetzee

Lizé van Greunen

Minette Burger

Marietjie Batt

Sorita Loubser

Susan van der Westhuizen

Susan Nieuwoudt

Sharonay Coetzee

Sunelle Daniels

 

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UKnow Editorial – June 2018

The importance of good quality bookkeeping is something that cannot be emphasised enough. If the financial records of an entity is not written up accurately, completely and timeously, every decision and action based on that information will be at risk of being wrong: strategic decisions regarding the development and future of the entity, information reported to owners and managers, calculation of prices and margins, etc. Another consequence of this is that audits end up costing a lot more due to errors, and this may even result in an adverse audit opinion being issued on the financial records of the entity.

It is worth spending the money to have this done properly. Many fall into the trap of skimping on this function only to end up spending even more money to remedy the consequences. Not only does the person attending to bookkeeping need to have proper accounting knowledge and experience and software skills, it is vitally important to maintain updated knowledge of tax and other legislation.

We invest an incredible amount in our people and systems to ensure quality and staying up to date with the latest developments in this field. Not only is this our livelihood, but also our passion! We are very excited about our new strategic development in this field.

If you want to respond to or comment on any of our news items or other relevant information, please contact us at news@unikone.co.za or 022 – 482 1169, or join the conversation on our social media platforms on Linkedin, Instagram and Facebook.

Warm regards until next month.

Oddette Boshoff

 

P.(ersonal)S.(tory) This is a photo of me and my dad. Not only is he the cleverest man I know, but also the wisest. He is my mentor and role model, and I count myself lucky to have the opportunity to learn from him every day. I am proud to be Chris de Jager’s daughter.

To all the dads – happy Father’s Day!

 

 

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Recon to the Next Level (IT14SD)

What do I mean with “recon to the next level”? Maybe you have heard about the SARS form called the IT14SD. This form is only applicable to companies and not yet to individuals or trusts.

SARS issued a guide on “How to complete the IT14SD” and it can be download at

http://www.sars.gov.za/AllDocs/OpsDocs/Guides/IT-GEN-03-G01%20-%20How%20to%20complete%20the%20IT14SD%20Supplementary%20Declaration%20Form%20-%20External%20Guide.pdf

This guide is a hefty 48 pages, but I will keep it short and try to keep it sweet and summarise the form for you.

If a company gets selected for verification by SARS after submitting the annual income tax return (ITR14), SARS might issue a letter (for whatever reason) called the “Verification of Income Tax Return” to the company. This letter states that the company can either submit a revised IT14 income tax return, or alternatively submit the Income Tax Supplementary Declaration (IT14SD) by a specified due date.  If the company decides to submit the IT14SD, it must reconcile the Income Tax (IT), Value-Added Tax (VAT), Pay-As-You-Earn (PAYE) and Customs Declarations for the applicable tax year.

The form distinguishes between different kinds of companies such as a dormant company, body corporate, a share block company, a micro business, a small business and a medium to large business, as per the classifications in the SARS guide.

To complete this form, the company will need its annual financial statements, the ITR14 income tax return, the VAT201 returns, EMP201 returns and any Customs Declarations for the applicable tax year.

The methodology of the form is to compare amounts declared on the ITR14 income tax return with the total of the amounts declared on the respective VAT201, EMP201 and Customs Declarations during the applicable tax year. If there are any discrepancies in excess of R100 between these amounts, the company needs to provide a reconciliation with reasons.

In the event that there are unreconciled differences, SARS may proceed to levy penalties and interest (at the very least) on any amounts that they deem under-declared or over-claimed. It might even lead to any taxpayer’s worst nightmare – a SARS audit.

EMP201 Pay-As-You-Earn Reconciliation

Let’s start with the reconciliation most people are familiar with – the PAYE reconciliation. The EMP501 employer reconciliation is completed and submitted every six months.  This is the process where you reconcile the Pay-As-You-Earn declared and paid on the EMP201 returns for that period, and generate the IRP5 tax certificates for your employees.

The IT14SD takes this reconciliation a step further. Here the company has to reconcile the payroll costs declared on the income tax returns as tax deduction with the payroll costs declared on the EMP201 returns for the tax year.

(Click to enlarge image)

Income Tax Reconciliation

The next reconciliation is probably the easiest of the four reconciliations on the IT14SD, namely Income Tax.

The reconciliation is between the net profit or loss and the calculated profit or loss for the year, and represents the difference between the accounting profit or loss and the taxable profit or tax loss.

(Click to enlarge image)

VAT Reconciliation

Next up is the VAT reconciliation.

Do you reconcile your output VAT with your sales and your input VAT with you purchases and expenses?  Well, you need to as this is the reconciliation required on the IT14SD. A good time to do this will be after you last VAT return of the financial year, but first prize belongs to the person that does this after each VAT201 submission.

The IT14SD requires a reconciliation between the income declared on the ITR14 income tax return and the amount of supplies declared on the applicable VAT201 returns, as well as a reconciliation between purchases and applicable expenses claimed on the ITR14 income tax return and the amount declared under input VAT.

(Click to enlarge image)

(Click to enlarge image)

Customs Declarations Reconciliation

Customs declarations also need to be reconciled between the information declared on the SAD500, VAT201 and other relevant documentation, and the amounts claimed and declared in the ITR14 income tax return for imports and exports.

(Click to enlarge image)

The IT14SD proves yet another reason why it is important to not be penny-wise-pound-foolish when it comes to proper bookkeeping and tax compliance. It can save a lot of heartache (and money) if a company invests in proper, accurate and timely bookkeeping and tax compliance services that will also deliver many other value adding benefits.

Petro van Deventer

Senior Manager

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It is time (For procedurally fair and reasonable enforcement)

“In space-time, events that occur at the same time for one observer could occur at different times for another.”[1]  In the parallel universe of tax administration, everything is relative.  Time is not an absolute. Here, space-time means that when SARS requires a taxpayer to submit documents, 21 days are 21 days.  However, when SARS is required to consider a taxpayer request, 21 days mean one month (or more, depending on whether there is distortion by a heavy object; say a refund due to the taxpayer at the end of the SARS financial year.  A taxpayer has 30 business days to submit an objection to an assessment, while SARS has 60 business days to make a decision on that objection.

There is some debate over whether the laws of physics are universal.[2]  In our little tax galaxy, we can at least rely on the strong gravitational pull of the Constitution and the Promotion of Administrative Justice Act.  We can find solace in the fact that SARS is a creature of statute and, as such, may exercise only the powers conferred on it by the relevant legislation.  For SARS, the Tax Administration Act (TAA), as interpreted and applied by our courts, is as immutable as Newton’s three laws of motion.

First Law – SARS must follow prescribed audit procedure

Section 40 of the TAA empowers SARS to select a person for inspection, verification or audit “on the basis of any consideration relevant for the proper administration of a tax Act, including on a random or a risk assessment basis”.

The procedural requirements, as contemplated in section 42, may be paraphrased as follows:

  • In accordance with Public Notice 788, the SARS official responsible for or involved in an audit must provide the taxpayer with a report indicating the stage of completion of the audit every 90 days.
  • If the audit identified potential adjustments of a material nature, SARS must within 21 business days provide the taxpayer with a document containing the outcome of the audit, including the grounds for the proposed assessment.
  • The taxpayer must then be allowed 21 business days to respond in writing to the facts and conclusions set out in the document.

The SA Tax Court in IT13726 at [30]:

“The respondent’s non-compliance with sections 40 and 42 of the TAA clearly offends both the Constitution and the principle of legality. Accordingly, the respondent’s decision to conduct an additional assessment without notice, must be set aside as it does not comply with the peremptory prescripts of the applicable legislation and it is also constitutionally unsound. In the circumstances, the assessment is found to be invalid.” [3]

Second Law – The decision to issue an additional assessment must rational, not random

Section 92 is a mandatory provision that requires the issuing of an additional assessment if SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus.

Holding the principles of legality and reasonableness in reverence, one would assume that a SARS official will go to adequate lengths to consider all relevant information before a declaring “I am satisfied that an additional assessment must be issued on these grounds!”.

In the real world the Supreme Court of Appeal brought SARS to boot in no uncertain terms in the matter of SARS v Pretoria East Motors (Pty) Ltd:

The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do.[4]

Third Law – SARS must issue a notice of assessment

Section 96 requires SARS to issue to the taxpayer a notice of the assessment.  In the case of an assessment that is not fully based on a return submitted by the taxpayer, SARS must also include in the notice a statement of the grounds for the assessment.

This requirement is so logical and self-explanatory, it almost does not merit the status of an immutable law.  However, the Eastern Cape High Court discovered that in the case of Mr. Nondabula’s, SARS did not hesitate to institute drastic collection procedures although no assessment had been issued:

“Once the stage provided for in section 92 is reached the first respondent is required to comply with the provisions of section 96 by issuing a notice of assessment with all the information required and provided for in section 96.  I may mention that the whole of section 96 is couched in peremptory terms, meaning that the first respondent has no discretion when it comes to section 96.” [21]

“Having failed to comply with section 96 the first respondent jumped to the provisions of section 179(1) and issued the impugned Third Party Notice and thus effectively closing down applicant’s business.  This was not only unlawful but a complete disregard of the doctrine of legality which is a requirement of the rule of law in a constitutional democracy.” [22][5]

If SARS could adhere to these rules in the exercise of its powers, as it is obliged to do, the taxpayer at the receiving end will at least be well informed and in a position to exercise the right to object to the assessment.

But even if SARS were to toe the line as far as audits go, there is one tiny problem, already identified in a previous article.[6]

The TAA bestows upon SARS the powers of inspection, verification and audit.  An inspection may only be performed for the purposes listed in section 45, for instance to determine the identity of a person occupying certain premises, or to determine whether a person is registered for tax.  However, audits and verifications are the actions that lead to additional assessments and tax liabilities.  Section 42 determines the procedure to be followed during an audit.  No such rules apply to verifications.  A taxpayer is usually informed of that a return is the subject of a verification when SARS issues a notice on eFiling requesting supporting documents.  Should SARS be satisfied, upon receipt of the documents, that the current assessment does not reflect the correct application of the relevant tax Act, an additional assessment is issued.  However, as SARS did not conduct an “audit”, the taxpayer is not informed of the outcome of the verification or of any proposed adjustments.  The additional assessment is issued without any prior notification and if the taxpayer is not in agreement, the only option is to object to the assessment.  Looking back at space-time, this essentially means that a matter that could potentially have been resolved within 42 business days may now take up to twice as long (30 business days to submit objection and 60 business days for SARS to respond) to finalise.

In an annexure to the 2018 Budget Review, our previous Minister of Finance proposed that “a taxpayer be notified at the start of an audit as part of efforts to keep all parties informed.”[7]  Why not use this opportunity to bring the powers of “verification” into the same orbit as “audit”?  Then the rules of reasonable and procedurally fair administrative action can really have universal application in the tax universe.

Annalize Duvenage

Specialist Tax Consultant

 

 

[1] https://www.space.com/17661-theory-general-relativity.html

[2] http://www.pbs.org/wgbh/nova/blogs/physics/2015/10/are-the-laws-of-physics-really-universal/

[3] TCIT13726 Port Elizabeth, 13 February 2018

[4] SARS v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91

[5] VZ Nondabula v The Commissioner: SARS & Another, High Court of South Africa, Eastern Cape Local Division, Case No. 4062/2016

[6] SARS’ powers of audit and verification – Much of a muchness (UKnow October 2015)

[7] 2018 Budget Review, Annexure C – Additional tax policy and administrative adjustments

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UKnow Editorial – May 2018

Lately it feels like two sentences keep on repeating itself in my conversations with clients and business partners:

  • It is nearly impossible for the ordinary man to take care of his or her own tax affairs; and
  • Compliance and back-office administration have become so onerous that business owners actually don’t get to focus their time on their core business.

Tax has become such a complicated field and the unfortunate consequence of this is the high cost of tax compliance and specialist advice to the taxpayer. Reading our article on Section 7C in this newsletter will give you some idea of the technicalities of tax, the changes in legislation and administrative procedure that we constantly have to update our knowledge on. Too often we have to help out taxpayers who chose to be penny wise pound foolish, which ended up costing them dearly.

Further to this, we all suffer from the burden of the multitude of compliance requirements and back-office administration in order to run a business in South Africa. It is not doing the growth of our economy any favours, but until things change for the better, the only option left to business owners is to manage this aspect in the most effective way. Delegating these responsibilities to a specialist service provider can end up adding more value to your business, and is worth considering.

With this in mind, we have renewed our focus on using IT and cloud technology to its full advantage in order to offer clients solutions that add value to their business. We strive for constant innovation, not only in terms of our services and resource offering, but also in business strategizing with clients for maximum benefits.

Our new P.S. personal story at the end of our newsletters aims to give a personal touch and behind-the-scenes background to our business and the people in it. We hope you enjoy reading it while getting to know the personality of Unik Professional Services. If you want to respond to or comment on any of our news items or other relevant information, please contact us at news@unikone.co.za or 022 – 482 1169, or join the conversation on our social media platforms on Linkedin, Instagram and Facebook.

Warm regards until next month.

Oddette Boshoff

P.(ersonal)S.(tory) I am wearing my mother’s pearls in this newsletter photo. She is one of the strongest, most generous and caring people I know. She has dedicated her life to her children and family, and still supports me on a daily basis so that I can be all I want to be. For me, these pearls are a symbol of her beauty and strength.

I dedicate Bette Midler’s song “Wind Beneath My Wings” to my beautiful, amazing, strong mother Andrea.

To all the mothers out there – happy Mother’s Day!

 

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Section 7C: The phantom menace – or not?

Much has been written about Treasury’s latest attempt to curb the use of trusts as tax avoidance (not evasion!) vehicles, but it seems the jury is not quite out. The main issue that remains undecided is whether interest accumulating on unpaid distributions falls within the ambit of the provision.

When faced with an interpretation conundrum, it is always good to heed the advice of Julie Andrews in The Sound of Music: “Let’s start at the beginning; a very good place to start.”

What section 7C aims to target is the avoidance of wealth taxes (estate duty and donations tax) where interest free loans are made to a trust. The donor’s asset (the capital amount made available to the trust) remains stagnant, while the capital asset acquired by the trust grows in value. Had the donor simply transferred the asset to the trust, he would have been liable for donations tax. In addition, the donor would often waive or reduce the loan capital using his annual R100 000 donations tax exemption. Doing so, he reduces the value of his assets for estate duty purposes. The absence of interest results in an erosion of the income tax base.

The anti-avoidance provision first saw the light in the 2016 Draft Taxation Laws Amendment Bill. In its original form, it was downright scary:

  • The deemed interest in the loan, i.e. the difference between interest calculated at the official rate (Seventh Schedule fringe benefit rate) and the interest actually charged, would be subject to income tax in the hands of the lender.
  • The deemed interest would not qualify for the annual interest exemption, thus the full amount of “interest” would be treated as taxable income.
  • Any waiver or reduction of the loan amount would be subject to donations tax, with the lender being denied the annual donations tax exemption.
  • The lender would not be allowed to claim any deduction, allowance or loss on the waiver or cancellation of the loan.
  • Finally, the amount of income tax payable on the loan would have to be recovered from the trust within three years. If not, it would be treated as a further donation to the trust.

Needless to say, these proposals were not very well received, the main criticism being that Revenue was trying to cover a shortfall in donations tax and estate duty by imposing income tax. Fortunately, in this case, the cries did not fall on deaf ears and the legislators went back to the drawing board.

The following extract from the Final Response Document issued by SARS and National Treasury shows that they made a complete U-turn:
The interest forgone in respect of interest-free or low interest loans will no longer be treated as income but will be treated as an on-going and annual donation made by the lender on the last day of the year of assessment of the lender.

The revised section 7C came into effect on 1 March 2017 and applies to any amount owed by a trust in respect of a loan, advance or credit provided to the trust before, on or after that date. It applies regardless of whether the loan was made by a natural person who is a connected person by that trust, a natural person who is a connected person to that person, or a company in relation to which that person is a connected person. In other words, there is no getting away.

The difference between the “official rate of interest” and the interest charged on the loan constitutes a donation. Initially the official interest rate was linked to the fringe benefit interest rate determined in the Seventh Schedule to the Income Tax Act, currently 7,5% per annum. However, Treasury perhaps felt that they had surrendered too much with the watered-down edition of section 7C, and for years of assessment commencing on or after 1 January 2018 the “official rate of interest” is now linked to repo rate, with 100 basis points added for good measure.

On the upside, the annual donations tax exemption is back in play to give some relief.

Time to tackle the elephant in the room. From the onset one of the main causes of concern was the matter of beneficiaries’ loan accounts, or “unpaid benefits”. These consist of amounts distributed to beneficiaries but not paid to them and are a common feature of many trusts. Once again, the deliberations leading to the final version of the provision are of value:

Comment: The exclusion of vesting trusts from the application of the anti-avoidance measure is welcomed. However, it does not go far enough and should also exclude discretionary trusts where the income of the trust vest in the beneficiary but are not actually paid to the beneficiary.Response: Noted. This issue stems from the interpretation that vested but accrued distribution are regarded as a loan, advance or credit made by the beneficiary to the trust. This is an interpretation issue that has not been tested and consideration will be made on the provision’s practical application in such scenarios.

The Explanatory Memorandum on the Taxation Laws Amendment Bill 17B of 2016 goes a step further:

An amount vested by a trust in a trust beneficiary that is not distributed to that beneficiary will, however, qualify as a loan or credit provided by that beneficiary to that trust if that non-distribution results from an election exercised by that beneficiary or a request by that beneficiary that the amount not be distributed or paid over, e.g. if the beneficiary has reached the age at which a vested amount must be paid over or distributed to him or her and the trustee accedes to a request by that beneficiary that this not be done; or the beneficiary enters into an agreement with the trustee in terms of which the amount may be retained in the trust.

So, it seems that as long as the beneficiary does not explicitly agree to the funds being retained in the trust, the unpaid benefit should not be treated as a loan or credit advanced to the trust. Somehow, this is not comforting enough to put beneficiaries with unpaid benefits at ease. Especially if the rather nasty prototype of the original section 7C is any indication of how seriously SARS wishes to curb the use of trusts to avoid (any) tax. And remember, agreements come in various shapes and forms. It is not inconceivable that, in the scenario sketched in the Memorandum, SARS may view a failure by the beneficiary to request payment of distributed amounts as a tacit or implied agreement that causes the whole arrangement to fall foul of section 7C.

In trying to get to the bottom of this, there have been two guiding lights. The first is the stated purpose of section 7C. The Explanatory Memorandum is quite straightforward; the aim is to “limit taxpayers’ ability to transfer wealth to a trust without being subject to tax”. A beneficiary who does not receive payment in respect of distributions is surely not transferring his wealth to the trust. Or is he?

The second guiding light comes from SAIT’s Piet Nel in the course of a recent tax update webinar, and specifically his focus on a verb. Section 7C applies to a loan, credit or advance provided by a person to the trust. He used the Oxford Living Dictionary to define “provide” as “make available for use”. To provide requires more than mere acquiescence. If the vested funds merely stay in the trust, held in trust for the benefit of the beneficiary, there should be no problem. However, what if the trustees decide to use those funds to acquire a new asset or enhance the value of an existing asset? Then we are back to exactly the kind of mischief the legislation aims to prevent.

And not wanting to be a prophet of doom, there is another tiny word that causes ominous ripples in the back of the mind. Time to call a spade a spade. Many trusts are used as vehicles to deflect income tax and capital gains tax to beneficiaries who are taxed at a lower rate. This is perfectly legal. Section 25B provides that to the extent to which an amount has been derived for the immediate or future benefit of any ascertained beneficiary who has a vested right to that amount during that year, that amount will be deemed to have accrued to that beneficiary. Now, in the context of income tax, “accrued” has been held to mean “unconditionally entitled”, even if payment is to be effected somewhere in the future.

What niggles is this: In order to have a favourable tax treatment of trust receipts and accruals, we need to have a beneficiary with a vested right to the income or capital gain. On the other hand, the beneficiary’s right to his share of that income or capital gain needs to be watered down and be made dependent on an additional decision to actually make the payment, lest it be regarded as the tacit provision of a loan, advance or credit.

Once again, back to the Explanatory Memorandum:

An amount that is vested irrevocably by a trustee in a trust beneficiary and that is used or administered for the benefit of that beneficiary without distributing or paying it to that beneficiary will not qualify as a loan or credit provided by that beneficiary to that trust if

  • the vested amount may in terms of the trust deed governing that trust not be distributed to that beneficiary, e.g. before that beneficiary reaches a specific age; or
  • that trustee has the sole discretion in terms of that trust deed regarding the timing of and the extent of any distribution to that beneficiary of such vested amount.

It is significant that the Memorandum makes reference to that beneficiary and such vested amount. Can it be inferred that that amount may then not be applied for the benefit of any other beneficiary? Prof. Walter Geach’s comments in a seminar hosted by CM2 in August 2017 certainly seem to point in that direction:

“In my opinion, if the amount that has conditionally vested in a particular beneficiary is pooled with all other trust funds and any income and/or capital gain can arise therefrom for the benefit of other beneficiaries, this would amount to a loan, advance or credit as envisaged by section 7C.”

What is required to steer clear of section 7C’s tentacles is essentially a two-tier exercise of discretion by the trustees. First, to vest an amount in a beneficiary and then, later, to pay that amount to the beneficiary. Prof. Geach explains as follows:

“Because a beneficiary cannot claim payment (i.e. cannot enjoy the amount/asset) until the happening of that event, there is no loan, advance or credit made by that beneficiary to the trust. Therefore section 7C cannot apply. This type of vesting is known as ‘conditional vesting’”.

With conditional vesting we can play it safe for purposes of section 7C. The question is: Are we then still toeing the line for purposes of section 25B?

Annalize Duvenage
Specialist Tax Consultant

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Evidence is key – SARS’ Questions (Part 2)

Firstly, a big thank you to every person out there who read the first edition of Evidence is Key in our previous issue of UKnow. It keeps me motivated to keep on writing and I hope to help someone somewhere.

This follow-up article deals with information requested from an individual taxpayer, while my next article will focus on trusts, BUT remember that SARS can ask these questions for any type of taxpayer.

1. Vehicle and Travel Costs
Much has been said about motor vehicles and travel claims, and I hope I am not repeating myself. If so, please consider this a reminder. Below is a typical calculation for motor vehicle expenses incurred by an individual taxpayer.

(Click to enlarge image)

If you look at the above calculation, what supporting documents would be required of the individual taxpayer?

The cost price of the vehicle: SARS wants a signed purchase agreement, as well as an invoice – not a quote. If you only have an unsigned copy of the purchase agreement, you will need to provide 3 months statements showing repayments, or a letter from the financing institution confirming the amounts on the electronic agreement. So to make things easy, please make sure you have a signed copy of the agreement.

I quote the following SARS question received:

Supporting Documentation Required: Kindly provide the following invoices / calculation and supporting documents is requested: Donations and depreciation as well as all documentation regarding business expenses that is taken into account and calculation regarding travelling.

If we look at the above calculation, the taxpayer will need to provide the following:

Bank Charges: This will be indicated on the monthly statements of the financial institution.

Fuel: Please keep you receipts! Some of the receipts do fade over time, so make sure you can still read it. Even better, scan the receipts and keep them as electronic records while they are still new. (Nowadays some fantastic software is available to scan all documentation and keep it for record purposes or serve as the basis for cloud accounting and bookkeeping. Please contact us for more information on this.)

Depreciation: The purchase amount (cost price) will be confirmed on the signed purchase agreement and invoice. If you cannot claim the VAT on the purchase of the vehicle, the VAT forms part of the cost price.

Repairs and Licenses: These will be amounts paid for example the services of the vehicle, replacement of tyres and the vehicle license fee. All original invoices must be kept.

Finance charges: SARS is not always satisfied with an amortisation schedule – they want either a letter from the financial institution confirming the amount of interest incurred, or a tax certificate confirming the interest amount. Make sure you receive this every year, as some financial institutions close the account when the loan amount is repaid and cannot access the information at a later stage.

Insurance: An insurance contract can be a lengthy document, so we usually send SARS only the page of the insurance contract that reflects the amount for the vehicle we claimed. However, SARS may request the entire original contact for verification.

2. Other Regular Deductions

Donations: Please note that only donations for which you have received a valid original section 18A certificate can be claimed as a tax deduction.

Medical Expenses: There is a guide on the SARS website on how to determine the amount of medical expenses that can be claimed as a tax deduction, what to include in this amount and what not. This topic can be a newsletter on its own! The short version is: You will need all invoices and proof of payment of all out-of-pocket expenses not covered by your medical aid fund. Note non-prescription medication is not tax deductible.

As per my first article….remember that the taxpayer bears the onus of proving that an expense was incurred in the production of income. The golden rule is: If you want to claim it, you need to prove it. So make sure that your supporting documents are complete and correct.

Petro van Deventer
Senior Manager

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UKnow Editorial – March 2018

It feels a bit like a new era…. A new president, a new (ish) Minister of Finance, a new VAT rate and a new tax year!

This is the time of year that we accountants breathe for a moment and start our new year with fresh energy. We have some exciting developments lined up, one of which is our new virtual accounting solution. This will especially benefit clients who have a need for more real-time financial management information, giving a new depth to our service offering. Please contact us should you want to discuss how this can work for you.

We are also launching our new LinkedIn page this month (search Unik Professional Services) where we will post informative, technical and interesting information regarding our company, our services and other relevant professional topics. In addition to this, we decided to launch a profile on Instagram (search oddette_unik) where we will be sharing a bit of our fun side and behind-the-scenes moments at Unik Professional Services. You can also access our online presence via our website (www.unikone.co.za) and our Facebook page (search Unik Professional Services).

We hope that you find our newsletters interesting and informative. As always, if you want to respond to or comment on any of our news items or other relevant information, please contact us at news@unikone.co.za or 022 – 482 1169, or join the conversation on our social media platforms on Linkedin, Instagram and Facebook.

Warm regards until next month.

Oddette Boshoff

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