Uncategorized

UKnow Editorial – Aug 2019

Two of the reasons why I am so proud of our firm is firstly our incredible team, and secondly our collective strive to achieve quality, deliver service excellence and focus on innovation. Our world, our profession and our business environment is constantly changing, and because of this we work hard to stay ahead of new developments and embrace challenges as new opportunities.

Against this background, we are very proud to be launching an exciting new chapter in our Unik journey soon, so watch our usual spaces for these announcements! We are looking forward to the enhanced service delivery and benefits that this will have for our clients.

As we focus on introducing more of our team members this year, please read about our amazing Daleen Louw who has been part of our team for over 35 years.

We also welcome Chrisanne Dicks, who recently joined our team.

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.

Read more →

Debt Relief Part II – Application Of Section 19 And Paragraph 12A

The previous article on debt relief focused on the legislation: the general application of the provisions and recent amendments.  To recap:  the provisions apply when a taxpayer obtains a “debt benefit” in consequence of a concession or compromise in respect of a debt.  Cancellation, waiver, redemption and debt to equity conversions all are actions that may give rise to a debt benefit.  See our previous article Debt Relief Part I

The tax treatment of the debt benefit depends on how the initial debt was applied.

Trading stock – Section 19(3), (4) and (5)

The tax treatment of a debt that was used to acquire trading stock will depend on whether the stock is still “held and not disposed of”.  A taxpayer is entitled to a deduction in terms of section 11(a) in respect of the cost of trading stock acquired.  So much of the stock that is still held at the end of the tax year is included in his taxable income as closing stock.  This amount is carried forward to the subsequent tax year as opening stock and taken into account as a deduction.  (Section 22(1) and (2))

If the trading stock is still held and not disposed of at the time the debt benefit arises, section 19(3) provides that the amount taken into account in terms of section 11(a) or 22(1) or (2) must be reduced by the amount of the debt benefit.  In certain circumstances, the amount of the debt reduction may exceed the amount taken into account for purposes of subsection (3).  This would for instance be the case where the taxpayer had opted to reduce the value of the trading stock as a result of a decrease in market value.  In terms of section 19(4) any excess amount of the debt benefit will, for purposes of section 8(4)(a), be deemed to be an amount that has been recovered or recouped and will be included in the taxpayer’s income.

In the instance where the taxpayer has already disposed of the trading stock when the debt is reduced, he would be deemed to have recovered or recouped any amount that had been allowed as a deduction in respect of the acquisition of the trading stock.

Goods and services – Section 19(5)

Subsection 19(5) applies to all other expenses, as well as stock no longer held (see above).  To the extent that the taxpayer had been granted an allowance or deduction in respect of the expense, the amount of the debt reduction will be deemed to be an amount that has been recovered or recouped for purposes of section 8(4)(a) and will be included in his income.

Allowance assets – Section 19(6) and Paragraph 12A(3)

Allowance assets are strange creatures, forever crossing the capital/revenue divide.  Accordingly, it is necessary to consider the implications for both CGT and income tax if the debt used to fund the acquisition of an allowance asset is reduced.

If the taxpayer still owns the asset when the debt is reduced, the starting point is paragraph 12A(3).  The aim of this provision is to reduce the base cost of the asset by the amount of the debt reduction.  Section 19(6) then kicks in and any excess amount of the debt reduction (to the extent that it exceeds the base cost of the asset) is applied to deductions or allowances granted in respect of the asset.  These amounts are deemed to have been recovered or recouped for purposes of section 8(4)(a) and are thus included in income.

The interaction between paragraph 12A, dealing with CGT, and section 19, catering for income tax, can be demonstrated in the following example:

In Year 1, Mr. A buys a machine for R1 000 000 on credit.  He is entitled to a wear-and-tear allowance of R200 000 p.a.  By year 2 his machine has an adjusted base cost of R600 000.  He runs into financial difficulties and the creditor waives R750 000 of the R1 million loan.  In Year 3 he decides to sell the machine for R800 000.  His liability for tax is calculated as follows:

Click to enlarge

Now let’s do a time warp and switch the two events.  Mr. A sells the machine in Year 2, while the waiver giving rise to the R750 000 debt benefit occurs in Year 3.  Prior to the recent amendments, only the accumulated wear-and-tear allowance of R400 000 would have been deemed to be an amount recovered or recouped for purposes of section 8(4)(a).  Furthermore, since there is no longer an asset in respect of which paragraph 12A(3) can apply, the amount of the debt reduction can only be offset against his assessed capital loss.  If no such loss, one very happy taxpayer could have skipped into the sunset.

Well, the fiscus decided that it was not going to have any skipping, and as from the 1st of January 2019, this loophole has been closed.  Section 12A(4) now provides that where a debt benefit arises in respect of an asset that had been disposed of in a previous year of assessment, the “absolute difference” between the capital gain or loss in respect of that disposal and the amount that would have been determined had the debt benefit been taken into account in the year of the disposal, must be treated as a capital gain in the year in which the debt benefit arises.

Prior to the amendments, the tax consequences for Mr. A would have been as follows:

Click to enlarge

Had the debt benefit occurred in the same year, the capital gain would have been calculated as follows:

Click to enlarge

The absolute difference between this gain and the loss incurred by Mr. A in Year 2 is R600 000.  This amount must be taken into account as a capital gain.  However, in terms of paragraph 8 the gain must be set off against the capital loss of R200 000 carried forward from Year 2.  He therefore has a net capital gain of R400 000.

Non-allowance assets – Paragraph 12A(3) and (4)

It is much simpler to account for the reduction of a debt used to fund the acquisition of a non-allowance asset (an asset in respect of which no deduction or allowance is granted in terms of the Act).  If the asset is still held by the taxpayer at the time of the reduction, paragraph 12A(3) provides that the base cost of the asset must be reduced by the amount of the reduction.  As mentioned above, the base cost can only be reduced to zero and the provision cannot create a negative base cost.  Any excess must, in terms of subparagraph (4), be applied to reduce the taxpayer’s assessed capital loss.  If he has no assessed capital loss, that is the end of the road and the debt reduction has no further tax implications.

If the taxpayer no longer holds the asset, subparagraph (4) applies in the manner explained above, except that there would be no recoupment of allowances.

In conclusion

The underlying message to taxpayers is that there is no such thing as a free lunch.  When a taxpayer incurs an expense, whether to purchase stock or pay rent or buy a machine or fixed property, certain tax consequences arise.  He may be granted an outright deduction or an allowance, and at the very least he will end up with a base cost that he can deduct from proceeds should he sell his asset.  When the debt is reduced or compromised, the taxpayer is left with only the tax benefit.  The debt benefit provisions aim to rectify this situation by effectively reversing or neutralising the tax benefits originally obtained by the taxpayer.  In practice, the application of the provisions may prove problematic because it is not always possible to specify how borrowed funds were applied.  Many businesses are funded by both borrowings and earnings and do not necessarily keep track of which funds are used to finance which expense.  Going forward, it might be a good idea to keep accurate records of how borrowed funds were applied.

Annalize Duvenage

Specialist Tax Consultant

Read more →

Planning on selling property?

Have you heard the saying “location, location, location” when it comes to property?  My parents own a beach house and years ago one of their friends came to visit and spent the night. The next morning, the man stood on the stoep with his coffee, looking out over the ocean.  He turned to my mother and said: “It’s a crummy house, but what a location!”

When a client informs us just before the end of the financial year that they are planning on selling a property, they often tell us not to worry about the tax consequences for the current tax year, as the property will not be transferred before year-end. That is exactly when we start to worry….

The first question we ask is on what date the contract (deed of sale) was signed and if there are any special or suspensive conditions. This would for instance be the case if an offer is subject to the buyer’s financing being approved. The reason for this question is that the Income Tax Act states that you need to pay the tax when income is received or accrued, whichever happens first.

The proceeds from the sale of fixed property, and therefore the related capital gain, accrues on the date that the contract is signed, unless there is a suspensive condition.  In that case, accrual takes place on the date that the condition is met, for instance the date on which the buyer’s application for a bond is approved.  For tax purposes, this is the effective date. Full stop, end of discussion.

The requirement that transfer of ownership must be registered at the Deeds Office is not a suspensive condition.  For tax purposes, this is merely regarded as a formality.

If the terms of a contract are met, let’s say 30 January, and the transfer is only completed on 2 March (so you will only receive the payment for the property on or after the 2 March), the transaction is considered to have taken place on 30 January for the calculation of tax.  You will therefore need to take the capital gain into account for your IRP6 provisional tax payment at the end of February. This can have a significant cash flow impact.

So, when you purchase a property the location may be the most important factor, but when it comes to selling, it is all about the right timing for tax!

Petro van Deventer

Senior Manager

Read more →

Welcome to our team!

We would like to welcome Chrisanne Dicks to our Unik family!

She recently joined our team as Personal Assistant to our Director, and will also be attending to HR, Trust and Estate administration.

We hope you have a wonderful journey with us!

Read more →

Meet our Team – Daleen Louw

Being referred to as “part of the furniture” in our firm is a badge of honour. This honour is very much deserved by Daleen Louw, who has been with the firm that today is Unik Professional Services for over 35 years.

Daleen started out as a typist back in the day of typewriters and then the revolutionary fax machine. She progressed to the typing of our very important financial statements, which later modernised by her using more sophisticated software to produce our various documents. Today she also oversees a team of administrative staff, is our managerial assistant, assists in our Debtors Department and handles many other ad hoc tasks thrown her way.

Daleen is very special to me, as she has known me since I was a child growing up and popping into the office often, then when I did vacation work and later during my training contract. She has supported me and our business throughout the years in all our changes, new ideas and various ventures.

Daleen, you are truly a pillar of strength and a right-hand! We appreciate you.

Read more →

Re-visit and Re-think your Input Vat

We have recently experienced a high number of audits and reviews from SARS on VAT returns submitted. The questions asked during these audits and reviews are usually valid and aimed at establishing whether the claims submitted for input VAT should be allowed.

Previously the focus of audits and reviews was mainly the validity of tax invoices, but SARS has decided to re-visit and re-think their strategy.

As VAT vendors and tax practitioners we need to do the same.

Let’s start with a quick look at the relevant legislation.  Section 17 of the VAT Act determines that a vendor may only claim input VAT on the portion of the claim that was used to make taxable supplies.  If more than 95% of the claim was used by the vendor to make taxable supplies, the whole amount will qualify for an input tax claim.  But if less than 95% of the goods or services are used to make taxable supplies, then the input tax needs to be apportioned.  No input VAT can be claimed on certain specific expenses, for example entertainment and in respect of passenger vehicles.  A vendor may not claim input tax on private expenses. If the expenses are used for business and private use, only the portion of the VAT attributable to the business expense can be claimed as input tax.

When apportioning an amount to calculate the input tax that may be claimed, the most commonly used formula is the turnover based method.  A vendor needs to obtain permission from SARS if he wants to use another method.  The formula requires a vendor to calculate the ratio as follows:

Taxable supplies / Sum of all taxable and exempt supplies, as well as all other income received or accrued during that period x 100.

This ratio can be used for instance if the vendor has a property that consists of shops as well as flats.  The letting of the commercial properties is a taxable supply, while the letting of the flats (residential properties) is exempt.  If this vendor gets a single bill for electricity he will need to apportion his input tax using the formula.

If the private use is not specified, the vendor needs to estimate the percentage of private use.

During a recent VAT audit the first question asked by the SARS official was whether the enterprise was operated from the vendor’s residential address.  Since this was indeed the case, SARS proceeded to question the percentage added back (or apportioned) for private use of the following:

  • Electricity
  • Internet
  • Telephone
  • Insurance

When a vendor claimed input tax in respect of more than one cell phone, the vendor was requested to provide the following:

  • The full names and identity number of the user,
  • The duties performed by the user, and
  • Which numbers (s) are used for private purposes.

SARS reviews of VAT returns have gone way beyond checking whether invoices for input tax are valid.  We need to re-visit and re-think every input tax amount that we want to claim from SARS.

Look out for our article on fringe benefits.  And while we are on the topic of VAT, don’t forget to declare the VAT on fringe benefits, such as right to use of asset.

Please feel free to contact your portfolio manager if you require a discussion on this topic.

Petro van Deventer

Senior Manager

Read more →

Debt Relief Part I – Out With The Old, In With The New (Sort Of)

“Debtors in distress seeking relief are a recurring economic concern.  With the recent global financial crisis, an unusually large number of companies are experiencing financial distress.  Relief for these companies is essential if local economic recovery is to occur.”

In the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2012 SARS explained why it was necessary to introduce a new regime to determine the tax consequences when a debt is reduced for less than full consideration.  This goal was achieved by adopting a two-pronged approach.  Section 19 of the Income Tax Act (“the Act”) deals with the income tax implications of debt reduction, while paragraph 12A of the Eighth Schedule to the Act addresses the capital gains tax (“CGT”) consequences.

Since then, the relevant provisions have undergone a number of tweaks, a major overhaul in 2018 and, more recently, some fairly substantial amendments.  A bit like Hollywood stars and plastic surgery; there is a recognisable core, but on the surface almost everything has changed.

Initially the legislation tackled “debt reduction”, referring to any amount by which a debt is reduced less any amount paid by the debtor as consideration for that reduction.  “Debt” simply meant any debt but for a tax debt, i.e. an amount owing to SARS.  Along the way, the definition of “debt” was specifically amended to exclude interest.  In the latest version, the term is defined as “any amount that is owed by a person in respect of expenditure incurred by that person, or a loan, advance or credit that was used, directly or indirectly, to fund any expenditure incurred by that person”.  Tax debts are still excluded, but interest is back in the game.

Debt reduction has now become “concession or compromise in respect of a debt”, and it follows that the relevant definition would have gained a few pounds.  In addition, it has a new best mate.  “Concession or compromise” goes hand in hand with “debt benefit” and the two need to be considered as a collective.  In short, the new look section 19 and paragraph 12A regime applies to the following scenarios:

  1. When a debt is cancelled or waived, the debt benefit consists of the amount so cancelled or waived.
  2. Where the debtor (or a connected person to the debtor) redeems the claim in respect of the debt, or effects a merger by acquiring the claim in respect of the debt and in so doing extinguishes the debt, the debt benefit is the amount by which the face value of the claim before this arrangement, exceeds the amount of any expenditure incurred in respect of the redemption of the debt or the acquisition of the claim in respect of the debt.
  3. A special new dispensation is created to cater for debt to equity conversions, where companies settle their debts with equity, whether by converting debt claims into shares, exchanging debt for shares or by applying the proceeds from shares issued to settle the debt. The tax consequences depend on whether the person acquiring the shares had an “effective interest” in the debtor company before the arrangement.  Incidentally, the Final Response Document issued by Treasury in respect of these amendments, declined to furnish a definition of “effective interest”.  In the context, it is assumed that the term refers to an interest held either directly or indirectly by the person acquiring the shares.

a) If that person did not have an effective interest prior to the arrangement, the debt benefit is the   amount by which the face value of the debt claim before the arrangement exceeds the market value of the shares acquired in terms of the arrangement.

b) If, however, the person did have a prior effective interest, the debt benefit is the amount by which the face value of the debt claim exceeds the amount by which the market value of that person’s interest after the arrangement exceeds the market value of the interest prior to the arrangement.

But, and this is a big but, the “debt to equity conversion” rules only apply to the extent that the amount that is so converted represents interest incurred.  Furthermore, the rules do not apply at all if the debtor and creditor form part of the same group of companies.

Before examining the mechanics of the provisions, it is perhaps a good idea to note the general circumstances in which the debt reduction provisions do not apply:

  • To the extent that the debt is reduced by way of a donation as defined in section 55(1) of the Act, or is deemed to be a donation in terms of section 58 because it was disposed of (reduced) for inadequate consideration. The first instance requires an element of gratuity or liberality.  In very simplified terms this could be explained as the absence of any commercial reason, like the financial distress of the debtor, for the reduction of the debt.  As far as the second provision (the deeming provision) is concerned, it has been held that the motive for the disposal is irrelevant; it is simply a question of whether the consideration given for the disposal is considered adequate by SARS.  (Reference Welch’s Estate v C: SARS 66 SATC 303 as quoted in SARS Interpretation Note 91).  The original version of this provision left an enormous loophole, as not all transactions that qualify as “donations” are     subject to donations tax.  Think of inter-spousal donations, for instance.  The amendment that came into effect on 1 January 2019 clearly stipulates that it is only donations in respect of which donations tax is actually payable that qualify for the     exemption.
  • The debt is reduced by a deceased estate and the amount by which the debt is reduced forms part of the property of the deceased estate for purposes of the Estate Duty Act. In this scenario, it not necessary for the amount to be subject to Estate Duty (it may for instances qualify for exemption), but merely that it forms part of the property of the deceased estate.  According to the Final Response Document this mismatch might be addressed by an amendment to the Estate Duty Act in the next legislative cycle.
  • The debt that is reduced qualifies as a fringe benefit as contemplated in paragraph 2(h) of the Seventh Schedule to the Act. If an employer releases an employee from the obligation to pay a debt owing to the employer, the amount that was owing is treated as a taxable benefit and included in the employee’s gross income.

Special exemptions apply to companies.  The debt relief rules are not applicable to intra-group transactions where the debtor company has not traded for the year in which the debt benefit arises, as well as the preceding year of assessment.  An exclusion unique to paragraph 12A is where a debt owed by a company to a connected person is reduced in the course or anticipation of the liquidation, winding-up or deregistration of that company.  There is however no similar exclusion under section 19 and the reduction of the debt may have adverse consequences on the income tax side.

For section 19 and/or paragraph 12A to apply, the debt in question must be owed in respect of expenditure incurred by the debtor, or in respect of a loan, advance or credit used to fund expenditure incurred by the debtor.  The tax treatment of the debt benefit will depend on the type of expenditure incurred.

The practical application of the debt reduction rules will be discussed in our next edition.

Annalize Duvenage

Specialist Tax Consultant

See our next Article Debt Relief Part II

Read more →

UKnow Editorial – April 2019

One of the biggest reasons for the success of Unik is our awesome team. Each person in our firm is special, all with different strengths and certainly some interesting personalities. We celebrate these strengths and unik-ness of each of our team members, and the whole of Unik is most certainly therefore greater than the sum of its parts. Because of this, we thought it a good idea to have our newsletter photos for this financial year introduce our readers to some of our awesome people. The photos are a reflection of our personalities, our fun side and our celebration of life while working at Unik.

We pride ourselves on not being conventional. We work hard and we play hard. We find humour in very tuff situations, but use the challenges to make us better. Most of all, we focus on building relationships – with our clients, our business partners and our staff. We hope that you enjoy meeting our team!

For those of our readers celebrating Easter, have a blessed season.

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

Read more →

Meet Our Team – Christine Hartley

Christine, like many in our firm, is a jack-of-all-trades. Sometimes due to necessity, but often because she just wants to get stuff done – properly, the first time around. She has taken on many responsibilities during the 15 years that she has been with the firm that today is Unik Professional Services, and her no-nonsense approach and high quality standards are some of her success trademarks.

She is always willing to take on new duties, often out of her comfort zone, and as a result have grown into the very capable multi-skilled star that she is today. She possesses that unique talent combination of strong administrative skills as well as awesome creativity. However, what we enjoy most about Christine is her wicked sense of humour! She will often drop a sharp comment in a difficult situation which reduces everybody to laughter, and in a high stress work environment sometimes that is just what we need. But don’t mess with her – one look with those blue eyes can silence the even the snarkiest attitude.

Christine is responsible for the company secretarial compliance in our firm, and as a qualified B-BBEE analyst she also assists in this service line. She assists with IT, general practice administration and is also responsible for our digital marketing system – including this newsletter that you are reading!

Thank you Christine for being truly unik!

Read more →

Must you submit financial statements to CIPC?

All companies in South Africa (including close corporations) must submit an annual return to the CIPC in the month of its registration anniversary, and pay the required annual duty.

A requirement that came into effect during February 2019 is that the company must either submit the latest annual audited financial statements, or alternatively complete the Financial Accountability Supplement (FAS), before the annual return will be accepted by the CIPC. Failure to do so will result in penalties, and ultimately the deregistration of the company.

If a company is required to be audited, the latest audited financial statements must be submitted to the CIPC. The CIPC will not accept financial statements older than the previous year’s statements.

The submission of the financial statements can only be done in the XBRL or iXBRL format. This means that whatever program is used to compile the annual financial statements, it will have to be converted into either the XBRL or iXBRL format.

If a company is not required to be audited, it must complete the electronic Financial Accountability Supplement and submit it to the CIPC.

Clients are urged to address any outstanding annual financial statements, as well as the format in which these financial statements are compiled, as there are significant time and cost factors to be considered.

Oddette Boshoff

Director

Read more →