Update to Draft Taxation Laws Amendment Bill, 2016
– section 7c

The revised Draft Taxation Laws Amendment Bill, 2016 (section 7C) has been approved by Parliament and should be promulgated soon to be effective 1 March 2017. The second draft was accepted without any major changes to it. Some additions were made to the Explanatory Memorandum issued by the South African Revenue Services (SARS).

An example of the effect of the legislation:

Interest free loan to trust: R10 million
Donation: R10 million x 8% interest at the SARS official rate= R800 000
Donations tax: (R800 000 – annual exemption R100 000) @ 20% = R140 000.

The two most likely scenarios that may apply to you, in line with this legislation are as follows:

  • You have sold an asset to the trust on an interest-free loan basis or interest rate lower than the SARS official rate;
  • The trustees of a trust made a distribution to trust beneficiaries and the beneficiaries loaned it back to the trust.

Indirect loans to trusts will be subject to section 7C. An example of this would be when you advance an amount to someone who is not a connected person to you (Y), subject thereto that Y will advance an interest-free loan to the trust and cede the claim for repayment by the trust to you as security for repayment of that loan.

Section 7C should not apply in the instance where trustees credit distributions on loan account to a beneficiary, and the payment of the loan is in the sole discretion of the trustees. The trust deed also has to allow the trustees to do so. There must be no contract of loan between the trustees and the beneficiaries for this transaction agreeing on the terms applicable to the retention of the vested amount in trust. The beneficiaries must have no say in whether or when the amount vested in them should be distributed to them (refer to page 11 of the SARS Explanatory Memorandum).

What this means for you:

If you have made a loan to a South African trust, we recommend that you evaluate your position and the impact of this legislation on you before 28 February 2017 (if any). Your specific circumstances would dictate the best tax efficient advice for you. In some cases the best solution would be for you either to pay interest on the loan, or to repay the loan, or to make loans to a company, or to restructure your trust.

In addition, we recommend a review of your trust deed to make sure that:

  • the wording is correct to give trustees an absolute discretion regarding payments to beneficiaries of vested amounts;
  • the loan amounts are checked in detail as they may fall into the exemptions provided for in the legislation; and
  • the loan agreements are not entered into for beneficiary vested amounts on credit account in trust.
  • The disclosure in the financial statements of trusts are of the utmost importance – it should clearly differentiate and disclose loans to the trust, separately from vested amounts retained in trust on credit. These should already be included in the annual financial statements of the trust for the year ending on 28 February 2017.

Please contact your Audit Partner on 011 662 0926 to make an appointment.

Alternatively, you can also contact your portfolio or wealth manager for assistance.

Source: Sanlam

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)

Nwanda Internal News
(January 2017)

January_NewYearBlog_Image

Awesome Rewards :

Obtained their BCompt(Acc) degrees with distinctions:

  • Hennie de Beer & Natasha Bothma

Obtained distinctions during the October/November 2016 examinations:

  • Keisha Sibiya, Rafeeah Razak, Safwaan Mansoor, Jessica Soutgate and Sean Bushe

Succesful completion of UNISA Tax Technician course

  • Fatima Wadia

Congratulations:

  • Sadiya Mansoor, successful completion of SAICA articles and promoted to Junior Manager
  • Kim Sing, promoted to HR Manager

Farewell to staff member:

We bid farewell to Sarvesh Chinappa, who started as a trainee accountant on 11 January 2010 and will leave the firm as a Junior Manager 7 years later.  We wish him success in his future endeavours.

Maternity leave:

crown

Keep calm Sikhanyile Noholoza and
enjoy your maternity leave.

 

Nwanda’s Year End Bash:

We held our Black and White year end BASH on the 2nd of December 2016.

Here with some evidence that we all enjoyed the day…

Exchange control implications for branching out

As globalisation becomes an increasing commercial factor, a great many of our clients also find themselves branching out their operations and activities beyond the borders of South Africa, primarily into Southern Africa but often also beyond. Funding such initiatives may be a complex exercise, not only to decide on whether to finance the expansion through debt or equity financing (and actually obtaining such sources of funding), but also to get the necessary exchange control approvals in place to be authorised to enter into such offshore funding initiatives.

The Financial Surveillance Department of the South African Reserve Bank is primarily tasked with managing the South African exchange control regime. Exchange controls are in place to regulate the in- and outflows of currency in and out of South Africa. It is accordingly illegal to export South African currency without prior approvals specifically put in place. This dispensation also extends to the funding of South African businesses setting up operations offshore. It is for example impermissible for a South African entity to set up a business (either as a branch or as a separate entity) in another country without the prior approval of the Financial Surveillance Department (or one of its authorised dealers).

To apply for the requisite approvals clients should approach their relevant banks which would typically be authorised to act as an authorised dealer of the Reserve Bank. This implies that the bank itself would be authorised to approve certain applications made to it for foreign direct investments, although some transactions may require applications to be put to the Reserve Bank directly. Approvals will typically be conditional upon certain facts being illustrated by the applicant and it agreeing to observe certain requirements such as e.g. lodging financial statements annually, presenting regular progress reports to the bank, proving to satisfaction that arm’s length conditions are imposed, etc. Only once the necessary approvals are in place will entities be able to move funds to and from the Republic.

Exchange controls do not only affect South African residents, but also have a bearing on non-resident businesses expanding to South Africa. Debt funding into South Africa for example should be approved, even though it will initially lead to capital inflows into South Africa. The Reserve Bank would however want to specifically approve lending terms linked to inward debt funding initiatives to ensure that excessive amounts charged as interest do not leave the country. Similarly, equity investments into South Africa are also affected and South African subsidiaries of international corporate groups are required to have their share certificates issued endorsed “non-resident” by an authorised dealer. To the extent that non-resident companies engage in a level of activities in South Africa such that requires them to register as external companies, they should be aware thereof that external companies (to the extent that they represent a branch in South Africa) are considered to be a separate exchange control resident, despite the fact that the rest of the company may be operating outside of South Africa. The implication is that these South African branches too cannot introduce and remit cash offshore without prior approval either.

Acting in breach of exchange controls is not only illegal, but also a criminal offence.

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)

Explaining zero rated VAT

Value-Added Tax, or VAT, is currently typically charged at 14% on all taxable supplies of goods or services rendered by registered VAT vendors. Taxable supplies exclude exempt supplies, such as providing financial services, residential accommodation or educational services (see section 12 of the Value-Added Tax Act, 89 of 1991). Where a VAT vendor makes exempt supplies, it may not levy VAT on invoices rendered for such goods or services provided to the vendor’s clients.

Taxable supplies include though the supply of goods or services at a VAT rate of zero percent. In other words, where a VAT vendor were to supply zero rated goods or services, it will levy VAT on the invoice at 0%, and not the standard rate of 14%. This may appear nonsensical at first, especially considering from an economic perspective when compared to exempt supplies: effectively no VAT is charged on an invoice whether the supply by the VAT vendor is exempt from VAT or charged at a rate of zero percent.

The significance lies therein that the exempt supplies are exempt from VAT altogether, while zero rated supplies still qualify as “taxable supplies” as defined in the VAT Act. VAT vendors may therefore claim input tax for expenditure incurred in order to render taxable supplies, even if zero rated.  This will not be the case for VAT exempt supplies.

Put simply therefore: input tax may be claimed against expenditure incurred to the extent that the expenditure is used ultimately to make either zero or standard rated supplies. To the extent that the expenditure is applied to make VAT exempt supplies, no input VAT may be claimed.

To use an example: imagine a VAT vendor, A (Pty) Ltd, which renders services to an Australian based firm (and which is zero rated in terms of section 11(2)(l) of the VAT Act). The invoice to the Australian firm amounts to R100 + VAT at zero percent (therefore R100). To render the services, A makes use of a subcontractor which invoices it an amount of R50 + VAT at 14% (therefore R57). To the extent that the services of the subcontractor is used to further the enterprise of A in making taxable supplies (even if at zero percent) to the Australian customer, A is able to claim an input tax amount of R7, thereby realising a profit of R50.

Had the services rendered by A amounted to exempt supplies for VAT purposes though in terms of section 12 of the VAT Act (such as supplying financial services for example), A would have still only invoiced its customer an amount of R100, yet unable to claim the input tax amount of R7 on the basis that subcontractor fee is no longer paid in the furtherance of A’s enterprise in making taxable supplies. In this scenario where exempt supplies are made, a profit of only R43 would have been made.

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)

New transfer pricing documentation requirements

The transfer pricing regime in the Income Tax Act, 58 of 1962, is regulated by section 31 of that Act. It in essence requires that cross-border transactions be entered into on an arm’s length basis where connected persons transact with one another. The obvious mischief sought to be countered is for connected persons to charge fees between one another to ensure that the party in the most tax beneficial regime is more profitable than the taxpayer in the more onerous tax jurisdiction.

Determining when a fee will be “arm’s length” will necessarily be a facts based determination to be evaluated on a case-by-case basis. For any taxpayer therefore to claim that its transactions are concluded on an arm’s length basis will have to be substantiated by relevant corroborative evidence, primary among which will be whether the prices involved are comparable to industry norms and standards coupled with a commercially defensible transfer pricing policy document setting out how pricing is determined for cross-border related party transactions entered into by the taxpayer (notably intergroup transactions).

The Commissioner for SARS has recently (28 October 2016) published a comprehensive list* of certain information and documents that taxpayers are required to maintain when they enter into cross-border activities with connected persons or branches. This includes:

  • A description of the person’s ownership structure (including details of shares or ownership interests in excess of 10 per cent held) as well as a description of all foreign connected persons with which that person is transacting and the details of the nature of the connection;
  • The name, address of the principal office, legal form and tax residence of each of the connected persons with which a cross-border transaction has been entered into by the person; and
  • The person’s business operation summary, including—
    1. a description of the business (including the type of business, details of the specific business and external market conditions) and the plans for the principal trading operations (including the business strategy);
    2. an organogram showing the title and location of the senior management team members; and
    3. major economic and legal issues affecting the profitability of the person and the industry.

There are additional requirements for transactions exceeding R 5 million. These notably include keeping on record the necessary exchange control approvals obtained for entering into the relevant transaction.

The notice replaces SARS’ previous reporting requirements contained in its Practice Note 7. The notice issued confirms what we have in recent times started experiencing in practice, being a renewed focus by SARS on transfer pricing as a means of revenue collection for the fiscus.

* See Government Gazette Vol. 616 No. 40375

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)