Nwanda Internal News
(February 2017)

DAYS

Awesome Rewards:
Proffessor Mafela – for passing the SAICA APC Exam
Kavitha Bhawanideen – for passing the SAICA APC Exam
Francis Venter – cleaning of deep storage and taking care of M-files scanning
Chante-Liz Coetzer – overall improved performance

Farewell to staff member:
We bid farewell to Annelize van Zyl our Office Manager, we wish her success in her future endeavours.

It’s a girl:
Congratulations to Sikhanyile Noholoza on the birth of her baby girl on the 5th of February 2017.

Growing the Nwanda Partnership :
On 1 February 2017 Nwanda admitted Peter Steyn as a Partner and Christopher Botha as a Candidate Partner.  Peter joins us with his staff compliment of 3.

Welcome one and all to the Nwanda Team!

Welcome to our Nwanda additions:
Trainee accountants

Front: Gideon Manika  Left to right middle: Dean Elson, Jennifer Neill, Shene Miller, Ghilaine Kikoba, Shaista Ebrahim, Lebohang Lemaona, Miguel Jorge, Left to right back: Mohammed Moolla, Ernestus Botha, Talita,, Roux, Matthias Krafft, Amy Anderson.

Front: Gideon Manika
Left to right middle: Dean Elson, Jennifer Neill, Shene Miller, Ghilaine Kikoba, Shaista Ebrahim, Lebohang Lemaona, Miguel Jorge,
Left to right back: Mohammed Moolla, Ernestus Botha, Talita Roux, Matthias Krafft, Amy Anderson.

Penalties on Underpayment of Provisional Tax

Under paragraph 20(1) of the Fourth Schedule to the Income Tax Act 58 of 1962, amended (“the Act”), if the actual taxable income of a provisional taxpayer, as finally determined under the Act, exceeds R1 000 000 and the estimate made in the return for the payment of provisional tax, that is the so-called second provisional tax payment, is less than 80% of the amount of the actual taxable income, the Commissioner is obliged to levy a penalty, which is regarded as a percentage based penalty imposed under chapter 15 of the Tax Administration Act 28 of 2011 (“TAA”).

The penalty, in the case of a company, amounts to 20% of the difference between the amount of normal tax calculated using the corporate tax rate of 28% in respect of the taxable income amounting to 80% of the actual taxable income and the amount of provisional tax in respect of that year of assessment  paid by the end of the year of assessment.

Paragraph 20(2) of the Fourth Schedule to the Act confers a discretion on the Commissioner to remit the penalty or a part thereof where he is satisfied that the estimate of taxable income was seriously calculated with due regard to the factors as having a bearing thereon and was not deliberately or negligently understated.

The Port Elizabeth Tax Court was recently required to adjudicate a matter relating to the imposition of a penalty on the underpayment of provisional tax in Case No. IT14027, as yet unreported, where judgment was delivered on 7 December 2016.

The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal ©iStock.com/ “Alert Judge
-by junial

ABC (Pty) Ltd was a provisional taxpayer which delivered its return for payment of provisional tax for the 2010 year of assessment on 30 June 2011. In its return of provisional tax it estimated the taxable income for the year of assessment and made payment in accordance with its estimate. Sometime later it appeared that the actual income received exceeded the estimate made by the company substantially. As a result the South African Revenue Service (“SARS”) imposed an underestimation penalty in terms of paragraph 20 of the Fourth Schedule to the Act.

The company lodged an objection which was rejected by SARS and resulted in an appeal which was decided in its favour by the Tax Board. SARS subsequently appealed the decision of the Tax Board to the Tax Court for a hearing de novo and subsequently filed a statement of grounds of assessment and opposing the appeal.

In reply, ABC (Pty) Ltd filed its statement of grounds of appeal according to the Tax Court rules. In its grounds of appeal the company abandoned all of the grounds raised in its original objection and in its notice of appeal and sought to rely only on the procedural ground raised for the first time by the chairperson of the Tax Board upon which he had found in favour of the company.

SARS subsequently filed a notice of exception arguing that the company could not rely on a new ground of objection not previously contained in its grounds of objection.

The company originally estimated its income for the 2011 year of assessment in an amount of R431 638,00 and made payment of provisional tax amounting to R64 905,54. Later, on 30 September 2011 the company made a further payment of R1 377 466,22. Subsequently, the company filed its income tax return reflecting a taxable income for the year of assessment amounting to R5 050 076,00.

By virtue of the large difference between the tax actually due per the final taxable income and the provisional tax paid, SARS imposed the underestimation penalty under the provisions of the Act. SARS considered the objection lodged by the company on the basis that the company did not seriously calculate its tax income as required.

The TAA had not yet come into force by the time that the company’s objection had been disallowed and its notice of appeal lodged. The Tax Board decided that the Commissioner was correct in rejecting the company’s objection and that the appeal should be dismissed on its merits.

However, the chairperson of the Tax Board mero motu raised a procedural issue under the TAA which had since come into force and decided in favour of the company. The chairperson of the Tax Board reached the view that the manner in which SARS had dealt with the imposition of the penalty was in conflict with chapter 15 of the TAA, especially sections 214 and 215 thereof.

The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal. Tax Court Rules do not provide for an amendment to the taxpayers’ grounds of objection and the Court therefor referred to the rules of the High Court.

The Tax Court considered the various provisions of the TAA and made the decision that SARS’s exception to the company’s application should be upheld and that the application for the amendment of the company’s grounds of objection should be dismissed. The Court therefore dismissed the company’s appeal and confirmed the penalty imposed on the understatement of provisional tax.

Based on the judgment it is concluded that taxpayers need to exercise extreme caution in calculating taxable income for purposes of provisional tax, failing which they will become liable to the 20% underpayment penalty.

Furthermore, when a taxpayer disputes the imposition of a penalty, or in fact any assessment, it is important that the grounds of objection are properly formulated as it is not possible to subsequently amend the grounds of objection.

Source:
Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2017.

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)

Non executive directors liable for VAT

-JOHANNESBURG

A ruling by the South African Revenue Service (SARS) that non-executive directors are required to register and charge VAT where they earn director’s fees exceeding the compulsory VAT registration threshold of R1 million during a 12-month period will likely create a significant administrative burden for non-executive directors and the companies they serve.

The ruling also raises questions about whether SARS will be able to cope with the large number of VAT registration applications that are likely to be submitted over the next three months before the ruling becomes effective.

Moreover, many listed companies – often holding companies earning mainly dividend income – are not registered for VAT and will not be able to claim a VAT deduction even though their non-executive directors will charge 14% VAT.

After a prolonged period of uncertainty about whether amounts payable to a non-executive director are subject to the deduction of employees tax, SARS issued two Binding General Rulings on the issue on Friday.

Parmi Natesan, executive at the Centre for Corporate Governance at the Institute of Directors in Southern Africa (IoDSA), says there has been much confusion and debate around  the issue in the past, with the IoDSA and other bodies having written to both SARS and National Treasury requesting clarity on the varying interpretation of both the Income Tax Act and the Value-Added Tax Act.

The IoDSA welcomes the fact that clarity has been provided, she says.

Gerhard Badenhorst, tax executive at ENSafrica, says SARS has previously ruled that director’s remuneration is not subject to VAT and although the rulings did not specifically refer to non-executive directors, the scenario described in the ruling was typically that of a non-executive director.

The rulings were withdrawn in 2009, but it was generally accepted that Sars still subsequently applied the principles set out in these rulings.

Badenhorst says in his experience, most companies considered non-executive directors to be employees.

“In most instances, companies purely deducted employees tax and they weren’t registered for VAT.”

The SARS ruling now explicitly states that director’s fees received by a non-executive director for services rendered on a company’s board are not subject to the deduction of employees’ tax.

“I think the administrative burden will be substantial for all parties involved and only time will tell whether the additional revenue collected by Sars will be substantial.”

Badenhorst says a further practical issue or question that has arisen is with regard to the VAT registration process.

“It is currently a difficult process to register for VAT purposes as SARS often rejects VAT registration applications  for various reasons, which causes the applicant to submit his or her application a number of times before the application is eventually accepted. The issue is whether SARS will be able to cope with the large number of VAT registration applications that are expected to be submitted over the next three months.”

While the ruling applies from June 1 2017, industry commentators differ on whether non-executive directors could face a VAT liability, penalties and interest related to prior tax periods.

Badenhorst says generally Sars would issue a binding general ruling in draft form, allowing industry to comment before a final ruling is issued, but in this case the ruling was issued in final form, and this issue would have to be clarified.

Since the ruling applies from June 1 2017 it seems that Sars may not seek to apply it retrospectively.

But Chris Eagar, attorney and director at Finvision VAT Specialists, says the ruling is not legislation and merely a confirmation of SARS’s interpretation. Therefore it doesn’t change the law.

If SARS agrees that the situation was unclear in the past, it may decide not to actively pursue the  application of the law retrospectively. However, its role is to apply the legislation as it stands. In such instance, there would be a historic liability going back five years, he says.

Non-executive directors and their employers would typically be on friendly terms and companies could decide to pay the VAT to the director retrospectively, with the employer claiming an input tax credit (if it is entitled to do so). In this way the director will not be out of pocket as far as the tax is concerned, upon payment to SARS.

But penalties and interest may still need to be paid, Eagar argues.

Under the Tax Administration Act, penalties range from 10% to 150%, but it is unlikely that SARS would impose these penalties, as the default seems to have arisen due to “bona fide inadvertent error”. The 10% late payment penalty will remain, however. Where the default constitutes a so-called “first incidence”, it is likely that SARS would waive this penalty upon application. This still leaves the potential VAT liability over the five-year period as well as the interest payable, he says.

SARS did not respond to a request for clarity on whether the ruling would be applied retrospectively by the time of publication.

Source: MoneyWeb Today

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)