Management’s responsibility

Throughout the audit of a set of financial statements, the phrase “management/director’s responsibility” appears. It is included in the engagement letter, the financial statements and the auditor’s report.  But what does it mean?

Management is responsible for the management of the business, for implementing and monitoring of internal controls in the business, and in terms of the Companies Act (“the Act”), for maintaining adequate accounting records and the content and integrity of the financial statements.  These financial statements must be issued annually to reflect the results thereof.

These financial statements are used by various users (shareholders, directors, banks, SARS, etc.) to make certain decisions (buying and selling of shares, valuations, credit terms, etc.), and therefore need to be a true representation of the business.  It is therefore critical that all transactions are valid, are recorded accurately and completely in the correct financial year, are classified correctly, and that all assets and liabilities that exist are recorded at the true cost/value thereof.

In terms of the Act, financial statements are to be prepared using either International Financial Reporting Standards (“IFRS”) or IFRS for Small to Medium-sized Entities (“IFRS for SME’s”).  Luckily management is not responsible to be experts in the above-mentioned standards, as the Act does allow for management to delegate the task of preparing the financial statements to someone with the knowledge and skill set to be able to perform this task.  The Act does, however, not allow management to delegate the responsibilities that go along with it too, so they need to ensure that when they do delegate the task, that it is to a responsible person and that they review the financial statements before approving it.

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)

SARS interest on provisional tax

As with various other business transactions, taxes in their various forms also attract interest, either payable by the taxpayer to SARS, or due to the taxpayer from SARS. Apart from knowing which of the various SARS interest rates are applicable (which is often a challenge in itself), knowing in which circumstances interest is applicable and the relevant income tax treatment of that interest, is increasingly important. This article explores one such a scenario: provisional tax.

Overpayment of provisional tax

If a taxpayer has any tax credit (amount by which taxes already paid exceeds the calculated tax liability) and that credit exceeds R10 000 or the taxpayer has a tax credit and the taxable income exceeds a certain amount (R50 000 for individuals and trusts and R20 000 for companies), the taxpayer earns interest at the prescribed rate, namely 6% (compared to the 10% when interest is payable to SARS – see in more detail below).

Subsequent income tax treatment

Interest earned from SARS will be included in the gross income of a taxpayer and accordingly, is fully taxable (subject to any annual interest exemptions for natural persons). Although income tax generally works on the principles of receipt and accrual, section 7E of the Act determines specifically that any interest due to a taxpayer from SARS will only be deemed to have accrued on the date on which it is paid to (received by) a taxpayer. Although less material for individuals, this could lead to some differences in treatment for companies and potentially give rise to deferred tax.

Underpayment of provisional tax

If a taxpayer’s normal tax obligation exceeds any tax credit and the taxable income exceeds a certain amount (R50 000 for individuals and trusts and R20 000 for companies), interest will be levied by SARS at the prescribed rate – currently 10%. Interest is also payable at the 10% prescribed rate on late payments in respect of first, second and third provisional tax periods.

Subsequent income tax treatment

Section 23(d) prohibits the deduction from taxable income of any interest paid under any act that is administered by SARS. Therefore, any interest paid to SARS will not be deductible for income tax. Presumably, this is since this interest will not be considered to be in the production of income or expended for the purposes of a trade.

Given the widely publicised delays on refunds for various types of taxes, taxpayers should carefully scrutinise their statements of account from SARS to ensure that interest they are entitled to in terms of the various tax acts has been paid to them. Taxpayers should also carefully take note of due dates for provisional tax payments, to ensure that interest is not incurred on late payments or any underpayments.

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)

Different interest rates in tax

The Income Tax Act[1] contains definitions for various interest rates. These interest rates serve as the basis for interest calculations in income tax in different circumstances and can broadly be categorised into three main areas. Knowing the difference between these different types of interest rates could have a material impact on the amount of interest due or receivable by taxpayers or influence the way in which they structure transactions.

What are the different types of interest rates and when are they applicable? SARS currently distinguishes between two “prescribed rates” and a so-called “official rate of interest”. The prescribed rates are administrative in nature and applicable to tax debts, whereas the official rate of interest is more substantive in nature, setting the baseline against which the reasonability of interest rates to transactions are measured.

  • First prescribed rate: This is the interest rate applicable to any tax debts due to SARS by taxpayers, or tax refunds due to taxpayers by SARS on successful appeals and certain delayed refunds. The rate is determined by a notice in the Government Gazette in terms of the Public Finance Management Act.[2] Since 1 July 2018, this rate stands at 10% (the highest it has been was 19% during 1999!).
  • Second prescribed rate: This rate is applicable to the overpayment of provisional tax and is linked to the first prescribed rate. Unfortunately, this rate which is only in taxpayers’ favour, is 4 percentage points below the first prescribed rate, therefore currently at 6%.
  • Official rate of interest: The official rate for Rand-denominated debt is linked to the repurchase rate plus 100 basis points. The official rate is adjusted at the beginning of the month following the month during which the South African Reserve Bank changes the repurchase rate (currently therefore 7.5% since 1 April 2018).

Importantly, the prescribed rate is currently still regulated by the Act. It has long been proposed that it be regulated in terms of the Tax Administration Act. The relevant provisions are already contained in the Tax Administration Act, but the effective date has yet to be determined. It does not, however, appear as though this will, from a value perspective at least, have any material impact.

“Interest rate” in income tax can take on more than one meaning, depending on the specific circumstances. It is therefore critical that taxpayers are aware firstly, what piece of legislation is applicable at any point in time and secondly, what type of interest rate is applicable in their specific circumstance.

[1] No 58 of 1962

[2] No 1 of 1999

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)