Tax Season 2019 – What to expect

SARS recently released two media statements, in which it notes several improvements made to eFiling for the 2019 tax season, including the issue of customised notices indicating specific documents required in the event of an audit or verification and a simulated outcome issued before a taxpayer has filed.

What is the tax season?

Tax season is the period in which individual taxpayers file their income tax returns to ensure that their affairs are in order. Although the majority of taxpayers who earn a salary have already paid tax through monthly pay-as-you-earn tax (PAYE), which was deducted from their salary by their employer and paid over to SARS, employees may still have an obligation to file a tax return if they earn above the filing threshold (see in more detail below). Once SARS reconciles what was paid over by the employer with what a taxpayer declares on their tax return, an assessment is issued which may result in the taxpayer needing to pay an additional tax to SARS, or is due a refund, or neither.

Taxpayers who are natural persons and meet all of the following criteria need not submit a tax return for the 2019 filing season:

  • Your total employment income for the year before tax is not more than R500 000;
  • Your remuneration is paid from one employer or one source (if you changed jobs during the tax year, or have more than one employer or income source, you must file);
  • You have no car or travel allowance, a company car fringe benefit, which is considered as additional income;
  • You do not have any other form of income such as interest, rental income or extra money from a side business; and
  • Employees tax (i.e. PAYE) has been deducted or withheld 
Although you are not required to submit a tax return if you meet the above criteria, it is always good practice to ensure that you have a complete filing history with SARS. If your tax records do ever become important in future (such as in the case of remission of penalties, tax clearance certificates, etc.), you do not want to be in a position to have to prove that you were not liable to file a return in a particular year. The administrative burden in the current year certainly outweighs the potential issues down the line.

Important filing dates

  • eFiling opens on 1 July 2019 and closes on 4 December 2019.
  • Manual filing at branches opens on 1 August 2019 and closes 31 October 2019.
  • Provisional taxpayers have until 31 January 2020 to file via eFiling.
There is already a steady increase in the number of taxpayers in queues at SARS branches – it is therefore advised that you engage with your tax practitioner as soon as possible, to plan for tax season 2019.

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)

Deductibility of interest for non-trading individuals

SARS Practice Note 31.2 (PN31.2) provides for a person to be able to deduct interest paid, even where that person is not a moneylender or doesn’t carry on any other trade, where that interest expense is incurred in the production of other interest earned to the extent that it does not exceed the interest income. Strictly, in terms of prevailing income tax legislation, this practice (which favours taxpayers) is not supported by the Income Tax Act, 58 of 1962.

Reliance on this practice by a taxpayer was recently considered in the Western Cape High Court.[1] Due to the unique structure of the taxpayer’s employment contract as a partner at a law firm, a portion of his profit share was withheld as an obligatory interest-bearing loan to the employer, to fund ongoing working capital requirements (‘director’s loan’). While periodic distributions of interest that accrued on the director’s loan was paid to him and treated as taxable income, he was not allowed to claim repayment of the capital for as long as he was in employment. At the same time, the taxpayer would incur interest on a bank loan used to purchase an immovable property (‘bank loan’).

The court had to consider whether there is a sufficiently close link between the interest incurred by the taxpayer on the bank loan, and the interest earned by him on the outstanding balance of the director’s loan. In other words, whether the bank interest can be said to have been incurred in the production of the interest income on the director’s loan.

The taxpayer contended that it did since he would have used the proceeds of the director’s loan to repay the bank loan had it not been for the strict repayment terms, and in the process reducing the capital and interest incurred on the bank loan. He considered the portion of the bank loan equal to the director’s loan as a loan payable on which an interest deduction should be allowed. This was supported by evidence of deposits into the bank loan from distributions of profit share which could also be matched.

The court found that even assuming the funds standing in credit of the director’s loan are ‘capital’ or ‘surplus’ funds as required by PN31.2, any distributions he receives thereon are entirely in the discretion of his employer. As a result, he was not solely reliant on the distributions to maintain the bank loan and the fact that he made deposits into the bank loan from profit distributions does not distract from this fact. To have access to the bank loan, he had to maintain it from sources other than distributions on the director’s loan. Accordingly, the purpose of the bank loan was to provide him with a facility, and not to maintain the director’s loan. It cannot be said that interest paid on the bank loan brought about interest earned on the director’s loan. He would have received interest on the director’s loan, irrespective of the existence of the bank loan. Accordingly, the court disallowed the taxpayer’s appeal for deduction of the interest incurred.

An important takeaway from the judgment is the distinction the court made between the two scenarios dealt with in PN31. Firstly, PN31.1 deals with a scenario where an interest expense was incurred in the carrying on of a trade, while PN31.2 deals with a scenario where a taxpayer does not carry on a trade. The requirements of the two paragraphs should be considered separately and not treated as a single principle. It is therefore important for taxpayers that want to claim interest deductions and rely on PN31 to consider both scenarios, especially if they are not in the business of lending money.

  • [1] L Taxpayer vs The Commissioner for the South African Revenue Service (Case A124/2017, on appeal from the Tax Court).
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)

“Booking” capital losses on shares is not that easy

There is a number of techniques that taxpayers use to reduce their capital gains tax (CGT) exposure on long-term share investments. A common practice is to utilise the annual exclusion of R40 000 provided for in paragraph 5 of the Eighth Schedule of the Income Tax Act[1] by selling shares that have been bought at a low base cost, at a higher market value and then immediately reacquiring those shares at the same higher value, thereby ensuring that the investments’ base cost is increased by as much as R40 000 per year. If the gain on those shares is managed and kept below the annual R40 000 exclusion, taxpayers receive the benefit of a ‘step-up’ in the base cost of the shares to the higher value for future CGT purposes, without having incurred any tax cost.

A reverse scenario is to build up capital losses for off-set against any future capital gains and taxpayers are often advised, especially during times of market volatility, to ‘lock-in’ capital losses created by the expected temporary reduction in share prices. This involves selling shares at a loss and then immediately reacquiring the same shares at the lower base cost, but with the advantage of having created a capital loss – a technique known as ‘bed-and-breakfasting’.

Without placing an absolute restriction on ‘bed-and-breakfasting’, paragraph 42 of the Eighth Schedule limits the benefit that could have been obtained from the ‘locked-in’ capital loss. The limitations of paragraph 42 apply if, during a 45-day period either before or after the sale of the shares, a taxpayer acquires shares (or enters into a contract to acquire shares) of the same kind and of the same or equivalent quality. ‘Same kind’ and ‘same or equivalent quality’ includes the company in which the shares are held, the nature of the shares (ordinary shares vs preference shares) and the rights attached thereto.

The effect of paragraph 42 is twofold. Firstly, the seller is treated as having sold the shares at the same amount as its base cost, effectively disregarding any loss that it would otherwise have been able to book on the sale of the shares and utilise against other capital gains. Secondly, the purchaser must add the seller’s realised capital loss to the purchase price of the reacquired shares. The loss is therefore not totally foregone, but the benefit thereof (being an increased base cost of the shares acquired) is postponed to a future date when paragraph 42-time limitations do not apply.

Unfortunately, taxpayers do not receive guidance on complex matters such as these on yearly IT3C certificates or broker notes, since these are generally very generic. Therefore, taxpayers wishing to fully capitalise CGT exposure on market fluctuations are advised to consult with their tax practitioners prior to the sale of shares.

  • [1] No. 58 of 1962
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)

Tax season 2019: Improvements made to eFiling

SARS recently released two media statements, in which it notes several improvements made to eFiling for the 2019 tax season, including the issue of customised notices indicating specific documents required in the event of an audit or verification and a simulated outcome issued before a taxpayer has filed.

What is the tax season?

Tax season is the period in which individual taxpayers file their income tax returns to ensure that their affairs are in order. Although the majority of taxpayers who earn a salary have already paid tax through monthly pay-as-you-earn tax (PAYE), which was deducted from their salary by their employer and paid over to SARS, employees may still have an obligation to file a tax return if they earn above the filing threshold (see in more detail below). Once SARS reconciles what was paid over by the employer with what a taxpayer declares on their tax return, an assessment is issued which may result in the taxpayer needing to pay an additional tax to SARS, or is due a refund, or neither.

Taxpayers who are natural persons and meet all of the following criteria need not submit a tax return for the 2019 filing season:

  • Your total employment income for the year before tax is not more than R500 000;
  • Your remuneration is paid from one employer or one source (if you changed jobs during the tax year, or have more than one employer or income source, you must file);
  • You have no car or travel allowance, a company car fringe benefit, which is considered as additional income;
  • You do not have any other form of income such as interest, rental income or extra money from a side business; and
  • Employees tax (i.e. PAYE) has been deducted or withheld 
Although you are not required to submit a tax return if you meet the above criteria, it is always good practice to ensure that you have a complete filing history with SARS. If your tax records do ever become important in future (such as in the case of remission of penalties, tax clearance certificates, etc.), you do not want to be in a position to have to prove that you were not liable to file a return in a particular year. The administrative burden in the current year certainly outweighs the potential issues down the line.

Important filing dates

  • eFiling opens on 1 July 2019 and closes on 4 December 2019.
  • Manual filing at branches opens on 1 August 2019 and closes 31 October 2019.
  • Provisional taxpayers have until 31 January 2020 to file via eFiling.
There is already a steady increase in the number of taxpayers in queues at SARS branches – it is therefore advised that you engage with your tax practitioner as soon as possible, to plan for tax season 2019.

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)

What to consider when appointing beneficiaries of provident funds

The award of the retirement fund death benefit is a controversial, complicated and slow process, that is not well-understood by fund members and their dependents. The inevitable fear, frustration and financial hardship that follow from long payment delays add to the emotional strain of losing a loved one.

Below we explain how the process works, the issues trustees must take into account and what you, as the fund member, can do to expedite the process.

Process regulated by Pension Funds Act

The payment of death benefits from a Pension, Provident or Retirement annuity fund is regulated by section 37C of the Pension Funds Act 24 of 1956. When a member dies and a claim is made, the trustees of the fund must follow the requirements as set out in the Act and cannot merely follow the beneficiary nomination which was made by the member.

In determining who will receive the benefit on the death of a member, the trustees are granted 12 months from the date of death to search for any dependents of the deceased member. This must be done despite the existence of a beneficiary nomination.

The trustees have the final say with regards to the distribution of the death benefit; however, they must ensure that there is equitable distribution.

The beneficiary nomination acts merely as a guideline to the trustees as to the wishes of the member and will be taken into consideration when investigating the claim.

The trustees need to take the following matters into consideration:

  • The age of the parties involved
  • Their relationship with the deceased
  • The extent of their dependency on the deceased, if any (did the deceased provide any money to them)
  • The financial status and affairs of the dependents (employment, capability of managing money)
  • The future earning potential of the dependents (are they likely to find employment if unemployed; are they students; are they disabled etc.)

In addition, the trustees also need to take into consideration:

  • Any parties the deceased had a legal duty to support (spouses, children, parents, grandparents, unborn children etc.)
  • Factual dependents (common law spouses, same-sex partners, step children, foster children)
  • Customary law spouses
  • Major children who the deceased had a legal responsibility to support

The way that the death benefit is paid is also regulated by section 37C and currently allows for the following options:

  • Payment directly to the dependent or nominee
  • Payment to a trust
  • Payment to a guardian or caregiver
  • Payment to a beneficiary fund.

Other considerations

When a death benefit is payable to a minor then the trustees may only pay the benefit to the guardian of the minor or to a beneficiary fund. As a guardian has the right in terms of law to administer the financial affairs of the minor, the trustees cannot, without applying their minds to the facts, pay the benefit into a beneficiary fund and not the guardian.

Should the trustees not find a dependent within the 12 month period following the death of the member and a beneficiary was nominated by the member then the trustees may pay the benefit to the nominated beneficiary. If no beneficiary was nominated then the benefit will be paid into the deceased’s estate.

The most effective way to speed up the process is to ensure that, as a fund member, your beneficiary nomination form is kept up to date all the time and lists ALL your financial dependents. This helps the Fund trustees greatly in their investigation, and therefore minimises the delay in settling the claim.

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)

Is there tax on gift cards?

The Cape Town Tax Court delivered a judgement on 17 April 2019 on the timing of income tax in relation to gift cards issued by a retailer.[1]

Here, the taxpayer “sold” gift cards to its customers to be redeemed at any of the taxpayer’s stores. The question under consideration was whether the revenue from the “sale” of the gift cards constituted “gross income” for purposes of the Income Tax Act[2] as soon as it was received by the taxpayer, or only when the gift card was redeemed or has expired.

In terms of section 1 of the Income Tax Act,[3] a taxpayer must include in “gross income” all amounts “received by or accrued to or in favour of” that taxpayer. Initially, the taxpayer included all amounts received in respect of the gift cards in the year in which the cards were issued and paid for.

However, the Consumer Protection Act (“CPA”)[4] came into effect with specific provisions on the treatment of gift cards. It stated that any consideration paid by a customer to a supplier for a gift card is the property of the bearer of the card until the supplier redeems it. Also, a supplier may not treat any prepayments in its possession as the property of the supplier.[5]

As from 2013, the taxpayer, therefore, transferred the revenue from the gift cards to a separate bank account until such time as the cards were redeemed or become expired and accounted for these amounts in its financial records as an unredeemed gift card liability.  The taxpayer also did not include these amounts in its “gross income” at the time of the “sale” based on the argument (and irrespective of the CPA provisions) that the money was not received by the taxpayer for its own benefit, but was held for the benefit of the card bearer. Secondly, the effect of the CPA provisions rendered it inconsistent with being “gross income” for income tax purposes.

The Court found that the mere segregation of monies in a separate bank account did not by itself mean that the funds were somehow held “in trust” for the benefit of the cardholders as opposed to the taxpayer. However, the result of the CPA and the treatment of these amounts in order to comply with its requirements was that the taxpayer did not receive such monies for its own benefit until the cards were redeemed. The Court held that these receipts therefore only constituted “gross income” when it was redeemed or had expired.

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)

The Carbon Tax Act explained

What It Is and How It Will Help Us Sustain the Future

“Global warming”, “greenhouse effect”, “carbon emissions” – since Al Gore’s 2006 Nobel Peace Prize-winning documentary, An Inconvenient Truth, some have found these words popping up around every corner. For others, these concepts have been a part of dialogue years before Leonardo DiCaprio’s voice started informing viewers of the melting ice caps. South Africa’s Carbon Tax Act, which came into effect on 1 June 2019, is proof that people from this latter group have been working for more than a decade to help put South Africa onto the list of countries that are committed to lowering their greenhouse gas emissions and in so doing, saving the world.

The Carbon Tax Act, in a nutshell, is the “polluter pays” principle, where companies who have high-volume carbon- and greenhouse gas emissions pay a special tax on these emissions. Although new to South Africa, carbon tax has been around since the 1990s, when Denmark, Finland, Norway and Sweden started taxing high-emission companies. Countries such as Switzerland and Japan, along with Canada’s British Columbia province, have all moved into their second stage of Carbon Tax since the 2000s as well.

Now while it may seem that South Africa is somewhat late to the party, extensive sustainable development processes preceded this Act. In 2011, the National Climate Change Response Policy was drawn up, followed by the National Development Plan of 2012. These policies paved the way for South Africa’s joining the rest of the members on the United Nations Framework Convention on Climate Change in signing the Paris Agreement – the joint commitment to take immediate action in battling the rising climate change. The 2019 Carbon Tax Act is our next step.

The Act will be introduced in two phases. Phase one, which began in June 2019, will run until the end of 2022, after which the second phase will run until the end of 2030. The purpose of splitting this venture in two is to lessen the initial blow on the affected parties. This lower initial tax rate is put in place to make companies aware of the change that needs to be made in their infrastructures, giving them time to lessen their emissions before the second phase commences. The rates for the second phase will be finalised after a review of phase one, promising to be much higher than the initial rates.

Although many may feel this Act is “too little, too late”, the benefits are long-term and are aiming not to improve or drastically change the country in a few years, but to gradually create a sustainable, lower-emission economy which will improve the lives of all South Africans daily. European countries who introduced a carbon tax as early as the 1990s are showing visible decreases in their carbon emissions compared to their neighbours who have not initiated similar taxing endeavours. Taking this into consideration, the visible results of this Act will most likely only become apparent after 2030.

While this act is a bold statement on the government’s behalf – hoping to turn the country towards sustainable development along with taxes on products such as fuel and plastic bags – it is by no means enough to ensure a more sustainable future. Directors of the affected organisations are encouraged to align their businesses with the larger environmental goals and remedying their shortfall areas (which will be helped along by the first phase of the Carbon Tax Act), while also embarking on their own endeavours to improve the sustainability of their organisations.

As the decision-makers of the industry, the board of directors will be expected to lead by example, ensuring their decisions are driven by effectivity and ethical motivations. In all decision-making, the greater long-term implications and sustainability of the company have to be considered, regarding not only the environment, but also third-party stakeholders and, most importantly, its employers. Change comes from within, and so the board has to secure an ethical, transparent, workplace while changing the way the company sees itself in relation to the larger sustainable movement.

Ensuring the development of environmental policies, the implementation of an Effective Environmental Management system, and the inclusion of environmental issues in the company’s risk management are key steps towards the board’s aim to create responsible corporate citizenship.

Along with almost 200 other countries who have joined in the commitment to lower carbon emissions and battle climate change, South Africa is helping to change the world. By taking the initiative your company can help change it, and in so doing save the future as well.

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)