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Trusts – Liability of Trustees

The following article is an excerpt from our June 2018 newsletter:

Trusts have recently come under the spotlight from a SARS perspective. With the recent amendments, it is important for a trustee to fully understand their role and responsibilities. Although a trustee may not act in the capacity of trustee until he/she has received a letter of appointment from the Master, he/she is still liable for any unlawful act committed in the handling of trust affairs prior to the issue of the letters.

Once a trustee has accepted the position and is authorised to act, the trustee must act at all times in the best interests of the trust’s beneficiaries and fulfil all duties in terms of the trust deed and the law. A trustee may not be negligent when performing their duties. A trust itself cannot be sued as it is not recognised as a legal person in South Africa (unless a statute defines it as such). It is the trustees in their official capacity who can be sued.

An indemnity clause in the trust deed which exempts trustees from liability for breach of trust is void and does not exempt a trustee from actions involving ordinary or gross negligence or intentional wrongdoing. Criminal liability may be imposed on a trustee who commits a crime in the course of the trust administration e.g. theft or fraud.

Trustees are jointly and severally liable for damages (delict). Beneficiaries or third parties (e.g. creditors) who have suffered a loss as a result of breach of trust are entitled to bring a damages claim against the trustees. Trustees can be sued for damages by beneficiaries if they act negligently (even if they act in good faith) and/or if they intentionally act wrongfully. A co-trustee who was not involved with a breach of trust may nevertheless be liable for any wrongful action of another trustee if the “innocent” trustee’s ignorance and/or inactivity is causally connected to the damage incurred. For example: where the “innocent trustee” is aware of a breach of trust by co-trustees but does not report it, or where the “innocent trustee” improperly allows trust funds to remain in the sole control of co-trustees.

Being a trustee is no light matter. If you are a trustee and would like to find out more about your roles and reasonability’s please feel free to contact us for professional advice in this regard.

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Estate Plan Review

The following article is an excerpt from our June 2018 newsletter:

While it makes sense to review one’s estate plan on annual basis there are some key events which should ring a bell for an estate planner to revise their estate plan immediately. The following are some key events:

Divorce

The Wills Act states that except where expressly otherwise provided, a bequest to a divorced spouse will be deemed revoked if the testator dies within three months of the divorce. This provision is to allow a divorced person a period of three months to amend their Will, after the trauma of a divorce. Should one fail to amend their Will within three months after divorce, the deemed revocation rule will fall away, and the divorced spouse will benefit as indicated in the Will. In addition, review beneficiary nominations on any policies, retirement annuities, and trust deed provisions (all subject to the divorce order).

Sale or donation of asset specifically mentioned in Last Will and Testament or Inter vivos trust

Marriage

Birth of a child or grandchildren:
If children are minors the estate planner needs to ensure that the assets they inherit are protected through the estate planners Will.

Estate planner acquires significant property

Downturn in estate planner’s financial position

New business ownership:
Provide for business succession planning in the partnership, shareholders or association agreement(s).

Change in legislation having an impact on the estate plan:
For example, annual Budget speech announcements and tax legislation amendments.

The estate planner will need to decide whether it is practical and viable to merely amend current documents or create entirely new documents to account for any changes. Estate planning is a complex matter and requires the input of various professionals in order to consider all relevant tax and legal implications. We strongly suggest you contact us for professional advice in this regard.

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Annual Employer Reconciliation for the period 1 March 2017 – 28 February 2018

The following article is an excerpt from our May 2018 newsletter:

Employers are required to submit their PAYE Employer Annual Reconciliations between 1 April and 31 May 2018 to SARS, confirming or correcting payroll tax amounts which were declared in respect of the 2017/2018 tax period.

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Davis Tax Committee final report on VAT

The following article is an excerpt from our May 2018 newsletter:

The terms of reference of the Davis Tax Committee (DTC) in general required the Committee “to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability”, and in particular as it relates to value-added tax (“VAT”), to give specific attention to:

“…efficiency and equity. In this examination, the advisability and effectiveness of dual rates, zero rating and exemptions must be considered”

Brief summary of recommendations.

Taxpayer compliance: The VAT gap

Essentially the tax gap in the VAT environment is the difference between the tax that is due under the VAT law, and the amount of actual tax collected. The magnitude of the gap “can be seen as an indicator of the effectiveness of VAT enforcement and compliance measures, as it arises as a consequence of revenue loss through cases of fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations”.

The following observations and actions have been recommended to SARS:

  • continue to monitor the VAT compliance gap as a means of evaluating its performance, and to inform strategic decisions about tax;
  • take the opportunity of the release of the supply-use tables in February 2015 to update its estimate of the VAT gap, and its sectoral composition;
  • consider broadening its tax gap analysis to include other major taxes and;
  • further integrate its revenue and national compliance analyses, to support systemic compliance risk management. There is more scope for more detailed revenue analysis of revenues from individual industry sectors and taxpayer segments to support strategic risk analysis.

Zero-rating
The recommendation of the DTC is that no further zero-rated food items should be considered.

Dual (multiple) rates
The DTC recommends that multiple rates not be adopted.

Exemptions
This has been considered mainly from a financial services perspective and the DTC has suggested that the various approaches adopted in other jurisdictions should receive further urgent consideration by National Treasury and SARS.

Place of Supply Rules
Explicit place of supply rules have been adopted in most jurisdictions so as to fix the place in which supplies are to be taxed and accounted for. Given the magnitude of cross-border trade, in particular cross-border services, generally accepted place of supply rules are necessary to prevent double taxation and non-taxation. The OECD has issued the International VAT/GST Guidelines that seek to promote common place of supply rules.

The DTC recommends that the VAT Act be amended to ensure the inclusion of clearly stated ‘place of supply rules’, specifically rules that are in harmony with the OECD Guidelines and which are supported and adhered to by other VAT jurisdictions.

E-Commerce
The new frontier for VAT is its application in an electronic commerce (“e-commerce”) environment, where the supply of electronic services across jurisdictional boundaries has given rise to many compliance challenges for governments. A significant number of foreign jurisdictions have sought to address this conundrum by adopting place of supply rules that apply specifically to e-commerce.

The Committee recommends that a number of technical amendments be made to the South African rules as regards the definition of “electronic services”, while the Committee also recommends that a distinction be drawn between B2B and B2C supplies.

Macroeconomic impact of raising VAT
The recommendation was to not increase VAT, however if it was (as it now has been) the recommendation was that a range of compensatory mechanisms be considered for adversely affected consumers

Traditional Communities
The DTC recommends that the VAT Act be amended to place traditional communities who operate similarly to a municipality on the same footing as municipalities.

It is interesting that despite of the in depth analysis by the DTC, VAT was indeed raised to 15%. The most logical approach would be to close the “VAT Gap” by improving collections disclosure and the like. One can expect an increase in activity in this area as well.

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Davis Tax Committee recommendations on a Wealth Tax

The following article is an excerpt from our May 2018 newsletter:

Since 1994 South African fiscal policy has placed little emphasis on wealth taxes, save for recent increases in the rates of transfer duty and estate duty. Given the disturbing levels of wealth inequality in South Africa, a taxation system that would ignore such disparities of wealth will lack the important requirement of legitimacy in the tax system.

The process of creating a wealth tax in South Africa as a means to redress South Africa’s levels of inequality would need to start with the consideration of a very simple form of an annual net wealth tax.

The decision on whether to implement an annual net wealth tax cannot be made without the following:

Consideration as to the appropriate tax base
The most important single question is whether retirement funds should fall within the scope of the tax. This is a controversial and complex issue which requires intensive engagement from Treasury, SARS and the relevant stakeholders, including the retirement industry and trade unions.

Comprehensive data on the pattern of wealth ownership
The DTC recommends that all taxpayers and beneficial owners of wealth (which includes control of trusts as well as beneficiaries thereof) that are required to submit an income tax return must be required to include the market value of all readily ascertainable wealth in a revised tax return for the 2020 year of assessment.

An evaluation as to the cost effectiveness of implementing a wealth tax
It is apparent from these recommendations that the introduction of a wealth tax cannot be implemented in the short term. Given the DTC’s findings on the extent of wealth inequality and the importance of the legitimacy of the tax system there are interim measures that could be implemented to promote these objectives. For this reason, the DTC recommends that the focus should initially be on increasing estate duty collections given that the necessary administrative capacity already exists.

Finally, most of the wealth tax submissions received by the DTC point to the fact that progress could be made in reducing South Africa’s levels of inequality by eradicating wasteful/corrupt government expenditure and curbing the levels of tax evasion that currently exist.

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The Davis Tax Committee Concludes Its Work

The following article is an excerpt from our May 2018 newsletter:

The Davis Tax Committee (DTC) has announced the conclusion of its work and the publication of the following four final reports:

  1. VAT (replaces the first VAT report);
  2. Corporate income tax (CIT);
  3. Public benefit organisations (PBO’s);
  4. Wealth tax.

The reports are based on the mandate of the DTC as per its Terms of Reference. The PBO and wealth tax reports were done in addition to the specified items in the Terms of Reference. The DTC does not require any further input on the four reports that have now been published as the reports have been finalised.

It is important to note that, as mentioned in the Terms of Reference of the DTC, “the Committee is advisory in nature, and will make recommendations to the Minister of Finance. The Minister will take into account the report and recommendations and will make any appropriate announcements as part of the normal budget and legislative processes. As with all tax policy proposals, these will be subject to the normal consultative processes and Parliamentary oversight once announced by the Minister.”

This brings the DTC to the conclusion of its work within five years of being appointed by the Minister of Finance on 17 July 2013 to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability.

Given the important nature and potential impact of these recommendations we have written abridged versions of the proposals on a wealth tax as well proposals regarding VAT  for your perusal.

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Important Dates

The following article is an excerpt from our April 2018 newsletter:

 

 

25th April 2018 – VAT manual submissions and payments
26th April 2018 – Excise Duty payments
30th April 2018 – VAT electronic submissions and payments
30th April 2018 – CIT Provisional Tax Payments

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The Emergence of Progressive Web Apps

The following article is an excerpt from our April 2018 newsletter:

It’s been a few months now since Progressive Web Apps (PWA’s) have made their way into both the web and mobile domains but are you fully aware of all the advantages and benefits they offer?

The web ecosystem has evolved quite a lot over the course of the past several years. The surge in mobile usage has totally changed our way of using the web. Mobile constraints, like limited space due to small screens, as well as a pointer much less precise than that on desktop (your finger), have pushed designers to create user interfaces that are far from what we were used to using in the early 2000’s. Clearer, more refined, and most importantly more intuitive, these interfaces figured out how to make their way onto larger screens as well – making it essential today to provide perfect user experience, regardless of the device being used.

PWA’s are the next generation apps, by combining the best of apps and the best of the web, offering an unparalleled experience all the way from mobile to desktop.

In addition, PWA’s which are available on the web directly from a URL, allow you to acquire on average 3 times more visibility than native apps do. The user experience that they offer leads users to stay 8 times longer than they do on classic websites.

PWA’s represent a new way to deliver incomparable user experience on the web, by offering features that have been reserved only for native apps up until now. In terms of usage, the number of smartphone users is incessantly increasing—the global percentage has jumped from 56% in 2013 to around 66% in 2018. Today, 57% of web surfers browse with the help of a mobile device, leaving estimations at over 61% by 2020.

Another indicator supporting this trend is Google’s recent move to modify its algorithm to favour sites that have perfect mobile versions. In time, Google algorithms will only use a site’s mobile version of its content to classify its pages, to understand data structures, and to show snippets of the site in search results.

As you can see, all odds are in favour of PWA’s being the new norm for web/mobile usage. Browser suppliers have got this message, as we can see through their efforts to implement all the technology necessary for them to work, so as to get to a point where PWA’s are completely universal.

We’re now facing a mega trend that’s going to revolutionize the way we use the web by having access to the best tools out there for developing your business.

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Save 28% to 45% Using Section 12J Structuring

The following article is an excerpt from our April 2018 newsletter:

Private equity firms, family offices, private individuals, trusts and companies who have invested in start-ups or mature businesses during 2017 may have missed a huge opportunity if they have not considered investing through a Section 12J Venture Capital Company (“VCC”).

At first glance, sophisticated investors may be convinced that Section 12J has no application to their investments. However, if investors are South African taxpayers, the chances that their investment/s may qualify for the Section 12J associated tax incentive are high.

The Section 12J benefit translates into a tax rebate on the full investment (28% for companies and up to 45% for individuals and trusts). This, in turn, results in a significant boost to returns on investment.

When considering whether Section 12J is applicable to an investment, one would need to determine whether any of the below elements exist. If they do, then an investment will be regarded as non-qualifying and thus Section 12J will not have application:

  1. the book value of the target company exceeds R50 million (unless the investment can be broken down into separate special purpose vehicles);
  2. the target company earns more than 20% of its income from investment income (for example, an investment into an investment holding company would not be permissible);
  3. the target company carries on majority of its trade outside of South Africa;
  4. the target company carries on one of the following “Impermissible Trades”:
    1. any trade carried in respect of immovable property, other than a trade carried on as a hotel keeper (i.e. an investment in hotels, serviced apartments, holiday homes and student residences under certain circumstances, will be permissible);
    2. any trade in the financial services sector (for example, banking, insurance, money lending, hire-purchase arrangements etc., however, this doesn’t prevent an investor from investing in technology within this sector);
    3. any trade carried on in respect of financial or advisory services, including trade in respect of legal services, tax advisory services, stock broking services, management consulting services, auditing or accounting services; and
    4. any trade carried on in respect of gambling, liquor, tobacco, arms or ammunition.

On the premise that an investor’s investment does not fall into one of the categories above, there is a real opportunity to take advantage of the Section 12J associated tax benefits. Accordingly, if you have just realised that Section 12J may be applicable to your business, or if you are still not sure, feel free to contact us for professional advice in this regard.

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SARS’s Stance on The Tax Treatment of Cryptocurrencies

The following article is an excerpt from our April 2018 newsletter:

Increased attentiveness and speculation regarding the future of cryptocurrencies has prompted calls for the South African Revenue Service (SARS) to provide direction as to how cryptocurrencies should be treated for tax purposes. However, there is an existing tax framework that can guide SARS and affected taxpayers on the tax implications of cryptocurrencies, making a separate Interpretation Note unnecessary for now.

SARS will continue to apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued.  Failure to do so could result in interest and penalties.

Cryptocurrency (typified by Bitcoin) is an internet-based digital currency that exists almost wholly in the virtual realm. A growing number of proponents support its use as an alternative currency that can pay for goods and services much like conventional currencies. In South Africa, the word “currency” is not defined in the Income Tax Act.  Cryptocurrencies are neither official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded by SARS as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.

Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”. Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade.

Alternatively, such gains may be regarded as capital in nature, as spelt out in the Eighth Schedule to the Act for taxation under the CGT paradigm. Determination of whether an accrual or receipt is revenue or capital in nature is tested under existing jurisprudence. Base cost adjustments can also be made if falling within the CGT paradigm.

Value-Added Tax (VAT)
The 2018 annual budget review indicates that the VAT treatment of cryptocurrencies will be reviewed. Pending policy clarity in this regard, SARS will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.

Should you require further information please do not hesitate to contact us for professional advice in this regard

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