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Budget Speech Review – Focus on Value Added Tax

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

While there were a number of changes announced in the recent budget speech, none were as significant as the increase in the standard rate of VAT from 14 to 15%. While largely anticipated the practical implications need to be reviewed in order to ensure compliance from a vendor perspective, and to gain a better understanding from a consumer perspective. Accordingly this newsletter is dedicated to some of the more pertinent issues arising from the increase.

TRANSACTION DATE

The VAT rate to apply depends on the time of supply rules.
in simple terms, this is the date on which the transaction is deemed to occur according to the VAT Act. The general time of supply rule is the earlier of when –

  • an invoice is issued; or
  • payment is received.

For most transactions the general time of supply rule will apply. However, some transactions have special time of supply rules. Some examples include supplies between connected persons, fixed property transactions and supplies made under instalment credit agreements. In addition, some rate specific rules could apply when there is a change in the VAT rate. Most transactions which occur on or after 1 April 2018 will be subject to VAT at the new rate of 15% unless a special time of supply rule or a rate specific rule applies

PRICES QUOTED OR ADVERTISED

All prices advertised or quoted by vendors for taxable supplies must include VAT at the standard rate (unless the supply is zero-rated). Vendors must state that the price includes VAT in any advertisement or quotation, or the different elements of the total price must be stated. That is, the total amount of VAT, the price excluding VAT and the price inclusive of VAT. Vendors must therefore check that all price tickets, labels, quotations, advertisements, etc., reflect the new VAT rate of 15% from 1 April 2018.

As a practical arrangement, the Commissioner for SARS has granted permission for a vendor to display a notice that the price does not include VAT at the new rate of 15% and prices will be adjusted at the point of payment. The notice must be prominently displayed at all entrances to the business premises and at all points where payments are effected. The notice should be removed by no later than the end of May 2018.

AGREEMENTS

Vendors may generally recover the price increase as a result of the increase in VAT rate from their customers. However, the increase cannot be recovered if there is a specific agreement with the customer in writing that the price cannot be increased as a result of a VAT increase. Vendors must therefore review existing agreements and those relating to offers accepted before 1 April 2018.

SALES AND BILLING SYSTEMS

Vendors must ensure that sales and billing systems are updated to include VAT at 15% from 1 April 2018. Vendors should test the systems for errors, and check that transactions are processed and reflected at the correct VAT rate, in order to avoid disputes with customers. Remember that prices are deemed to include VAT at 15%, so a vendor may incur penalties and interest where the output tax is under declared as a result of the incorrect VAT rate used.

RECEIPT OF QUOTES, TAX INVOICES, CASH REGISTER SLIPS DEBIT OR CREDIT NOTES

Check that any quote received on or after 1 April 2018 correctly reflects the new VAT rate of 15%, and that the total price (including VAT) is correctly calculated before accepting the quote. Remember that an input tax claim must be supported by documentary evidence, so you should check that the amounts on cash register slips and tax invoices received on or after 1 April 2018 have been correctly calculated based on the VAT rate of 15% (subject to certain exceptions) before claiming the VAT on your VAT201 return.

In cases where tax invoices issued on or after the rate change show VAT charged at 14%, you can only claim input tax at that rate. You therefore need to contact the supplier if an incorrect VAT rate is reflected on a document, or the amount is incorrectly calculated

VAT201 RETURNS

Vendors under Category B (March/April), Category E (annual return) and
most farmers registered under Category D VAT reporting periods, will have  transactions subject to the VAT rate of 14% and 15% which must be correctly reflected on the VAT201 return.

The VAT201 return will be updated to reflect the new VAT rate of 15% in time
for VAT reporting periods ending in or after April 2018. Furthermore, the VAT 201 return and related systems will be updated to process the relevant calculations at the new rate of 15%. More details in this regard will be communicated in due course.

RATE SPECIFIC RULES

Supplies starting before and ending on or after 1 April 2018 – Where goods are delivered or services are performed during a period commencing before 1 April 2018 and ending on or after 1 April 2018, the VAT-exclusive price of the supply must be apportioned on a fair and reasonable basis and allocated to the respective periods. The VAT rate is then applied accordingly. That is, the rate of  14%  is  applied   to   the   value   of   supplies   before 1 April 2018 and the rate of 15% is applied to the value of supplies from 1 April 2018 onwards.

This rate specific rule applies to –

  • goods supplied under rental agreements;
  • goods supplied progressively or periodically;
  • goods or services supplied in construction activities; and
  • services rendered over the period concerned,
  • but does not apply to supplies of fixed property (including residential fixed property).

Goods delivered or services actually performed on or after 1 April 2018 in respect of contracts
concluded  between  21 February 2018 and 31 March 2018 – Rate specific rules also apply  where  the time  of  supply  occurs  between  21 February and 31 March 2018 (that is, on or after the date of the announcement of the increased VAT rate, but before the effective date of the increased rate). Under this rule, when goods are delivered on or after 23 April 2018, or services are performed on or after 1 April 2018, but the time  of  supply  is  triggered  between  21 February  and  31 March 2018 as a result of any invoicing or payment in relation to the supply, then VAT at the rate of 15% applies. However, if the goods are delivered before 23 April 2018 (that is, within 21 days after 1 April 2018), or the services are rendered before 1 April 2018, then the supplies concerned will be subject to VAT at 14%.

These rate specific rules do not apply –where it is an established business practice for payments to be made, or invoices to be issued before the supplies are made;

  • in respect of the sale of residential property, certain real rights in residential property and shares in residential share block companies;
  • to the construction of a new dwelling by a construction enterprise.

Supply of residential fixed property

Even if the time of supply is triggered after 1 April 2018 due to payment or registration of the property in the purchaser’s name in a Deeds Registry taking place, the supply of residential fixed property could be subject to VAT at 14%.

This rate specific rule only applies if –

  • the contract for the supply was concluded before 1 April 2018; and
  • both the payment of the purchase price and the registration of the property will occur  on or  after 1 April 2018; and
  • the VAT-inclusive purchase price was determined and stated as such in the agreement.

For purposes of this rule, “residential property” includes a dwelling and certain real rights and shares in share block companies relating to a right of occupation of or interest in a dwelling. The construction of a new dwelling by a construction enterprise is also included.

As can be seen the administrative burden in ensuring compliance is daunting . We strongly advise that you seek professional advice when reviewing the implications for your business.Please don’t hesitate to contact us for professional advice in this regard.

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Tax Deadlines

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

SARS encourages taxpayers to submit outstanding returns

The South African Revenue Service (SARS) is embarking on a nationwide awareness campaign to remind taxpayers of their obligation to submit outstanding tax returns.

The campaign kicked off in KwaZulu-Natal on the 22nd January. Other provinces will be covered over the next six weeks. During this campaign, SARS will share information on taxpayer obligations, the submission of tax returns, and consequences related to non-submission.

SARS would like to see higher levels of compliance across all tax types and prompt payment of tax debt. Taxpayers who do not submit their returns are charged a penalty, which can range from R250 to R16 000 per month, depending on the taxable income of the taxpayer. It is a criminal offence not to submit a return and continuous non-compliance will lead to criminal prosecution.

There is a significant budget deficit, and collecting outstanding taxes is certainly one of the first ways of improving liquidity. You can expect a severe clamp down this year so if you have any outstanding returns please contact us for professional assistance in this regard.

Provisional Tax

Note that entities and individuals with February year ends are required to submit their 2nd provisional tax payment by the end of February 2018. Note that penalties are levied on the late or non-payment of provisional tax at a rate of 10%. If provisional tax has been understated a penalty of 20% will apply. Note that the non-submission of the return with four months of year end is deemed to be a submission with an estimate of zero.

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Carbon Tax Bill Released for Public Comment

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

The National Treasury has published the Second Draft Carbon Tax Bill for introduction in Parliament, as well as public comment and convening of public hearings by Parliament, which is expected to be early in 2018. Following that process, a revised Bill will be formally tabled in Parliament, which is expected to be by mid-2018.

The actual date of implementation of the carbon tax will be determined through a separate and later process by the Minister of Finance through an announcement during 2018, or at the 2019 Budget, taking into account the state of the economy. This announcement on the implementation date of the carbon tax will be complemented by a package of tax incentives and revenue recycling measures to minimise the impact in the first phase of the policy (up to 2022) on the price of electricity and energy intensive sectors such as mining, iron and steel.

Due date for comments Treasury has invited stakeholders to submit written comments on the draft Carbon Tax Bill by close of business on 9 March 2018 to carbontaxbillcomments@treasury.gov.za. Kindly email any queries to Sharlin Hemraj (sharlin.hemraj@treasury.gov.za) or Dr Memory Machingambi (memory.machingambi@treasury.gov.za).

The Draft Carbon Tax Bill together with the following annexures is available on the National Treasury website: www.treasury.gov.za

  • Annexure 1: Explanatory Memorandum
  • Annexure 2: Socio economic Impact Assessment Report
  • Annexure 3: First Draft Carbon Tax Bill 2015: Response Document

We will keep you informed on any developments in this regard.

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SARS Crackdown on Religious Sector

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

The South African Revenue Service (SARS) will engage religious institutions with the intention to investigate possible tax non-compliance in this sector. The decision follows SARS’ own preliminary investigation, its meeting with the CRL Rights Commission and general reports suggesting that certain religious organisations and leaders are not in compliance with tax laws and may be enriching themselves at the expense of tax compliance and their altruistic and philanthropic purpose.

SARS also acknowledges that a number of religious organisations are indeed complying with their tax obligations. Religious institutions may apply to SARS to be exempted from the payment of Income Tax and certain other taxes in terms certain sections of the Income Tax Act. Once such tax exemption status is granted, there are a number of specific criteria that have to be complied with, including but not limited to:

  1. Conducting activities in a non-profit manner with an altruistic or philanthropic intent;
  2. No such activity is intended to directly or indirectly promote economic self-interest of any person other than by way of reasonable remuneration paid for services rendered;
  3. Religious institutions are prohibited from directly or indirectly distributing funds to any person other than in performing their religious activity

SARS is also concerned that proper taxes on trading activities that are unrelated to religious activities as well as Pay As You Earn (PAYE) on remuneration and other benefits are not being paid in terms of legislation. Over and above, SARS has further found a number of religious institutions issuing tax deductible receipts in terms of section 18A of the Income Tax Act, 1962, for donations towards religious activities. This is not permitted in terms of the Income Tax Act, 1962.

These entities are encouraged to use the SARS Voluntary Disclosure Programme to regulate their taxes. SARS will be reaching out to the CRL Rights Commission and faith community to raise awareness about the relevant tax obligations of religious institutions where applicable.

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

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Budget Preview

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

Minister Gigaba will present his first full budget speech on the 21st February 2018. This has to be one of the most important budget speeches announced post-democracy – one that could make or break our fragile economy.

The scale of funding the budget deficit alone is daunting, set against a backdrop rebuilding investor confidence in “brand South Africa”. The starting point, according to the medium term budget speech, is the funding of a budget deficit in excess of R50 billion. Then Zuma’s bombshell announcement of free education has really set the cat amongst the pigeons. According to the Davis Tax Committee we would need at least an additional R60 Billion per annum to fund this. Treasury has bandied about figures of between R12 Billion and R20 Billion. We won’t even start discussing what additional funding our State Owned Enterprises may require. The departure of Michael Sachs, a key player in the formulation of our budget, says it all! Treasury is going to be hard pressed to come up with a workable solution, balancing the funding needs while at the same time stimulating an underperforming economy.

Some Potential Tax Implications:

  • Probable increase in Vat by 1% to 2 %
  • In order to soften the “political blow” of a VAT increase some form of wealth tax or increase in the maximum marginal rate of tax
  • Increasing the tax net
    • See our article on the Religious sector
  • Improving liquidity by enforcing compliance with submissions and payment of taxes
    • See our article on Tax Deadlines

Whatever the “solution”, it is going to a hard and bitter pill to swallow. We will keep you informed of
developments around the much anticipated budget speech.

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Financing a National Health Insurance (NHI) for South Africa

The following article is an excerpt from our December 2017 newsletter:

The large degree of uncertainty and lack of common understanding of how the NHI will be implemented and operate is of concern, given the magnitude of the proposed reform. At this stage a few pertinent observations can be made based on the draft NHI White Paper as well as the potential impact on taxes.

  1. There is currently substantial uncertainty about both the costs (R256 billion pa) and funding shortfall (R72 billion pa) of the NHI.
  2. A combination of tax instruments with as broad a base as possible would be preferable.
  3. Given that the NHI introduces a universal benefit, it is appropriate that its financing base be as broad as possible, in the interests of social solidarity.
  4. Excise taxes on alcohol, tobacco or sugar-based beverages are levied primarily to change behaviors, but high increases tend to lead to illicit trade, resulting in reduced collections, and are unlikely to fund a significant proportion of the NHI funding requirement.
  5. Given the considerable size of projected funding shortfalls, substantial increases in VAT or Personal Income tax and/or the introduction of a new social security tax would be required to fund the NHI.
  6. The magnitudes of the proposed NHI fiscal requirement are so large that they might require trade-offs with other laudable NDP programmes such as expansion of access to post school education or social security reform
  7. The proposed NHI, in its current format, is unlikely to be sustainable unless there is sustained economic growth.

Clearly the proposed implementation of the NHI will have severe repercussions for the fiscus and accordingly requires a substantial review before implementation can be considered.!

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Funding of Tertiary Education

The following article is an excerpt from our December 2017 newsletter:

In principle, the DTC has confirmed that a blanket free higher education (including the wealthy) is not economically financially possible. The following key issues were noted:

  • 1 in 8 children get to university, 1 in 17 graduate
  • The wealthy are considerably more likely to get to university
  • The richest 10% of households received 48% of governments subsidy in 2011
  • Graduate unemployment is 6%
  • Approximately R60 Billion extra per year would be needed for no fee higher income

Best way to eliminate or decrease financial exclusion from higher education 

There are a number of models to fund higher education. The one with the largest leverage potential is a system of government-backed student loans. Given that 10% of the population own “at least 90-95% of assets”, the vast majority of South African households do not have sufficient assets or income to stand surety for their children. Thus, the financial markets play almost no role in funding higher education for the poorest 80% of students. In this context, a government-backed income-contingent loan could be a way to ensure that more/all students are not excluded on financial grounds. The key features of such a system would be:

  • Leveraging existing financial infrastructure to facilitate the administration.
  • Loans would be repayable once students graduate and/or find employment (bear in mind there is only 6% unemployment amongst graduates)
    • The DTC does not deal comprehensively with the fact that only 50% of all students graduate. Clearly those who do not graduate will still have to repay their loans, but in all probability there will be a high level of default from these students.
  • Financial Leveraging. Using the traditional bank lending model of roughly R1 deposits for approximately R4 of loans, a student “lending fund” of around R40 billion could be created by a deposit of R10 billion.

Conclusion, Recommendations & Tax Implications

The DTC recommends that a system of free education for the poorest students combined with a sliding scale of income-contingent government-backed loans for the missing-middle and full-fees for the wealthy is the best workable solution. It is estimated that R15 billion would be required per annum to be sourced as follows:

  •  Raising the top marginal rate of personal income tax by 1.5% would yield R5,1 Billion
  • Increasing the Capital Gains Tax Inclusion rate for corporates from 80% to 100% will yield R1.4 Billion
  • Increasing the Skills Development Levy would yield and additional R8.8 billion.

The budget in February 2018 promises to be very interesting indeed with all the current demands on the fiscus!

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Davis Tax Committee (DTC) Publishes Final Repo< strong>rts

The following article is an excerpt from our December 2017 newsletter:

The Davis Tax Committee was established in 2013 to review what role the tax system can play in addressing the following key issues amongst others:

  • Economic growth
  • Unemployment, poverty and inequality
  • Small business growth
  • Corporate tax base erosion and profit shifting

In this context the following six final reports have been published:

  • Funding of tertiary education in South Africa
  • Financing a National Health Insurance (NHI) for South Africa
  • Second and final report on base erosion and profit shifting
  • Second and final report on hard-rock mining
  • Oil and gas report coupled with an IMF report on the same topic for the DTC
  • Tax Administration

Given the importance (and potential impact) of these issues, we will summarise the key findings of three of the reports in this newsletter.

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TRUSTS – TAXATION LAWS AMENDMENTS BILL 2017

The following article is an excerpt from our November 2017 newsletter:

At the time of the Medium-Term Budget Statement minister Gigaba also signed the Taxation Laws Amendments Bill 2017, which gives effect to various bits of legislation, one of which is the issue surrounding interest free or low interest loan accounts to trusts. Many commentators have stated that the wording is incorrect and could give rise to unintended consequences. We will keep you informed of developments in this regard. Should you have any queries in this regard please do not hesitate to contact us.

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MEDIUM-TERM EXPENDITURE OUTLOOK

The following article is an excerpt from our November 2017 newsletter:

To offset revenue shortfalls and reduce borrowing, government has had to reduce its reserves. This leaves government with little room to maneuvre should risks to the expenditure ceiling materialise. Moreover, further reductions in the ceiling may be required to stabilise national debt. Various risks and pressures need to be taken into account over the medium term:

  • Additional spending commitments may emerge from policy processes underway. Government is evaluating the implications of providing fee-free higher education and training to poor and middle-income students. Other policy commitments include NHI, proposals in the Defence Review, improved early childhood development, accelerated land reform and several large infrastructure project proposals.
  • The inflation outlook has been revised down compared with the 2017 Budget, relieving pressure on inflation-linked expenditure such as the wage bill. However, public-sector remuneration budgets pose a large and imminent risk, with the possibility that some national and provincial departments will exceed compensation ceilings.
  • A new civil service wage agreement in which salary increases exceed CPI inflation, and without headcount reductions, would render the current expenditure limits difficult to achieve.
  • Several state-owned companies persistently demonstrate operational inefficiencies, poor procurement practices, weak corporate governance and failures to abide by fiduciary obligations.

Debt-service costs

At a time when revenue is under pressure, an increasing share of tax collection will be diverted to settle interest payments. As gross debt expands, debt service will remain the fastest-growing category of spending over the next three years. Relative to the 2017 Budget projections, debt-service costs will be R1 billion higher in 2017/18, R2.4 billion higher in 2018/19 and R6 billion higher in 2019/20. By 2020/21, government projects that nearly 15 per cent of main budget revenue will go toward servicing debt. This crowds out the space to fund social and economic priorities.

Interest payments as a share of main budget revenue

Source: National Treasury

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