Withdrawal of vat relief for residential property developers

Section 18B of the Value-Added Tax Act was introduced effective 10 January 2012 in a bid to grant relief for residential property developers caused by the slump in the property market at that time. Many property developers, registered for VAT, would develop residential properties with a view to dispose of these properties in the short-term as trading stock and as part of its VAT enterprise. However, following the global financial crisis of little less than a decade ago, many property developers found themselves in a position where they were increasingly forced to rent out residential properties once a development was completed due to the slower rate at which properties could be disposed of compared to earlier.

 

The letting of residential property is typically exempt from VAT. Due to a change in use of the properties therefore (albeit temporarily) from being held for sale as trading stock to now being put up to be let in the interim while being on market constituted a change in use of the properties. Due to the change in use of the properties, from being used to make taxable VAT supplies in the ordinary course of business and being sold as trading stock by the developer, to now being used to make VAT exempt supplies in the form of being used to generate residential rental income, the provisions of section 18(1) of the VAT Act would ordinarily have applied. In terms of section 18(1), where goods have been acquired previously for purposes of making VATable supplies, and these goods are subsequently used to make exempt supplies, the VAT vendor must be deemed to have disposed of all those assets for VAT purposes. In other words, even though no actual disposal of assets has taken place, such a disposal is deemed to take place for VAT purposes and which gives rise to output VAT having to be accounted and paid for by the developer based on the open market value of the property at that stage.

 

As one could quite easily imagine, having to account for output VAT in these circumstances may be prohibitive, especially considering that the value of a property will likely have been enhanced due to the development and that VAT inputs thus far claimed by the developer would be overshadowed by the output VAT amount that is now required to be claimed.

 

It is in acknowledgement hereof that section 18B was introduced to the VAT Act in 2012. In terms of that provision, property developers were granted a 36-month grace period within which to sell properties, and during which time these residential properties could be rented out without a deemed supply being triggered for VAT purposes.

 

When introduced originally, it was made clear at that stage that the relief for temporary letting as explained above will only be in effect until 1 January 2018. However, it is arguable that the property market has not recovered sufficiently yet for the relief to be withdrawn at this stage.

 

This article is a general information sheet and should not be used or relied on as legal or other 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)

Interest received by non-residents on SA bank accounts

Persons that are not tax resident in South Africa (“SA”) are only taxed in SA on income received by or which accrued to such non-resident from an SA source. This will include interest received on an SA bank account.

 

Non-residents may, however, be exempt from SA income tax on interest earned in terms of section 10(1)(h) of the Income Tax Act. The section 10(1)(h) exemption does not apply though to the extent that the non-resident is a natural person who was physically present in SA for a period exceeding 183 days in the 12-month period preceding the date on which the interest was received by or accrued. In these circumstances, the non-resident must register for income tax and declare such SA source interest to the South African Revenue Service. The exemption will also not apply where the debt from which the interest arises is effectively connected to a permanent establishment of that person in SA or where the interest received is in the form of an annuity. The general interest exemptions in section 10(1)(i) may, however, still apply to non-residents that are natural persons.

 

Other than for an income tax effect, non-residents earning SA source interest can also be subject to the withholding tax on interest (“WTI”) at a rate of 15%, unless certain exemptions apply. This withholding rate can be reduced by an applicable double taxation agreement between SA and the foreign country where the person (who is a non-resident for SA tax purposes) is tax resident. Two exemptions from WTI may apply to non-residents receiving interest on an SA bank account. Firstly, there is a general exemption from interest received from SA banks. Secondly, no WTI is payable where the non-resident exceeds the 183-day threshold as set out above.

 

In summary, non-residents are not subject to WTI on interest received on an SA bank account. Also, no liability for income tax will arise on condition that none of the exclusions in section 10 mentioned above applies. To the extent that any of these exclusions apply though, the non-resident will have to register for income tax in SA and submit an income tax return. An applicable double taxation agreement should also be considered as it may contain specific provisions relating to the taxation of interest and providing relief to the extent that none is afforded by the domestic legislation discussed in this article, although this will not affect the obligation to submit an income tax return to the South African Revenue Service.

 

This article is a general information sheet and should not be used or relied on as legal or other 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 consultancy services: A fringe benefit?

A recent judgment of the Tax Court sitting in Pretoria highlighted yet again the very broad nature of the employment fringe benefit regime governed by the Seventh Schedule of the Income Tax Act and as applies to goods and services provided to employees through an employer. As a general principle, employees’ benefits received from their employers in whatever form could potentially be treated as part of employees’ remuneration and therefore subject to income tax in their hands. Such fringe benefits are therefore also subject to the PAYE regime and which should be applied by employers in withholding PAYE on the value of such benefits.

 

Paragraph (i) to the “gross income” definition in section 1 of the Income Tax Act specifically includes in gross income “… the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit or advantage granted in respect of employment or to the holder of any office, being a taxable benefit as defined in the said Schedule…”.

 

In the particular tax court case, a South African subsidiary company, forming part of an international corporate group, employed non-resident employees as part of a global secondment programme which the group was implementing. In terms of that secondment programme, employees were guaranteed an after-tax salary amount of not less than what the employees would have received in their country of residence while working for the South African subsidiary company. In other words, where a higher tax charge would be levied in South Africa on remuneration earned, the South African subsidiary would carry that cost on behalf of that employee.

 

In order to implement this complex “Tax Equalisation Scheme”, the South African employer company contracted the services of a firm of tax consultants to assist the non-resident employees to submit their tax returns in accordance with the South African income tax laws, and also to ensure that the returns reflect the correct information to give effect to the “Tax Equalisation Scheme”.

 

The Tax Court found that the services which the tax consultants provided, although arguably necessary for purposes of fulfilment of the employer’s contractual arrangement towards its employees, were in essence a service rendered to the employees and not the employer, even though the tax consultants’ services were paid for and contracted by the employer. As a result, these services constituted a “benefit or advantage” for the employees as envisaged in the gross income definition quoted above, and moreover such services were provided for the “private or domestic purposes” of the employees in question. As a result, the appeal against the PAYE assessment raised by SARS in the amount of R2.4m was dismissed.

 

Although a fact-specific judgment, it nevertheless again highlights the very broad nature potentially of the PAYE regime. Given the heavy penalties and other sanctions linked to a contravention of the provisions of the Fourth Schedule (which governs the collection and payment of PAYE, which may also be levied on fringe benefits received by employees), employers are advised to approach the tax consequences of employee benefits with caution.

 

This article is a general information sheet and should not be used or relied on as legal or other 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)

From Xero to Hero

The internet and modern communications technology has changed everything, including the way that businesses keep their records up to date; one new approach we recommend has at its heart the cloud based accounting software, Xero.

 

In a nutshell, Xero allows you to update and view the financial state of your business in real time, from almost anywhere. And, as your appointed advisors, because we can see exactly the same information you can, we can give you the advice you need, when you need it.

 

Why do we like Xero so much? Because it’s so easy and convenient for our clients to use. Nobody knows more about your sales and purchases than you do. So it makes perfect sense for you to record your business transactions, as they happen, rather than months after the event.

 

With Xero, you don’t need to worry about data backup or software updates – it’s all in the cloud, so everything is always secure and up to date. And rather than paying for us to just typing in your data, you are able to pay us for providing you with valuable advice and guidance that will help you to make your business a success.

 

Contact Zuydam Konsult to see how we can help you implement Xero today.

Your primary residence and capital gains tax

Capital gains tax is somewhat of a misnomer in that it does not represent a tax in and of itself, but rather operates to include a portion of a person’s capital gains realised when an asset is sold in that person’s taxable income, and which taxable income is then subject to income tax. For natural persons, 40% of capital gains realised on assets are included in taxable income, whereas the inclusion rate for legal persons stand at 80%.

 

Disposing of immovable property would typically give rise to a significant capital gain. However, where that property sold is the primary residence of the person selling it, certain exclusions apply which reduce the ultimate income tax liability of the seller, often even eradicating the capital gains tax effect of the sale altogether.

 

Paragraph 44 of the Eighth Schedule to the Income Tax Act, 58 of 1962, defines a residence as “any structure, including a boat, caravan or mobile home, which is used as a place of residence by a natural person, together with any appurtenance belonging thereto and enjoyed therewith.” The exclusion does not apply however to any residence but only to a person’s primary residence.

 

Again, a primary residence is defined as “a residence—

(a) in which a natural person … holds an interest; and

(b) which that person … or a spouse of that person … ordinarily resides or resided in as his or her main residence and uses or used mainly for domestic purposes…”

 

Theoretically therefore, the exclusion would not apply to holiday homes. The Act is further explicit in that a person cannot have more than one primary residence at any given moment.

 

The exclusion afforded to disposals of primary residences is quite significant and can operate in either of two potential manners. Firstly, where the selling price of the primary residence is less than R2 million, no capital gains tax will be payable. Secondly, even if the selling price is more than R2 million, up to R2 million of the capital gain will be excluded from being subject to income tax.

 

Where two persons use the same property as a primary residence and jointly own that property, the R2 million is apportioned between the two of them. In other words, the exclusion applies per property and not per taxpayer. If for example a husband and wife own a house which they sell for a profit of R3 million, each will be taxable on R500,000’s worth of gains (being R1.5million less R1million each).

 

The exclusion is significant, yet not one to be taken for granted. Many taxpayers make the mistake of transferring their primary residence to a trust structure for estate duty purposes, thereby forfeiting the potential primary residence exclusion if the property is sold in future: by virtue of the definitions above non-natural persons can never have a primary residence and trusts and companies therefore are ineligible for the relief provided.

 

This article is a general information sheet and should not be used or relied on as legal or other 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)

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