What should you know about Auto Assessment?

What should you know about Auto Assessment?

What is an auto-assessment?
An auto-assessment is an automatic assessment issued on taxpayers by SARS. This basically means that SARS has collected taxpayer information from their parties (such as medical aid or retirement annuities) and then use this information to file your return and issue an assessment on this return automatically without your involvement.

How will you know if you are auto-assessed? 
You should receive an email or SMS from SARS informing you that you have been selected for auto-assessment. The process started in July 2022. But, this is not the first time SARS has issued an auto-assessment. They also issued these in the 2021 tax year.


What should I do if I receive an auto-assessment? 

SARS says if you agree with the aut0-assessment, you do not have to do anything. However, should you be in disagreement, you have just 40 working days from the date of assessment to file a correction (edited tax return.)


What happens if you miss the 40 days? 

If you do not do anything, SARS assumes you are in agreement with the auto-assessment. The assessment becomes your final assessment at the expiration of the 40 business days.

Can I request an extension? 
If you feel the 40 working days are too little, you can request an extension on eFiling before the 40 days have expired. SARS will require “reasonable” grounds for the request. if you miss the deadline, you will have an additional 21 working days to submit a request for an extension on the same terms. If both 21 and 40 days have passed and you still were not able to submit a correction, you will need to provide “exceptional circumstances” to justify a delayed request for extension.


NOW TO THE BIG QUESTION, SHOULD I ACCEPT THE AUTO-ASSESSMENT? 

We think this is a risky move if (and SARS may not pick up these things on an auto-assessment:)

1. You have qualifying donations you would like to claim

2. You have qualifying out-of-pocket medical aid expenses

3. Your medical aid is being paid for by someone who is not the principal member (normally the person paying for the medical aid would be the one to claim the medical tax credits.)

4. You have capital gains on assets that you sold that fall outside the scope of an auto assessment

5. You are a crypto or share trader

6. You have a side business or rental income (profit or loss)

7. You have and qualify for a home office expense claim (deductions)

8. You would like to claim your business travel kilometres

9. SARS missed one or some of your retirement annuity funds

Contact us:
Was this helpful? Would you like us to do your tax return? Get in touch with us via email (evatax@evacfo.com) or by phone – 021 823 9684

What are the tax implications of trading or buying shares?

What are the tax implications of trading or buying shares?

The tax implication for having shares boil down to two things, whether your gain is income in nature or capital (gain) in nature. Let’s start by defining these two things:


Income: 

Shares held as trading stock are bought mainly for resale at a profit. In other words, any shares held for speculative purposes normally fall under this category. The profits or any gain or loss made on the disposal of such shares (held for-profit/speculative) purposes will be of a revenue nature and will not be subject to capital gains.


Gains of a revenue nature are subject to tax at marginal tax rates that vary between 18% and 45% depending on the circumstances of the taxpayer after taking into account all his/her other income (such as salary, rent, business income e.t.c.) The taxpayer can also deduct expenses directly related to the trading of these shares such as broker fees, transaction fees, subscription to broker news, tools and platforms and any such costs directly related to the trading of these shares.


Capital: 

On the other end of the spectrum, for shares held as a capital asset (that is as a long-term dividend producing investment,) any gains or losses arising from such shares (held for investment/dividend earning) upon disposal will be of a capital nature.


Gains that are of a capital nature are subject to capital gains and at a lower tax rate than gains of a revenue nature. Firstly, you get an exclusion of R40 000 as an individual on your gains. This means that you start paying capital gains tax if your gains exceed R40 000 for a tax year (year of assessment.) This is known as the annual exclusion. For natural persons dying during or after the 2020 tax year of assessment, the exclusion is R300 000.


In addition to the annual exclusion, 40% of the gains are included in taxable income and then taxed as the normal marginal tax rates that apply to your salaries or other income. This 40% is known as the inclusion rate. Assuming that your marginal tax rate is 45% (the highest tax bracket,) the maximum you pay on capital gains is 18% (0.4 x 0.45 = 0.18.)


Yes, you guessed it right, there can be 0% tax on your capital gains when:

  • The sum of capital gain and losses does not exceed the annual exclusion;
  • The sum of capital gain is less than or equal to the sum of capital losses (which means your gains set off against your gains); or
  • Taxable income falls below the level at which normal tax becomes payable, that is if your combined income plus gains fall under the tax-free threshold.

The effective rate (of 18%) we spoke about earlier applies if you fall in the highest tax bracket as an individual taxpayer. The rate is different from that which applies to companies or trusts. Companies and trusts, other than special trusts, pay a higher CGT than natural persons. They do not qualify for the annual exclusion and must include the capital gain at 80% of the gain into their taxable income.  These are the effective tax rates:

  • Companies are at an effective rate of 22.4% which is derived from the 80% inclusion rate and the 28% normal taxes for companies (0.28 x 0.8.)
  • A trust that is not a special trust si at 36% effective tax rate for capital gains (0.45 x 0.8)

What we have done above is the simplest way to look at share-holding. Are things that simple? Not always. The line between gains/losses of a revenue nature or gains of a capital nature can be a bit blurry.


Capital vs revenue: 

When computing your tax liability, the first step is to determine if your gains are capital or revenue in nature. Apart from the three-year rule according to Section 9C (that basically says you must own a share for at least 3 years for your gains to be treated as capital in nature,) the Tax Act itself does not provide objective rules to distinguish between gains of revenue and capital nature. This task has always been left to the courts, which over the years have established some rules for this distinction. So, the onus is on you as the taxpayer to prove that your gains are of a capital or revenue nature.


The most important factor in establishing the nature of your gains is the intention. This is not always an easy task since you can have more than one intention at a time and since intention can change over time. But, the courts have established that the taxpayer evidence as to intention must be tested against the surrounding circumstances of the case. These may include, the frequency of transactions, method of funding and reasons for selling. These may help establish your intention when you bought or sold the shares (Elandsheuwel Farming (Edms) Bpk v SBI.) “If they (the shares) were bought as a long-term investment to produce dividend income, the profit is likely to be of a capital nature. But if the shares were bought for resale at a profit, the profit will be of a revenue nature.”


In SIR v The Trust Bank of Africa Ltd it was established that for a profit to be of a capital nature, “the slightest contemplation of a profitable resale need not be excluded.

Where there were mixed intentions, the dominating intention is the one that establishes intention (COT v Levy.)


Some general guidelines/Principles (source, the SARS guide on tax implications on shares:) 

  • Any profit or loss on disposal of shares will be of a revenue nature if they were purchased for resale as part of a scheme of profit-making (Californian Copper Syndicate (Limited and Reduced) v Harris (Surveyor of Taxes)
  • A profit on the sale of shares is more likely to be of a revenue nature if it was not fortuitous, but designedly sought for and worked for (CIR v Pick ’n Pay Employee Share Purchase Trust )
  • The usual badge of fixed capital investment is that it is acquired for better or for worse, or, relatively speaking, for “keeps”, and will be disposed of only if some unusual, unexpected, or special circumstance, warranting or inducing disposal, supervened (Barnato Holdings Ltd v SIR). 
  • The scale and frequency of share transactions are of major importance, although not conclusive (CIR v Nussbaum).
  • Shares bought for the dominant, main and overriding purpose of securing the highest dividend income possible will be of a capital nature when the profit motive is incidental (CIR v Middelman).
  • Just as an occasional swallow does not make a summer, an occasional sale of shares yielding a profit does not of itself make a seller of shares, a dealer in them (CIR v Middelman).

I do not want to make this a complex matter, so let’s end here. If you need further information or guidance get in touch with me or consult your tax practitioner.

Are you learning anything from this series? Do you want to share any pointers or experiences?

Please leave a comment and remember to share.

Timely Financial Reporting/Financial Statements preparation

Timely Financial Reporting/Financial Statements preparation

Financial statements are intended to meet the needs of decision-makers as well as providing useful information to shareholders.  As a result, the timely preparation of these reports is essential. Financial statements must be available in time to inform decision-making. Therefore, it is important that financial reports/financial statements should be published as soon as possible after the end of the reporting period.


However, we should note here that timely financial reporting should not be reduced to a well-managed “busy financial statement drafting season. Rather, ”it requires careful, yearlong planning and monitoring.  Of course, the need for timeliness has to be balanced against the need for reliability, which in addition to timeliness is also an essential characteristic of financial statements.


Requirement of the Companies Act: 

In terms of the Companies Act, Section 30, Companies are required to produce annual financial statements within 6 months of their financial year-end or within any shorter period as may be appropriate to provide the required notice of an annual general meeting in terms of section 61(7). For example, if one’s year-end of Feb 2018, they should have a set of financial statements by end of August 2018.


Recommendations: 

I would like to make the following recommendations about ways to improve the timeliness and reliability of financial reports. These recommendations are based on my personal experiences and cannot be viewed as an exhaustive list.


Do not leave it until the last time: 

It is never a good idea to start the preparation of your financial statements late on in the year. As mentioned in my introduction, the process requires careful yearlong planning and monitoring. Start with clients whose books are updated and are in order on a monthly basis. For me, these are the client I have monthly management meeting with and at each management meeting, we ensure that the accounts for that month are in order. Once we close off the accounts, we do not come back to these to make any changes. You will find that by the year-end, there is little left to do to produce the financial statements because all books are in order. For me, I find that this process ensures the ongoing completeness and accuracy of financial data.


Team collaborations: 

Reid Hoffman once said, “No matter how brilliant your mind or strategy, if you’re playing a solo game, you’ll always lose out to a team.” I cannot stress enough the importance of working as a team and ensuring that the communications among the team are good and maintained. In my firm, as an example, we have three teams that work closely together to produce financial statements; the tax team, the financial statements drafting team and the financial management team. The financial management team is responsible for day-to-day accounting and the production of the Trial balance. The tax team helps with all complex tax matters. The drafting team takes the Trial balances and produces the financial statements.  What makes the teamwork together well is communication, each member communicating whatever changes or processes that take place at any stage of the process. The biggest advantage of all this is that the reliability of the financial statements is greatly improved. The application of tax and financial reporting laws is also improved.


Systems and processes:

I also find that it helps to have proper systems and processes in place for the production of financial statements. Companies should have a financial system that they use to draft financial statements. These should be able to produce financial statements acceptable for submission with SARS and the CIPC. Also, there should be a well-defined process for the production of financial statements. It could be a well-defined checklist, which has all elements that must be checked before a trial balance is imported into the financial statements software. The presence of such a process will also go a long way in producing a reliable set of financial statements.


Closing and financial statement preparation processing: 

The annual closing process. To avoid delays, aim to have your annual close within a month from the end of the financial period. Communicate these deadlines to all people involved in the process so that everyone is aware of the deadlines and the deliverables that each should meet.


Unforeseen circumstances. The financial report preparation process may identify items that could affect the amounts reported in the financial statements, such as legal disputes, contractual obligations e.t.c. In most cases, a reasonable amount of time may be needed to resolve such items. To avoid delays, it may be better to proceed with the issuance of the financial statements based upon reasonable estimates, rather than to delay their issuance.


Planning: 

There is that old saying that says if you fail to plan, you plan to fail. It is important to carefully when for when the production of financial statements should start, and by whom the financial statements should be prepared. As mentioned earlier, do not leave the drafting to the busy drafting periods. After the year ends, aim to have at least one set of financial statements done per week. Start with those where not too much cleaning is required going to those where late adjustments and more cleaning is done. Also, you may want to aim to submit these financial statements by the time the tax season opens in July. So, plan in a way that will make this possible.


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Credit notes under scrutiny, are you complying?

Credit notes under scrutiny, are you complying?

What we have seen now is increased scrutiny of credit notes for compliance with the VAT Act. The main challenge is that in most instances accounting packages being used by businesses do not contain all the information required on a credit note by the VAT Act. It is therefore important that businesses and accountants ensure that credit notes comply with the Act before they are issued and before VAT claims are submitted. Otherwise, it will be difficult for businesses to get back their legitimate VAT claims.


Key elements that must be found on the credit note are the following:

  • Vendor details (names and addresses, VAT registration numbers for both the issuing and receiving party)

  • The words “credit note” must be clearly stated on the document being issued

  • A brief description of the circumstances that gave rise to the credit note. Now this one is critical and what you may find is that some accounting systems do not allow for this. We would encourage you to add this narration to the description part of the credit note.

  • Information sufficient to identify the original transaction to which the credit note relates, that is the original invoice that is being credited. In other words, if someone else who is not familiar with your records comes to check the credit notes, they should be able to trace its origins with ease.

  • It would also be very important to make sure that the correct VAT rate is applied. If the original invoice was issued before the VAT rate changes to 15%, then the credit note should also be at 14%. One cannot claim back more than what they declared.

In more detail and in terms of Section 21(3), of the VAT Act, a credit note must contain the following particulars:

(i) The words “credit note” in a prominent place;


(ii) the name, address and VAT registration number of the vendor;


(iii) the name, address of the recipient. And where the recipient is a registered vendor, the VAT registration number of the recipient;


(iv) the date on which the credit note was issued;


(v) either—
(aa) the amount by which the value of the said supply shown on the tax invoice has been reduced and the amount of the excess tax; or
(bb) where the tax charged in respect of the supply is calculated by applying the tax fraction to the consideration, the amount by which the consideration has been reduced and either the amount of the excess tax or a statement that the reduction includes an amount of tax and the rate of the tax included;


(vi) a brief explanation of the circumstances giving rise to the issuing of the credit note;


(vii) information sufficient to identify the transaction to which the credit note refers;


(b) the actual tax charged in respect of the supply concerned exceeds the tax shown on the tax invoice as charged, the supplier shall provide the recipient with a debit note, containing the following particulars:
(i) The words “debit note” in a prominent place;
(ii) the name, address and VAT registration number of the vendor;
(iii) the name, address and, where the recipient is a registered vendor, the VAT registration number of the recipient, except where the debit note relates to a supply of goods in respect of which a tax invoice contemplated in section 20 (5) was issued;


(iv) the date on which the debit note was issued;


(v) either—
(aa) the amount by which the value of the said supply shown on the tax invoice has been increased and the amount of the additional tax; or
(bb) where the tax charged in respect of the supply is calculated by applying the tax fraction to the consideration, the amount by which the consideration has been increased and either the amount of the additional tax or a statement that the increase includes an amount of tax and the rate of the tax included;


(vi) a brief explanation of the circumstances giving rise to the issuing of the debit note;


(vii) information sufficient to identify the transaction to which the debit note refers:


Provided that—
(A) it shall not be lawful to issue more than one credit note or debit note for the amount of the excess;
(B) if any registered vendor claims to have lost the original credit note or debit note, the supplier or recipient, as the case may be, may provide a copy clearly marked “copy”;
(C) a supplier shall not be required to provide a recipient with a credit note contemplated in paragraph (a) of this subsection in any case where and to the extent that the amount of the excess referred to in that paragraph arises as a result of the recipient taking up a prompt payment discount offered by the supplier if the terms of the prompt payment discount offer are clearly stated on the face of the tax invoice.


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