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What are the tax implications of trading or buying shares?

May 27, 2022May 27, 2022Cloud Accounting, Credit notes templates, deregister a business, Financial statements preparation, foreign income, SARS, SARS completion letter, Tax, tax registration, tax return, Tax returns, tax tips, VAT registrationLeave a comment

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.

What can I do if SARS ghosts/blue-tick me?

January 24, 2022Business exit, Closing off a business, Financial reporting, Foreign income exemption, I cant pay SARS, SARS, SARS completion letter, SARS debt, SARS verification letter, Tax returnsLeave a comment

KEY TAKEAWAY POINTS:

SARS has 21 business days to complete a verification
They may finalise it with or without changes
If they take more than 21 business days, you have a right to lodge a complaint
If nothing happens, you may take the matter up with the office of the tax ombud
Remember to keep a proper track record of the matter and/or any follow-ups you make on the matter
In this article, we discuss what verification is, what to do when you are selected for verification and if SARS does not bother to get back to you on time.

INTRODUCTION:

SARS has capacity issues that they are working hard to resolve, But, it seems this 2021 tax season they took more than what they can handle.

We have observed many taxpayers who have been selected for verification but who have not heard back from SARS many days after the verification was initiated. Under normal circumstances, SARS has up to 21 working days to finalise a verification and issue a finalisation letter and/or final or adjusted assessment.

In one case we have looked at, for example, the taxpayer who was selected for verification on 29 July 2021 has not heard back from SARS even at the time of writing this article. We are certain, she is not alone in this.

Let’s look at some important definitions before we can consider what one must do if SARS takes their time on the verifications.

What is verification?

Being selected for an audit and verification are two different processes. With a verification, SARS is doing a face value verification of the information declared by the taxpayer on the declaration or in a return. This involves the comparison of the information on the return against the financial and accounting records and/or other supporting documents. All this is to ensure that the declaration/return is a fair and accurate representation of the taxpayer’s tax position. (Remember, in terms of the Tax Administration Act, the onus is on the taxpayer to provide supporting documentation to prove that the deductions and information on their declaration are reasonable, fair and accurate.)

Who can be selected for verification?

Any taxpayers can be selected for a verification process for the proper administration of tax. The selection can also be done on a risk basis. What should you do if you are selected for verification?

What should you do if I am selected for verification?

SARS will notify the taxpayer if they have selected them for verification. The letter issued will state what the taxpayer must do or provide to SARS. The letter will also notify the taxpayer to check their tax return and to make any corrections if there are any discrepancies on their tax return. The taxpayer will be given 21 business days from the date of the letter in which to provide the supporting documents and schedules. These documents and schedules can be submitted via eFiling or SARS support documents portals.

During the verification, you can expect to get another letter requesting additional information if the relevant material initially supplied was not sufficient to finalize the verification. If you are due for a refund, you may not get this until the verification process is finalised.

What happens if you do not respond to the verification?

It is always important to keep an eye out for SARS correspondences on your email or eFiling. Normally SARS sends you a message and email when they have issued important notices.

If you choose not to respond SARS may:

Issue a second letter reminding you to submit relevant information
Issue a final request for relevant information
If you still do not respond, a SARS official will contact you telephonically and request that you submit the necessary relevant material within 5 business days.
Should you still not respond, SARS may raise an assessment based on information readily available or obtain from a third party.

Now let’s consider what your options are if SARS ghosts you.

What if you have complied/responded but SARS takes all the time in the world on the verification?

There is the office of the tax ombud that can help with operational issues. But, it does not get involved before you have exhausted all internal SARS complaints mechanisms. You can only go directly to the office of the tax ombud only if there are compelling reasons to do so.

So, the first step to take is to complain to the SARS complaints office. To do so, you must be sure that the matter is now outside the normal service period, as in the example we have earlier about the taxpayer who was selected for verification on 20 July and has not yet back from SARS ever since.

There are three ways through which one can complain with SARS:

Via eFiling. See the step-by-step guide on how to complain eFiling. Please note that you have to be registered on eFiling to be able to do this. You may not download or print the form to send it by any other means. You must also have a valid case number to which your complaint relates.
By visiting the branch. If you do, you may need to ensure that you have spoken to all relevant higher people before you leave the branch. Due to covid, you may need to make an online appointment.
By calling the SARS Complaints Management office (CMO) on 0860 12 12 16.

Do not call the call normal call centre and say you are following up on an unresolved matter, the call centre agents may just “escalate” your case and normally that achieves very little. If your complaint is not resolved after 21 working days, you may take the matter to the office of the tax ombud.

Here are a few tips on winning the battle against SARS poor service/administrative issues and making sure you have a winnable case when you approach them or the Tax Ombud:

Be specific:

If you have a complaint, it is better to call the Complaints Management Office (CMO.) If you call the SARS contact centre to get a reference number, specify that it is a complaint with a complaint, specify that it is a complaint and not a follow-up. If you keep calling the call centre and saying you are following up, it may remain just that, a follow-up. You need to specify that you have a complaint so that it is treated as one. Some complaints will need case numbers, make sure you call the contact centre to get one.

Build a compelling case:

The most important thing to do when dealing with SARS is to build a good case, this is whether you are raising a complaint, an appeal or an objection. You will need a system to record your interactions with SARS (at each touchpoint with them). You also need to store documents and supporting documents relevant to the taxpayer’s case. The system of recording your interactions with SARS should allow you to build a timeline of how the case is developed and to ensure that you have all the documents you need for this case.

One such system is to make sure each client file/folder contains relevant subfolders that will help you gather the important and necessary information. The other is to build a dashboard that records the timeline and communications with SARS. This can take any form, for example, Word or Google docs, a task management tool like Asana, Trello or Monday.com.

NB: You do not do this because something has gone wrong, but because things may go wrong and often they do go wrong, but because things may go wrong.

The advantage of doing things this way is that you will save yourself a lot of time when doing the actual complaint, even an appeal or objection. The Tax Ombud form will ask you to summary your case in chronological order. So, if you had been building a case over time, this process will be a breeze. You have all the facts and timeline at your fingertips.

Do you need help with your SARS matters? Contact us here

Basic deductions you can use to save on tax (how to get a tax refund)

November 15, 2021November 15, 2021deregister a business, Financial statements preparation, I cant pay SARS, Invoice template, Owing sars, rental income, repayment arrangement, SARS, SARS completion letter, SARS debt, tax return, Tax season 2021, VAT registration, Why do businesses failLeave a comment

The tax season is offically coming to an end for non-provisional taxpayers in the next few days. But, even if you are planning for the next tax season, this article is for you as it will consider a few options/deductions that you can use to reduce your tax liability. Let’s consider these:

Medical aid credits:

Taxpayers can claim deductions (or tax credits) for medical aid schemes they contribute to. This can be applied where you contribute as a principal member or where you are not a principal member but pay for and on behalf of someone like a close family member. The credits depend on the number of beneficiaries of the medical aid. The more the beneficiaries the more the credits one can get. For the taxpayer or the first beneficiary, the tax credit is R332 for the 2022 tax year (R319 – 2021), R664 for the taxpayer and one dependant (2022 or 638 for the 2021 tax year0 and R224 for any additional beneficiary (215 for the 2021 tax year.)

Retirement annuity:

If you make contributions towards a pension, provident fund or retirement annuity, you can also claim deductions on taxable income. Taxpayers are allowed to deduct up to, from their taxable income, 27.5% of their remuneration of taxable income, whichever is greater, up to a maximum of R350 000 per tax year if they contributed to a retirement annuity fund, pension or provident fund.

Therefore, it is important that the taxpayer examines and calculate their annual contribution in order to fully take advantage of this tax benefit. However, there is no tax benefit once you withdraw from this fund (we will talk about withdrawals in another publication.)

Donations:

The taxpayer can also claim donations against his/her taxable income. There is a catch though. The deduction is limited to 10% of the taxpayer’s taxable income before claiming donations as a deduction (so, if the taxable income is R300 000, the claim cannot be more than R30 000.) The charitable organisation the taxpayer gives a donation to must also furnish the taxpayer with a Section 18A certificate, not just a receipt.

Home office expenses.

We have previously written about home expenses here. So, if you need a more detailed guide, please refer to that article. However, let’s cover a few things here too. Certain expenses that a taxpayer incur as a result of working from home can be claimed as a deduction against taxable income provided certain conditions are met:

The employer must allow the taxpayer to work from home. So, you can’t just work from home because you want to. Your employer must give you express permission to work from home.
The taxpayer must spend more than half (50%) of their total working hours working from their home office.
The part of the home in respect of which a claim is submitted must be occupied for purposes of a “trade”, as defined in section 1. So, in essence, there should be a specific part of the home that is used exclusively for this purpose. As an example, a specific set aside office must be kept aside for the trade. A taxpayer meeting with a client in the bar area of their home may not qualify for these deductions.
Building from the point above, the part that is so occupied must be specifically equipped for purposes of the trade. So, it is important that the space/office must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work.
The part must be regularly and exclusively used for purposes of the trade. As an example, taxpayers who earn a commission but who spend the majority of their time on the road visiting clients and performing their work at the client’s premises do not qualify for home office expense deduction.

Refer to our previous article on home office expenses for further details and examples of expenses that a taxpayer can get as a deduction for working from home.

Tax-free investments:

These accounts are offered by various financial institutions. The tax benefit is that any income (interest, dividends, REIT payments and capital gains) accrued or received from these funds are exempt from tax. For example, interest income earned is fully exempt from tax as opposed to interest earned elsewhere, which can be exempt only up to certain amounts as per the Act. Though the income is exempt, this must still be included on the taxpayer’s tax return.

Contributions to these funds should not exceed R33 000 annually and a lifetime agreement of R500 000. Any contribution above these amounts triggers a tax on the income earned.

Foreign income:

Ever heard f the 183 days rule? Individuals working overseas for a 183-day term could claim back tax deductions on income earned for the period there were outside the Republic. After 1 March 2020, the exemption is the first R1.25 million of foreign employment income earned by a resident will qualify for an exemption for tax years commencing on or after 1 March 2020.

Travel claim:

If you use your vehicle for work purposes and you are able to prove to SARS that you used your vehicle for work purposes, then you can claim a deduction on it. The catch, keep a travel logbook. Do not “manufacture one!”

Wear and tear:

The world is changing and often employees will use their own tools and equipment to carry out their work. If you are using goods/tools that you bought with your money for work purposes you are entitled to claim depreciation on these tools/assets. These can be computers or laptops. The catch, the cost of the assets must be written off over a time stipulated by SARS and you must be able to prove that the asset/tool was used for work purposes. For example, computers are written off over a period of 3 years. Assets that cost less than R7000 can be written off in full in the year of purchase.

Business expenses:

For the purposes of this article, we will treat a business as an unregistered business such as rental, sole proprietors and freelance businesses run by a taxpayer in their personal capacity. The taxpayer will get deductions for all business running costs as long as they are directly related to the business and as long as they can prove that they are business expenses. The expenses can include but are not limited to:

Interest on bond payments (note: not the full bond instalment)
Rates and taxes paid on the property
Water and electricity
Levies
Depreciation on furniture in the property
Advertising and/or rental agency fees
General maintenance and repairs cost like garden services, repairs and painting, cleaning services etc
Wear and tear
travel costs
Business running costs

Capital gains:

Individual taxpayers get an annual exclusion of R40 000 on capital gains. This means that they will start paying for CGT for any gain above R40 000. Also, only 40% of the gain is included in taxable income. If you are holding shares for investment purposes, this may be applicable to you. 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 9which 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.

For comparative purposes, CGT for individuals is smaller than it is for companies. This is important if you are going to consider holding your investment asset in your personal capacity or in a company. Individual taxpayers, assuming a higher tax bracket, pay a total of 18% on capital gains compared to 22.4% for companies.

Another very important aspect of CGT is the primary residency exclusion. “For the 2018 and 2019 years of assessment, the first R2 million of a capital gain or loss on disposal of a primary residence must be disregarded. This concession, known as the primary residence exclusion, means that most individuals will not be subject to CGT on the sale of their primary homes.”

We will discuss this concept in our future publications. For now, we just wanted to bring to your attention that you may qualify for this exclusion if you sold your primary residence.

There are various other incentives that can be applied by a taxpayer to reduce their tax liability, such as accelerated wear and tear on properties, urban development zones allowances, Section 12J, and certain investments that give the taxpayer some tax benefits. We will discuss these in our future publications to avoid an information overload.

Did you find this article helpful? Do you need help with your taxes? Give us a shout.

How to hold SARS accountable

June 4, 2021Business exit, Business Owner, I cant pay SARS, Owing sars, SARS, SARS completion letter, SARS debt, SARS verification letter, Tax, Tax returns, VATLeave a comment

The office of the Tax Ombud was established to act as a bridging gap between SARS and the taxpayer. But, taxpayers do not always have a direct line to connect with the Tax Ombud. A taxpayer may lodge a complaint with the Tax Ombud after they have exhausted all the SARS complaints mechanisms unless they are compelling circumstances for not doing so. Otherwise, the process below will have to be followed:

There are three ways through which one can lodge a complaint with SARS:

Via eFiling. See the step-by-step guide on how to lodge a complaint via eFiling. Please note that you have to be registered on eFiling to be able to do this. You may not download or print the form to send it by any other means.
By visiting the branch. If you do, you may need to ensure that you have spoken to all relevant higher people before you leave the branch
By calling the SARS Complaints Management office (CMO) on 0860 12 12 16.

Here are a few tips on winning the battle against SARS poor service/administrative issues and making sure you have a winnable case when you approach them or the Tax Ombud:

Be specific:

If you have a complaint, it is better to call the Complaints Management Office (CMO.) If you call SARS contact centre to get a reference number, specify that it is a complaint with a complaint, specify that it is a complaint and not a follow-up. If you keep calling the call centre and saying you are following up, it may remain just that, a follow-up. You need to specify that you have a complaint so that it is treated as one. Some complaints will need case numbers, make sure you call the contact centre to get one.

Try again:

Sometimes, a complaint lodged on eFiling may be rejected for one reason or the other. If you feel you have a compelling case, pick up the phone and call the CMO so that they may record and lodge the complaints on your behalf. You may also call them if you are not sure how the process works on eFiling or if you are too far from a SARS office. For example, I once lodged a complaint about a delayed refund (because refunds should be paid 7 workings days after verification or audit is finalised) but the system kicked me out and rejected my complaint. The complaint was successfully lodged after calling the CMO.

Build a compelling case:

NB: You do not do this because something has gone wrong, but because things may go wrong and often they do go wrong. Below is an example of client folders that tax practitioners or individuals can use:

Are you frustrated with the way SARS has handled your affairs? How can we help you? Click here to contact us

How to avoid or reduce the risk of a SARS audit

June 4, 2021SARS, SARS completion letter, SARS debt, SARS verification letter, Small Business, Small Businesses, Tax, Tax returns, VAT, XeroLeave a comment

By now we all know that SARS is looking to raise more tax revenue to make up for revenue collection shortfalls. This means SARS may and will do all they can to increase revenue collections.

It will not be surprising to find that SARS audit teams will target taxpayers in order to raise additional income. Besides, their systems are designed to pick up “discrepancies” on a taxpayers’ return and these can easily trigger an audit. So do not be surprised if, a few days after submitting, you get a notification from SARS saying you’ve been selected to submit your supporting documentation for inspection or even that you have been selected for a full audit.

At Eva Financial Solutions, we have a team of dedicated and diligent tax practitioners working around the clock to ensure that you do not pay a single cent more that what you should legally pay over to SARS. We have designed our internal processes, checks and balances to ensure that, even if the audit comes, our clients can avoid an audit or the process goes smoothly without causing them unnecessary emotional stress.

Here are a few tips:

Always ensure that your tax affairs are up to date and that you have filed all tax returns as they fall due.
SARS has now made it easy to check your tax compliance status online. You should always check that your tax status is green (compliant). Once you have picked up that you are not compliant seek to address the issues sooner rather than later or consult your tax practitioner for help.
You should always come clean with the taxman before being audited. Once the audit has started, you are prevented from claiming the relief under section 227 of the TAA for coming clean.
Before you submit your return, ensure that you have all supporting documents for every income and deductions on your return. If you kept a personal data room, by the time your return is due you would have gathered all the necessary supporting documents for your tax return (Medical aid, Travel logbooks, Interest and Dividends certificates etc.). Be warned, do not convince yourself that if you ignore SARS’ requests for documents long enough, it will just go away. Always have your house in order.
If you own and run a business as a sole proprietor or have a rental property, ensure that you do not include and deduct your personal expenses.
Chances are that an ordinary taxpayer will struggle to interpret various tax laws or will misinterpret certain SARS requests or requirements. Therefore, always use the services of a reputable tax practitioner or accounting firm. Eva Financial Solutions can assist you in this regard, contact them if you cannot get your own personal tax practitioner.
After submitting your return log into (or at least ask your tax practitioner to do so) SARS at least a few more time to check if SARS hasn’t issued any sneaky notifications that require your attention. If your email address and not that of your tax practitioner is linked to your profile, alert your tax practitioner if and when you receive any kind of notification from SARS.

When it comes to VAT, these tips might be helpful:

When you get VAT registered ensure that you have sent your VAT number to all your suppliers so that they may update their databases and add your VAT numbers onto your invoices.
Insist on getting a valid tax invoice from all your suppliers. When you receive a tax invoice, check that it meets all the requirements of a valid tax invoice
Check that the new VAT rate of 15%, and that the total price (including VAT) is correctly calculated before accepting the invoice/quote.
Before you submit your VAT return:
- Check that you have claimed only where you are supposed to claim VAT (for example, you may not claim on motor car (passenger vehicle) rental or entertainment expenses as defined and other zero-rated or tax-exempt supplies.
- Check that you have applied the correct tax types/rates to each transaction, for example, Zero-rated sales cannot be classified as tax-exempt. Ensure that each tax type is correctly populated on the VAT201 return.
- Check that you have declared all standard rated sales (Sales VAT at 15%) that you should have declared and have done so using the correct VAT tax rate.
- Perform turnover VAT reconciliation at each VAT return submission. This will always ensure that your income statement turnover matches your VAT return submission. This will also reduce the risk of an IT14SD and the time it may have to take you if you did this only because SARS asked you to do an IT14SD. Remember, SARS systems are designed to pick up discrepancies between your VAT return submissions and your annual income tax return turnover.
- Before you hit submit, ensure that the VAT201 is correctly populated and the amounts contained are correct and matches your now correct VAT reports. Remember, once submitted you can only increase not reduce the amount payable.
- Take care that cash register slips and tax invoices issued from 1 April 2018 reflect the correct VAT rate. This will generally be 15% unless a specific time of supply rule or a rate specific rule applies.
- VAT vendors issuing debit or credit notes from 1 April 2018 must ascertain that the correct VAT rate is reflected and applied when determining the VAT amount. Debit or credit notes will generally reflect the old VAT rate of 14% where it relates to supplies of goods or services before 1 April 2018, subject to certain exceptions. Similarly, debit or credit notes relating to supplies made after 1 April 2018 must reflect the new rate of 15%.
- If your accounting systems allow, ensure that you immediately lock the submitted periods so that no further changes are effected to a closed VAT period.

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How to guard yourself against being sued by SARS

June 4, 2021foreign income, Foreign income exemption, SARS, SARS completion letter, SARS verification letter, Tax, Tax returns, VATLeave a comment

Since April 2018, SARS has been cracking down on non-complying taxpayers in filing their tax return. Since April, SARS has successfully prosecuted and convicted 10 taxpayers for failing to submit their outstanding tax return. Among these people is prominent soccer player, Teko Modise. Most of you would have also read about the socialite Bonang being dragged to court by SARS over non-compliance.

In terms of the Tax Administration Act, the following are viewed as criminal offences:

Avoiding paying taxes
Not submitting tax returns
Failure to submit information to SARS
Submitting false information to SARS
Giving an incorrect answer to SARS, whether in writing or orally
Failing or neglecting to register or failure to notify SARS of changes in registered particulars
Issuing an erroneous, incomplete or false document required under a tax Act

Here are a few tips to guard against being sued by SARS:

Appoint a tax practitioner:

Tax laws and requirements are constantly changing. Each year new laws are introduced. It is hard to keep up to date with these changes if you are non-tax experts. It is advisable to appoint tax practitioners to always advise you on tax-related matters and to submit the tax return for you in terms of the relevant laws. This will save you the costs of objections and “fighting” with SARS.

Always check your tax compliance status and inbox:

One should regularly check their tax compliance status, which is a platform that gives an indication of whether one’s tax affairs are in order.

Your tax compliance profile should be green in all aspects as per the above image. The minute any of those tabs turn red, something has gone wrong with your tax affairs. You should immediately investigate and address these issues. SARS will also often send you a notification when your tax compliance status changes. When you receive this, immediately investigate and resolve it. If you hired a tax practitioner, you must also immediately notify them so that they can investigate and help you to resolve these identified issues.

Do not miss a return submission:

You must always submit all your tax return where you are required to do so. Missing a tax return is a criminal offence and may land you in trouble. There are few instances where one may not be required to submit a tax return. If in doubt about whether or not you need to submit one, consult with your tax practitioner/professional. Generally, only people who meet the four below criteria do not have to submit an income tax:

– Your total employment income/salary for the year is not more than R350 000

– You only received employment income/salary for the full year of assessment from one employer.

– You have no car allowance/company car/ travel allowance or other income (e.g. interest or rental income).

– You are not claiming tax related deductions/rebates (e.g. medical expenses, retirement annuity contributions other than pension contributions made by your employer, travel).

Keep and submit supporting documents:

One must always ensure that for everything on their tax return, there is a valid supporting document. Constantly check your inbox to ensure that you respond to request for supporting documents by SARS. SARS is becoming quite strict with these. So, ensure that you have proper and valid supporting documents for your tax return.

Be truthful and honest:

Remember, there is a difference between tax avoidance and tax optimisation. Tax avoidance is a criminal offence in terms of the Tax Administration Act and can land you in big trouble. When submitting your tax return, ensure that you have honestly done so. Declare all income that accrued to you in that tax year (salaries, rental income, commission and other incomes). In terms of expenses, you must take care not to include personal or expenses of a capital nature. As an example, personal groceries or drawings will not be allowed as deductions and should not form part of your deductions. Similarly, if you are in the business or renting cars or accommodation, the capital repayments on the car or property cannot be deducted as business expenses. If you have a home office, you may not claim your entire house’s rental expense.

For home office expenses, one would need to work out the total square meterage of the home office in relation to the total square meterage of the house, and then convert this to a percentage. One then applies this percentage to the home office expenditure in order to calculate the portion, which is deductible.

Conclusion:

It is a criminal offence not to submit a tax return. Late submission of a tax return also has huge consequences. Submitting late can attract penalties, interests and administrative penalties, which can range from R250 to R16 000 per month. If you have a couple of outstanding returns, this is when SARS can get the NPA involved leading to an individual’s case being heard before the court.

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What happens if you do not pay VAT on time?

June 4, 2021August 1, 2023Business Owner, SARS, Tax, Tax returns, VATLeave a comment

Introduction:

The past few months and weeks have been difficult for businesses in terms of cash flow management. This is due to the COVID-19, the lockdown and the uncertainty around the whole thing. When does the lockdown end, will it be extended again? How long will the COVID-19 pandemic last and what is the impact on a business’ cash reserves?

As month-end approaches, some businesses are wondering if they should pay their VAT obligations or if they should delay these a bit until their businesses have recovered cash wise.

In terms of the VAT Act, a registered vendor is required to submit their VAT returns and to pay their VAT taxes by the 25th of the month if they are submitting manually or the last day of the month if they are submitting online on eFiling. If these dates fall on a weekend or public holiday, the submission and payment have to be made on a day before the weekend.

As far as we all know, the government has not introduced any relief measures as far as VAT is concerned. This means that SARS is expecting your VAT returns at the end of the month.

What happens if you are unable to submit or submit but unable to pay?

The VAT Act (section 39) and the Tax Administration Act (TAA, Section 187 and Section 4) provides for the interest application and treatment where a taxpayer fails to submit or pay a VAT return.

If you are unable to submit, SARS immediately levies a 10% penalty on the amount that was due.

If you are able to submit, but unable to pay, SARS will levy interest on the outstanding amount from the date the tax debt was due until the date the debt is paid off.

So, if you failed to submit and pay the punishment is two-fold. A 10% penalty and interest that is charged on a daily basis at the prescribed interest rate until the debt is paid off.

A question that arises is what happens should a vendor fail to submit a VAT return and have a “valid” reason for failing to submit and pay a VAT return?

What happens if you fail to submit?

At the onset, we must point out that in terms of Section 234(d) of the Tax Administration Act, it is a criminal offence to fail or neglect to submit a return. So, if a taxpayer is to fail to submit a VAT return, there it has to be proven that there were circumstances beyond the vendor’s control that resulted in him/her not being able to submit or pay a VAT return. In terms of TAA section 187(7) these circumstances are limited to:

a natural or human-made disaster;
a civil disturbance or disruption in services; or
a serious illness or accident.

So, unless you can prove these things your return and payment remains due and payable at the end of the month.

Can the penalty and interest ever be waived?

Section 187(6) provides that the interest can be waived (directed that so much of the interest as is attributable to the circumstances is not payable by the taxpayer) if a senior SARS official is satisfied that interest payable by a taxpayer is payable as a result of circumstances beyond the taxpayer’s control. The circumstances are covered above.

What are your options if you cannot pay your VAT taxes when they fall due?

If your business is in a situation where you do not know if you should pay your VAT or not due to COVID-19 or lockdown, do some scenario planning before your VAT payments become due bearing in mind the penalties and interest that may hit you if you do not submit or pay in time. The three scenarios you can look at are:

What happens to your business’s cash flow for the next three months if you pay the 100% VAt due without delay
What happens if you pay a portion of it when the payment becomes due
What happens if you delay the payment completely and pay in a month or two.

The second option is to submit your return and apply for a repayment plan with SARS.

The third option is to apply for business continuity relief plans the government has unveiled for SMMEs.

The fourth option is to get a VAT payment loan.

How to avoid a similar problem in the future:

It is in your best interests to avoid repeat late submission and payment of VAT. Continually failing to pay your VAT may lead to your business going under. You act as an agent for SARS in collecting the 15% VAT. If your clients are paying you, there is no reason why you should not be able to pay VAT because technically that money does not belong to you. If your clients are paying you late, then you need to be looking at your debtor management systems and processes.

You do not want to make late payment a recurring problem. You may want to consider some of the following general measures:

Open a separate business VAT savings account.
Whenever an invoice is paid, put aside the 15% into this savings account.
Implement cash flow management tools and means that ensures you are always paid on time.
If you have retainer clients, switch them over to debit orders instead of waiting for them to do EFT.
Include a payment method when sending out invoices. Invoices that have a payment method tend to be paid much quicker.
Do you have any asset that you no longer use or that you are under-utilising? Do you think these can be sold if there is a market for them?

How can we help?

Contact or call me on 078 361 5200 for:

VAT registrations
Online VAT registrations
Cash flow management
SARS debt repayment plans
VAT audits
VAT submissions

Have a question? Join my community and ask post a question on what is keeping you awake at night.

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Is SARS always right? What if I do not agree with their assessments?

June 4, 2021Business Owner, Foreign income exemption, SARS, SARS completion letter, SARS verification letter, Tax, Tax returns, Why do businesses fail1 Comment

Many of us see SARS as that horrible master who just wants to take our money at every opportunity possible, and it’s money they didn’t even work for. Sometimes you look at an assessment and you even wonder what they are trying to do. Maybe they even issue an assessment and go on to recover monies owed by you by issuing an instruction to your bank to deduct whatever they feel is due to them. If this happens, what are your options?

Once the Revenue Authority issues an assessment on your tax return and they have issued a notification for the tax payable or refundable under your tax return, you can:

Choose to accept the assessment
Ask for reasons as to how SARS arrived at the issued assessment. This must be done within 30 days from the date of the assessment
You can choose to lodge an objection within 30 business days from the date the assessment is issued or within 30 business days after receiving the reasons on how SARS arrived at its assessment

SARS has a detailed guide on how you may file a notice of objection. However, I would advise that you consult a professional tax practitioner to assist you:

Ascertain if SARS’ assessment is correct
Determine if the relevant tax laws were applied correctly
Correctly lodge a Notice of objection on your behalf

Tips to get your objection right:

Ensure that you have all the supporting documents for the amounts you are objection to justify your reasons for objecting to the assessment. (For example, if you believe SARS missed your Medical Aid contributions, then you must have the supporting medical aid certificate when you lodge your objections)
Ensure that you indicate the tax type(s) and tax years that you which to proceed and object
Ensure that you select the items to dispute against by selecting the relevant tick boxes
Ensure you have selected the correct source codes/ transaction code of the disputed item is displayed. It is important that you get the correct source codes as SARS may reject the Objection based on the fact that you put an incorrect code even though the objection is on valid grounds.
Watch that you distinguish between dispute amount and requested amount. Again, SARS may turn back your objection if the distinction between these two is not shown. The disputed amount is the amount that has been charged for interest or penalties for late payment are displayed. The requested amount indicate what you believe the amount should be. This is important because if this amount and the amount above are the same, SARS will reject the NOO on that technicality.

An objection that does not comply with the rules of objections and the Tax Administration Act may be disallowed. In terms of the rules, you may submit a revised objection within 20 days of receipt of the notice of invalidity by SARS

If the objection is disallowed, you may elect to accept the outcome or appeal against the decision. If you elect to appeal the outcome, then you may elect to take the Alternative Dispute Resolution (ADR) route or the litigation route (via the tax board if less than R1 million or the tax court in all other cases).

You can initiate ADR by indicating that you wish to make use of the ADR process in your notice of appeal. Within 30 business days of your notice of appeal, SARS will inform you whether the matter is suitable for an ADR process. The ADR process must be concluded within 90 days.

If the dispute is resolved between you and SARS, it must be recorded and signed by you and a SARS representative. A settlement agreement must be approved by a senior SARS official. SARS will issue, where necessary, a revised assessment to give effect to the agreement reached by ADR. If the dispute is not resolved by ADR you may continue to appeal to the Tax Board, if the tax in dispute is below R1000 000, or the Tax Court.

Again, I want to stress out the need to consult a professional Tax Practitioner to assist you with this process. if you have gone through all these processes and have now won your case against SARS (where SARS issued unnecessary assessment without proper foundation), may you recover wasted costs incurred (consultations with lawyers and tax practitioners or accountants fees) through the unnecessary conduct of SARS officials?

The decision to use the services of professionals rests on the taxpayer. However, it goes without saying that the complexity of tax laws and regulations renders it necessary for one to consult with tax lawyers, accountants and tax practitioners. Currently, there is no formal authority covering whether taxpayers can recover their costs from SARS. But, practices in other tax jurisdictions allows taxpayers to recover damages in cases where they have suffered financial losses due to the conduct of the revenue authorities. In South Africa damages may be awarded by a competent court if the taxpayer can prove that he/she suffered financial loss as a result of the conduct of SARS.

What does a SARS completion/verification letter mean?

ChatJune 4, 2021August 10, 2023SARS, SARS completion letter, SARS verification letter, Tax, Tax returns37 Comments

What is a verification:

Remember, in terms of the Tax Administration Act, the onus is on the taxpayer to provide supporting documentation in order to prove that the deductions and information on their declaration are reasonable, fair and accurate.

Who can be selected for verification:

Any taxpayers can be selected for a verification process for the purpose of proper administration of tax. The selection can also be done on a risk basis.

What should I do if I am selected for verification:

SARS will notify the taxpayer if they have selected them for verification. The letter issued will state what the taxpayer must do or provide to SARS. The letter will also notify the taxpayer to check their tax return and to make any correction if there are any discrepancies on their tax return. The taxpayer will be given 21 business days from the date of the letter in which to provide the supporting documents and schedules.

The supporting documents or schedules can be submitted via eFiling or manually at the SARS branch near you.

What happens if you do not respond to the verification:

If you choose not to respond, SARS may:

Issue a second letter reminding you to submit relevant information
Issue a final request for relevant information
If you still do not respond, a SARS official will contact you telephonically and request that you submit the necessary relevant material within 5 business days.
Should you still not respond, SARS may raise an assessment based on information readily available or obtain from a third party.

NB: It is always best to respond to all queries as quickly as possible. There is a possibility of penalties and interests

What to expect when verification is completed:

You will receive a completion letter notifying you of the verification outcome. If all went well, this letter will normally notify you that no adjustments have been made. In that case, SARS will not be making adjustments to their assessments. If you are due for a refund, it should be paid out in 7 working days (provided you have no tax debt due or outstanding tax returns from prior years). If you were the one owing SARS, the amount due will remain payable.

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Can I deduct home office expenses?

August 2, 2020June 27, 2021Closing off a business, Company registration, Home office expense, SARS, SARS completion letter, SARS debt, SARS verification letter, Tax, tax season, Tax season 2021, tax tips, taxseason2021, VAT registration1 Comment

These days the work culture has changed. Since lockdown was introduced. Some companies had to close shop and some employees were required to work from home. Also and in general, the world is changing and so is the way people work and interact. Many people, like myself, prefer working from home. Working from home has become a normal thing. The GIG economy will also make working from home just another normal thing.

Luckily, SARS allows home office deductions if certain conditions are met. However, it is important to note that SARS often than not flag returns with home office expenses for audit. So it is important that one correctly and accurately claims these deductions.

It is worth understanding the rules around home office expenses as they are allowed under certain circumstances. Not everyone may end up deducting home office expenses.

Having said this, it is important to point out that the situation is different for self-employed people or what we would term sole proprietors or freelancers who work from home. These taxpayers can automatically deduct their home office expenses. These taxpayers (self-employed, sole proprietors, freelancers) do not need to work through the tight conditions required for one to be able to deduct home office expenses. They simply have to include their home office expenses with the local business, trade and professional income on their tax return.

What is required to be able to deduct home office expenses?

The employer must allow the taxpayer to work from home. So, you can’t just work from home because you want to. Your employer must give you express permission to work from home.
The taxpayer must spend more than half of their total working hours working from their home office.
The part of the home in respect of which a claim is submitted must be occupied for purposes of a “trade”, as defined in section 1. So, in essence, there should be a specific part of the home that is used exclusively for this purpose. As an example, a specific set aside office must be kept aside for the trade. A taxpayer meeting with a client in the bar area of their home may not qualify for these deductions.
Building from the point above, the part that is so occupied must be specifically equipped for purposes of the trade. So, it is important that space/office must be specially fitted with the relevant instruments, tools and equipment required for the taxpayer to perform their work.
The part must be regularly and exclusively used for purposes of the trade. As an example, taxpayers who earn a commission but who spend the majority of their time on the road visiting clients and performing their work at the client’s premises do not qualify for home office expense deduction.

What expenses can be deducted?

First, one needs to check the taxpayers’ remuneration structure to see if they are:

A commission earner, that is, takes more than 50% of their total remuneration from the commission or some other variable form which is based on their performance.
A normal salaried employee with variable payments/commission making up less than 50% of their total remuneration.

The commission earners can deduct the following:

Rent
Interest on bond
Repairs to premises
Rates and taxes
Cleaning
Internet
Wear and tear and
All other expenses relating to their house as well as other commission related business expenses (such as telephone, stationery, repairs to printers, maid answering phone in your absence etc)

The salaries employee with variable payments/commission making up less than 50% of their total remuneration can deduct:

Rent of the premises
Interest on the bond
Cost of repairs to the premises and other expenses in connection with the premises
Rates and taxes
Cleaning
Internet,
Wear and tear and all other expenses relating to their house only.

How to calculate the home office deduction:

One would need to work out/measure the total square meterage of the office in relation to the total square meterage of the house. This is then converted into a percentage. The percentage is then used to apportion the expenses that can be used for home office deductions.

Example:

Mrs taxpayer is a software engineer who works for Corona Company Pty Ltd. Her remuneration consists of a salary only (no commission.) Her Company allows her to work from home three days per week. Mrs taxpayer has a separate office at home, fitted out with a computer and printer, which she uses exclusively for her software engineering job. Her office is 30 square meters, and the floor space of her entire home (including the office) is 300 square meters.

During the tax year, she incurs the following expenses:

– R120, 000 interest on a bond

– R36, 000 rates and electricity

– R36, 000 paid to the cleaner

– R5, 000 roof repairs

– R12, 000 cell phone expenses

Based on the above information, Mrs taxpayer qualifies for home office deduction. Based on the space occupied by her home in relation to the entire house, the apportionment ratio is 10% (30/300).

Therefore her home office deduction is 10% x (120 000 + 36 000 + 36 000 +5 000) = R19 700.

Her cell phone costs will not be deductible since she is not a commission earner.

Will I qualify for a home office deduction for the 2021 tax season?

The 2021 tax season started 1 March 2020 and ends 28 Feb 2021. To be able to claim home office expenses you would need to have met the conditions specified earlier. You will also need to have ended up working from home for more than six months of the tax year. That is, you would have worked from home until at least the end of September 2020.

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