Duties explained: An overview of regulations for taxpayers

The South African Revenue Services (SARS) is the country’s tax authority, which manages various taxes, some of which apply to some industries, but not others. The taxes governed by SARS are as follows:

• Corporate income tax, which includes capital gains tax (CGT)

• Diamond export levy

• Dividend tax, which recently replaced secondary tax on companies (STC)

• Donations tax

• Estate duty

• Mineral and petroleum resource royalty tax

• Individuals’ tax, commonly referred to as pay-as-you-earn (PAYE)

• Securities transfer tax

• Transfer duty

• Turnover tax

• Value-added tax (VAT) TAXPAYERS: Companies are liable to pay tax at 28% on taxable income. However, where a company has made tax losses, it can carry them forward provided it continues to trade. Otherwise, if a company ceases trading, it cannot carry forward its tax losses. In the country’s tax legislation, trade is a defined term. In addition, there have been a number of tax cases on the meaning of the word “trade”. A leading case that was decided in the Appellant Division, now known as the Supreme Court of Appeal, is Burgess v Commissioner of Inland Revenue 1993 (4) SA 161(A), 55 SC 156, 16 TC 67.

In determining taxable income or tax loss, a South African company that is a resident of South Africa will be liable to pay tax on its worldwide income. A company is a South African resident if it is registered in South Africa or it is effectively managed in South Africa (unless double taxation agreements apply). If a company is not a resident, it will be subject to tax in South Africa on a source basis. In other words, a non-resident will be taxed on income derived from a South African source or deemed a South African source. A non-resident could be a division or branch of a foreign company. The tax rate that is applicable to these foreign companies is currently 33%. However, it was proposed by the minister of finance in a budget speech on February 22, 2012 that this rate will be reduced to 28% as soon as the dividend tax is changed to 15%, from 10%.

A company will be entitled to a number of tax deductions on expenses incurred to the extent that they are incurred in the production of income and provided such expenses are not of a capital nature. In addition, a company will be entitled to claim certain allowances on capital assets used for the purposes of trade. Should a company dispose of these assets, the allowances claimed are recouped and included in determining taxable income. If these assets are disposed of for proceeds that exceed the original costs, the company is liable for CGT on additional profits. The exception to this CGT would be in respect of mining companies.

MINING COMPANIES: The Income Tax Act No. 58 of 1962 (the Act) contains specific provisions for mining companies. These are contained in section 1 in respect of “gross income”, “mining for gold”, “mining operations”, “post-1973 gold mine” and “post-1990 gold mine” definitions. In addition, section 15 read with section 36 of the act determines deductions from income derived from mining operations. Meanwhile, section 15A determines the amount to be taken into account in respect of trading stock derived from mining operations.

Paragraph ( j) of the gross income definition specifically includes in this definition: “So much of the sum of any amounts received or accrued during any year of assessment in respect of disposals of assets the cost of which has in whole or in part been included in capital expenditure taken into account (whether under this Act or any previous Income Tax Act) for the purposes of any deduction in respect of any mine under section 15(a) of this Act or the corresponding provisions of any previous income tax act, as exceeds the sum of so much of any capital expenditure as in the case of such mine is unredeemed at the commencement of the said year of assessment and the capital expenditure that is incurred during that year in respect of such mine, as determined before applying the definition of ‘capital expenditure’ in section 36(11).”

Simply put, this sentence states that if a company disposes of a capital asset in respect of which capital expenditure was claimed, the total amount received or accrued in respect of disposal will be included in gross income. However, such receipt or accrual will be shielded by unredeemed capital expenditure, i.e. previous capital expenditure costs incurred by such mine that exceeded mining income in previous years. This means that even if the proceeds on disposal of such capital asset exceed the original cost, the total amount received or accrued will be part of gross income.

This is important because it marks the departure from the ordinary principles that apply when the disposal of assets is made by a non-mining company. The excess of proceeds over the original cost would be taxed at the CGT rate (which is less than the normal tax rate) for non-mining companies.

When calculating taxable income of a mining taxpayer, the Act allows the taxpayer to deduct capital expenditure in full. Capital expenditure is defined in section 36(11) and refers primarily to expenditure incurred for shaft sinking and mine equipment, as well as other mine assets. The deduction of capital expenditure is normally determined per mine (unless mines are contiguous) and to the extent that capital expenditure exceeds mining income per mine (unless mines are contiguous), such capital expenditure is carried forward to the next year of assessment. The taxable income of any company that is mining for gold on any gold mine is subject to tax based on a special formula rather than 28%.

ROYALTY TAX: The National Treasury introduced the mineral and petroleum resource royalty tax, which came into effect in 2010. Mining companies are liable for this tax. The royalty tax is calculated as a percentage of gross sales. It should be noted that “gross sales” is defined in the Mineral and Petroleum Resource Royalty Act No. 28 of 2008.

The royalty tax to be paid depends on the status of the mineral resource. The maximum royalty tax on refined mineral resources is 5% of gross sales. However, the maximum royalty tax on unrefined mineral resources is 7% of gross sales.

Small businesses that are residents, as defined in the Act, are exempt from royalty tax provided their gross sales in respect of all transferred mineral resources do not exceed R10m ($1.22m) during that year and that the royalty in respect of all transferred mineral resources to be imposed on the extractor for that year is not over R100,000 ($12,240).

A company must make a payment equal to one-half of the amount of the royalty tax so estimated within less than six months before the last day of that year. A taxpayer must submit an estimate of the royalty payable in respect of a year of assessment by the last day of that year and submit a payment, together with such return for that payment as the commissioner may prescribe, equal to the amount of the royalty so estimated less the amount already paid as part of the payment in the first six months.

INSURANCE COMPANIES: With regards to long-term insurance companies, every insurer is required to establish four separate funds as contemplated in subsection (4) of section 29A, and shall thereafter maintain such funds in accordance with the provisions of that section. These funds are the untaxed policy fund, individual policy fund, company policy fund and the corporate policy fund.

The Act provides that there shall be exempt from tax any income received by or accrued to an insurer from assets held by it in, and business conducted by it in relation to, its untaxed policyholder fund. The taxable income derived by an insurer in respect of its individual policyholder fund, its company policyholder fund and its corporate fund shall be determined separately in accordance with the provisions of this act as if each such fund had been a separate taxpayer, and the individual policyholder fund, company policyholder fund, untaxed policyholder fund and corporate fund shall be deemed to be separate companies that are connected persons in relation to each other for the purposes of subsections (6), (7) and (8) and sections 9B, 20, 24I, 24J, 24K, 24L and 26A and the Eighth Schedule to the act.

Short-term insurance companies are subject to the provisions of section 28 of the Act. These entities are permitted to deduct from their gross income the following costs:

• The total amount of the liability incurred in respect of premiums on reinsurance;

• The actual amount of the liability incurred in respect of any claims during the year of assessment in respect of that business, less the value of any claims recovered or recoverable under any contract of insurance, reinsurance, guarantee, security or indemnity;

• The liabilities contemplated in section 32 (1) (a) and (b) of the 1998 Short-Term Insurance Act (Act No.

53 of 1998) that have been included as liabilities of that person in respect of a year of assessment: Provided that no deduction shall be made in terms of this paragraph in respect of a liability incurred as contemplated in paragraph (b). Section 32 (1) (a) and (b) of the Short-Term Insurance Act reads as follows: a) The amount which the short-term insurer estimates will become payable in respect of claims incurred under short-term insurance policies: (i) And reported, reduced by the amount which it estimates will be paid in respect of those claims under approved reinsurance policies; (ii) But not yet reported, reduced by the amount which it estimates will be paid in respect of those claims under approved reinsurance policies, being an amount not less than the amount calculated in accordance with Part II of schedule 2. b)An unearned premium provision, being an amount not less than the amount calculated in accordance with Part II of schedule 2.

The unexpired risk provision incurred by the short-term insurer is not deductible.

PUBLIC BENEFIT ORGANISATIONS: As part of assisting our communities, many companies are involved in public benefit activities. These activities are supported by the National Treasury, which provides favourable tax legislation in respect of these activities. However, there are certain compliance measures to ensure that the tax base is not eroded.

The receipts or accruals of public benefit organisations are generally exempt from tax in terms of section 10(cN) if their sole or principal object is carrying on one or more public benefit activities, where:

• All such activities are carried on in a non-profit manner and with an altruistic or philanthropic intent;

• No such activity is intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation, otherwise than by way of reasonable remuneration payable to that fiduciary or employee. For the purposes of the Act, “public benefit organisation” means any organisation that is: (i) A non-profit company as defined in section 1 of the 2008 Companies Act (Act No. 71 of 2008), or a trust or an association of persons that has been incorporated, formed or established in the republic; or (ii) Any branch within the republic of any company, association or trust incorporated, formed or established in any country other than the republic that is exempt from tax on income in that other country.

TRUSTS & COLLECTIVE INVESTMENT SCHEMES: In the South African tax legislation trusts and collective investment schemes are taxpayers. Often they are treated as taxpayers of last resort. The provisions of the Income Tax Act that deal with taxation of trusts are set out in sections 25B and 25BA.

Section 25B requires that amounts received by or accrued to, or in favour of, any person in his or her capacity as the trustee of a trust to the extent to which those amounts are derived for the immediate or future benefit of any ascertained beneficiary who has a vested right to those amounts during the year of assessment, be deemed to be amounts that have accrued to that beneficiary. However, to the extent that those amounts are not derived for the immediate or future benefit of any ascertained beneficiary, these amounts are deemed to accrue to the trust.

Section 25BA provides that any amount that is not of a capital nature received by or accrued to any portfolio of a collective investment scheme, other than a portfolio of a property collective investment scheme, must be deemed to have directly accrued to the person who is entitled to the distribution by virtue of that person being a holder of participatory interest in that portfolio, if that amount is distributed to that person within 12 months. Otherwise this amount is deemed to have accrued to that portfolio on the last day of the period of 12 months commencing on the date of its receipt by that portfolio.

VALUE-ADDED TAX: Value-added tax (VAT), which is a progeny of the sale tax, was first introduced in South Africa in 1991 by the VAT Act No. 89 of 1991. The VAT is basically a transactional consumption tax that is subject to certain exceptions, levied by registered VAT vendors on the supply of goods and services. The VAT rate was initially introduced at 10%, and is currently at 14%. The ultimate end users or consumers of the services or goods are the bearers of the VAT.

The fiscus, through SARS, entrusted registered vendors as its agents to collect VAT on its behalf. Registered vendors have an obligation of remitting it to SARS on or before the 25th day commencing on the first month after the end of the vendor’s tax period. This task has added an additional administrative burden on vendors and, hence, since the inception of the VAT there have been numerous calls and appeals to SARS to simplify and ease the complexities surrounding the collection of VAT, especially for the benefit of small and medium-sized businesses.

To ensure VAT vendors are not unnecessarily being the bearers of the liability, sections 16 and 17 of the VAT Act allow vendors to deduct input VAT they have been charged in respect of services or goods they use for rendering VAT able supplies.

VAT DEBATE: Though VAT is the second-largest source of revenue for the fiscus, and despite numerous proposals from economists to increase the VAT rate, the government has been loath to do so – hence, its apparent stagnation at 14%. There are strong views that the government’s reluctance to increase the rate is geared towards appeasing the labour movement, which has been vociferous against the VAT rate increase as they argued that it would bitterly affect the “poorest of the poor,” who, because of unemployment and low wages, are battling to make ends meet. Although the government endeavoured to charge VAT at the rate of zero for certain basic foodstuffs consumed mainly by poor communities, studies have revealed that there has not been any real trickling down of the benefit, as unscrupulous vendors have been alleged to have increased the prices of such zero-rated foodstuffs, and thus neutralised the benefit of this effort.

Controversies and challenges about the VAT system do not only emanate from vendors, but SARS seems to be experiencing serious problems as well, arising from fraudulent claims of VAT refunds as mentioned by the minister of finance in his mid-term finance budget speech in October 2011.

The complexities surrounding the administration of VAT warrant engagement of professionals to avoid unnecessary penalties that could be levied by SARS on failure to comply with the provisions of the VAT Act. In terms of section 60 of the VAT Act, the commissioner for SARS may levy an additional VAT of 200% where an intention to evade payment of VAT has been proved.

PERSONAL INCOME TAX: The thorny subject of personal tax has been in existence since ancient and biblical times and yet it still makes headlines. Its protagonists, including Adam Smith, a pioneer of political economy, argue that every income-earning subject of a state has to pay taxes as the state affords them the resources to produce and earn that income.

The quantification of what has to be paid by taxpayers is based on a PAYE system. This means that the tax is paid on a sliding scale depending on a taxpayer’s income earned for the fiscal year in question. The tax rates for the current fiscal, which ends in February 2013, for individual taxpayers with an income of R0-160,000 ($0-19,584) is 18%, 25% plus R28,000 ($3427) for income of R160,001-250,000 ($19,584-30,600), 30% plus R51,300 ($6242) for income in the R250,001-346,000 ($30, 600-42,350)bracket and 35% plus R80,100 ($9804) for income of R346,001-484,000 ($42,350-59,241). For income in the range of R484,001-617,000 ($59, 241-75,521), the rate of tax is 38% plus R128,400 ($15,716) and for income of R617,001 ($75,521) and above, the rate is 40% plus R178,940 ($21,902).

As is the case in most other countries, personal taxes in South Africa constitute the largest source of revenue. Employers are, in terms of the Fourth Schedule to the Income Tax Act, obliged to withhold from remuneration paid to any employee an amount of PAYE that is to be remitted to SARS on or before the seventh day following the month on which the PAYE was withheld. Failure to do so by employers may give rise to levying of interest at prescribed rate and penalties of up to 200%. The definition of “remuneration” was amended with effect from March 1, 2002 to include director’s remuneration and emoluments.

CHALLENGES: Although the calculation of PAYE is fairly easy on a straight basic cash salary, in most cases challenges are posed by complex remuneration structures, which include non-cash employment benefits and other allowances. These benefits are sometimes inadvertently not taxed by employers, as they believe that they should not be taxed. Problems arise when they are audited by SARS and issued with a huge tax bill for failing to withhold the correct amount of tax as contemplated in the tax legislation.

Another challenge faced by employers emanates from the exemption of the so-called independent contractors from the withholding of PAYE. Unfortunately the independent contractors’ concept has not been clearly understood by employers and as such they end up failing to withhold PAYE from individuals who do not qualify to be classified as independent contractors.

As employers may not have capacity to determine who is and who is not an independent contractor, professional advisors have been engaged by employers to analyse contracts that they conclude with their service providers to determine whether or not they are independent contractors. SARS is now concentrating its audits in this area, as its “hit” rate has been impressive. That reflects a serious lack of understanding by employers in both private and public sector.

CAPITAL GAINS TAX: The CGT was introduced to the country’s legislation on October 1, 2001. Schedule eight to the Act covers the provisions of this legislation. All taxpayers are subject to CGT on disposal of assets. For the purposes of this legislation, an asset is broadly defined to include rights on assets.

A capital gain or loss is calculated by deducting the so-called base cost from proceeds on the disposal of an asset. If the disposed asset was acquired by the taxpayer before October 1, 2001, the taxpayer can minimise its CGT by applying time apportionment base cost. This time apportionment base cost is intended to ensure that in calculating CGT, a portion of the capital gain is not taxed. This tax-free portion is the proportion of the gain that can be attributable to the period prior to October 1, 2001. For example if an asset was acquired in 2000 and disposed of in 2002, only one third of profit will be subject to the CGT. The amount of gain to be included in taxable income is determined as (i) natural persons and special trusts is 25% of the gain, and (ii) companies 50%. It was announced in the February budget speech that the amount for companies will change to 66.6%.

OBG would like to thank SizweNtsalubaGobodo for their contribution to THE REPORT South Africa 2012