It’s hunting season! Are you ready?

As the traditional winter hunting season approaches and South African borders are (somewhat) more open after the stricter COVID-19 lockdown, it is important revisit the Value-Added Tax (VAT) impact of the various goods and services generally supplied to foreign hunters. The general rule is that the supply of goods or services in the Republic by a vendor to a foreign hunter is subject to VAT at the standard rate on the basis that the goods or services are consumed in the Republic. There are, however, certain exceptions to this rule.

Accommodation

The supply of “commercial accommodation” (lodging or board and lodging together with domestic goods and services) by a vendor to a foreign hunter is subject to VAT at the standard rate if the accommodation is supplied in the Republic. The consideration for the supply of commercial accommodation to a foreign hunter for an unbroken period of more than 28 days at an all-inclusive fee is deemed to be only 60% of the all-inclusive charge. The full value of meals, beverages and other entertainment supplied for a separate charge is subject to VAT at the standard rate. The full consideration for commercial accommodation that is supplied to the foreign hunter for less than 28 days is subject to VAT.

Hunting services

The nature of these services is such that the foreign hunter consumes the services whilst being physically present in the Republic. The supply of these services is therefore subject to VAT at the standard rate.

Trophy fee

The trophy fee is consideration for the supply of the hunted animal. This constitutes a supply of goods by the hunting outfitter which may be zero-rated provided that the goods are exported under as a direct export, indirect export (with election), or an indirect export where further work will be required.

Dip and pack and taxidermy services

The supply of dip and pack and taxidermy services may be zero-rated. The zero rate can only apply if the trophy is exported to the foreign hunter after the supply of the services, provided the supplier obtains and retains the required documentary proof. If the foreign hunter collects and subsequently removes the trophy from the Republic, the trophy is not exported to the foreign hunter, and the dip and pack and taxidermy services are therefore subject to VAT at the standard rate of 15%.

Single charge for a hunting safari package

In many instances, the hunting outfitter or another person assembles a hunting safari package consisting of various goods and services (including the trophy) to be marketed to foreign hunters. Even though a single charge may be paid for a hunting safari package, multiple goods and services may be supplied as part of the hunting safari package. The supply of these goods and services cannot be regarded as being merely incidental to the supply of the trophy.

The hunting package must therefore be separated into the various supplies provided such as accommodation, food, refreshments, trophy fee, professional hunting services and taxidermy services. The vendor will then be obliged to allocate a reasonable portion of the all-inclusive charge to each of the supplies of goods and services incorporated in the package and charge VAT at either the zero or standard rate, depending on the nature of the particular goods or services supplied.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Tax oddities and VAT frustrations

The Tax Administration Act provides for the audit and verification of taxpayers’ tax returns for all taxes administered by the Commissioner for the South African Revenue Service (SARS). In many instances, such requests for information are general, boiler-plate letters received by taxpayers, not indicating specifically what additional information SARS requires in the circumstances and which supporting documents must be provided. In recent times, in respect of both income tax and value-added tax, SARS has taken an arbitrary approach in issuing additional assessments based on information provided by taxpayers in response to the inadequate (or vague at best) requests for information.

Income tax

Many taxpayers (who are natural persons) have recently received a request from SARS in which they list the bank accounts that are registered in the name of the taxpayer, as well as a summary of the total number of credits (deposits) made into these respective bank accounts. SARS then requests the taxpayer to explain why those credit amounts should not all be included in the taxpayer’s taxable income. This is a highly arbitrary approach followed by SARS in accepting that all deposits made into a taxpayer’s bank account constitutes income. There can, of course, be multiple other reasons for such deposits, including donations between spouses, receipt of gifts, loan funding received, prize winnings, transfers between the taxpayer’s own accounts, transfers out of bond accounts into current accounts, et cetera. This approach displays a lack of understanding regarding commercial realities and places the taxpayer on the back foot: having to discharge the onus of amounts that should not be classified as income.

Value-Added Tax

Arguably, no VAT vendor in South Africa has escaped frustration from the administration of the VAT system, particularly as it relates to the verification of VAT returns. A practice that has recently emerged is that if one or two pieces of supporting documents provided to SARS does not meet the requirements of a valid tax invoice, SARS immediately, and without further inquiry, disallows all input VAT claimed by a taxpayer during the relevant tax period. This is a highly invasive approach in which SARS accepts that none of the goods and services received by a vendor during that period is valid, or that they lack supporting documents. Unless SARS is specific in their requests, a taxpayer cannot identify the information that should be provided to them. The blanket disallowance of all input VAT is an irrational practice that should be addressed at the appropriate level.

The examples above merely illustrate some of the arbitrary practices that taxpayers have recently been confronted with – as such, taxpayers are advised to carefully navigate the dispute resolution process, since providing SARS with incorrect information, or making incorrect statements in their correspondence with the revenue authority, may lead to severe prejudice as a result of these unacceptable practices.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Budget 2021: What was missing?

Finance Minister Tito Mboweni delivered his third annual budget address on 24 February 2021. While there was plenty of information on both income and expenditure issues, as well as proposed tax amendments, some aspects were, concerningly so, not addressed at all.

Exchange control

In 2020, the Minister indicated that changes would be made to South Africa’s capital flow system regulated through the South African Reserve Bank’s exchange control regulations. Previously, the exchange control provisions restricted the use of so-called loop structures to protect the tax base. Such loop structures involved South African exchange control residents investing in South Africa from a non-common monetary area. The proposed policy was that, instead of an approval process, all transactions would be allowed unless specifically restricted or regulated. While the Reserve Bank has revised its policy against loop structures from 1 January 2021 and now allows such arrangements, nothing more has been done regarding South Africa’s archaic exchange control system.

Assessed losses

The corporate tax rate reduction from 28% to 27% for years of assessment commencing on or after 1 April 2022 does not come without some trade-offs. One such trade-off includes the limitation on the utilisation of assessed losses. This was the second consecutive year in which the proposed tax amendments have alluded to a restriction on the utilisation of losses. However, taxpayers are still in the dark as to what the exact mechanism will entail and are left wondering if it will be an out and out restriction, or merely the phasing of losses. In the current harsh economic climate where many companies have suffered losses, any limitations imposed by Treasury will be met with fierce push back. It is disappointing that no further information in this regard was supplied by the Minister. We hope to see additional details in this regard come in the Draft Taxation Laws Amendment Bill in June of July 2021.

National Health Insurance

National Health Insurance (NHI) is being implemented in phases over a 14-year period that started in 2012. It will be established through the creation of a single fund that will buy services on behalf of the entire population. The funding for NHI will be through a combination of various mandatory pre-payment sources, primarily based on general taxes. Many tax practitioners were of the view that the NHI will be funded through the removal of the medical schemes tax credit, which taxpayers enjoy for monthly contributions to medical schemes. Surprisingly, not only has the medical scheme credit remained intact, but it has conversely also seen an upward inflationary adjustment.

Given the substantial expected costs of the NHI, it is concerning that the Minister made no further announcements in this regard, and taxpayers should remain hopeful that expectations are managed carefully to ensure that there are no surprises or substantial tax increases to fund the NHI.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Budget 2021: Corporate tax amendments

Finance Minister Tito Mboweni delivered his third annual budget address on 24 February 2021. The corporate tax rate reduction from 28% to 27% for years of assessment commencing on or after 1 April 2022 was arguably the most significant windfall for corporate taxpayers, although the actual cash benefits thereof will only be seen in the 2023 calendar year. Below, we highlight some of the other significant proposals, which will likely be contained in the Draft Taxation Laws Amendment Bill to be published for public comment in June or July this year.

Refining the interaction between antivalue shifting rules and corporate reorganisation rules

The Income Tax Act curbs the use of structures that shift value between taxpayers free of tax. The anti-value shifting rules apply to transactions involving asset‐for‐share exchanges. Asset‐for‐shares base cost rules prescribe that a base cost for assets acquired by a company in exchange for its shares should be equal to the sum of the market value of the shares it issued and the amount of the capital gain triggered by the application of the anti‐value shifting rule to ensure that there is no double taxation on the future disposal of the assets.

Clarifying the interaction between early disposal antiavoidance rules and degrouping antiavoidance rules in intragroup transactions

In addition to the early disposal anti‐avoidance rules outlined above, the intra‐group transaction rules contain de‐grouping anti‐avoidance rules, which apply when the acquirer and the party disposing of an asset in terms of an intra‐group transaction cease to form part of the same group of companies within six years of the transaction. The de‐grouping anti‐avoidance rules apply to reverse the tax benefit that was obtained in terms of the intra‐group transaction by triggering the greatest capital gain, gross income, or taxable income that would have arisen between the date of the intra‐group transaction and the date of de‐grouping. Because both of these anti‐avoidance rules apply to reverse the deferred tax benefit of an intra‐group transaction, it is proposed that changes be made to the tax legislation so that if one of the anti‐avoidance rules applies in respect of an asset, the other will not subsequently apply.

Reviewing the venture capital company tax incentive regime

National Treasury has determined that the incentive has not adequately achieved its objectives. The incentive has instead provided a generous tax deduction to wealthy taxpayers and most support has gone to low-risk ventures that would have attracted funding without the incentive. The incentive will therefore not be extended beyond its current sunset date of 30 June 2021.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Why do I need to know my rights as taxpayer?

Since the introduction of the Tax Administration Act in 2011, which aimed to consolidate most of the administrative matters in tax acts, taxpayers have become ever more aware of their rights in dealing with the South African Revenue Service (SARS). There has also been a significant increase in the number of cases in the Tax Court (as well as in our High Courts) that relate not to substantive tax matters, but rather to the exercise of taxpayers’ rights. We briefly highlight below some of the rights that taxpayers have in terms of the Tax Administration Act, and which they may wish to enforce at some stage.

  • You are entitled to receive reasons for any assessment that SARS raises and any taxes it imposes. Therefore, SARS is not allowed to simply raise assessments without giving you (when called on in terms of the dispute resolution rules) a full understanding of their justification and their interpretation of the law, which underlies the specific matter.
  • SARS is not allowed to appoint a third party to deduct money from your account (for example, a bank) without providing you with the proper notice at least ten days in advance, as well as providing you with remedies to address the matter.
  • SARS is not entitled to divulge your information (except as required by law) to any third parties.
  • Provided that your returns were free of material deficiencies, SARS must pay interest on delayed VAT refunds. This is a matter that is often overlooked in practice since taxpayers are all too happy to receive the actual VAT amount – do not forget about your interest!
  • SARS must provide you with a tax clearance certificate within 21 business days after the submission of an application. More and more institutions require the issuance of tax clearance certificates for general business purposes.

Although taxpayers have many rights afforded to them, one often finds a practical challenge in exercising those rights. The legislation provides for relief in certain circumstances but does not prescribe a form and manner in which taxpayers must utilise that relief (for example, an application for a reduced assessment where there has been an undisputed factual error). Although the law provides for relief, the Act does not prescribe how that relief must be exercised.

This is one of the clear shortcomings within our system of tax administration and one hopes that in due course, National Treasury and the Minister of Finance will identify these fallibilities as a systemic issue within the administration of our tax system, in order to approach the Tax Ombud to make recommendations on how taxpayers can exercise their rights afforded to them daily.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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