January 29, 2015 at 4:45 pm #379Marican IncorporatedKeymaster
Tax Technical FAQs: April 2013
VAT: Deposits for commercial property
Q: We received conflicted answers from SARS, Estate Agents and Accounting firms; we would like to know what the correct procedure is that we must follow regarding the following: On commercial property do we need to add VAT on rental deposits for new contracts? We are registered for VAT.
A: deposit does not fall within the ambits of the definition of “consideration” s 1 of the Value Added Tax Act.
It is however important that the deposit be held in a separate trust account as to not form part of gross income. Only when the deposit is used against lost rent or damages will VAT become payable, and landlords are advised to make mention in their lease contracts that the deposit is inclusive of VAT as to make sure that the net amount, after the deposit has been utilised is a full month’s rent. SARS acknowledges that no supply has taken place until such time as the deposit is utilised.
SBC: Personal service income
Q: Two attorneys in partnership have recently converted into an incorporated entity (Inc.). The Inc. has appointed 2 employees; and there are therefore 4 employees total (including directors). Not more than 80 per cent of income is from one source. Will the Inc. qualify as a SBC?
A: Not more than 20% of the total receipts and accruals may consist of income from rendering personal services. Legal services are expressly included in the definition of “personal service”. Section 12E(4)(d) provides that the corporation throughout the year of assessment employed 3 or more full time employees (other than shareholders of the company) who are on a full time basis involved in the business of the company.
It is my understanding that your client will not qualify as a SBC.
Income Tax: Conversion of foreign currency amounts
Q: Kindly confirm how the conversion of Pounds Sterling to Rands is applied to income from property rental in the UK? Does SARS accept the average conversion for the tax period or is there a table that they publish, or do I use the conversion rate at the end of that particular month that the income was received in the client’s bank account in UK?
A: Persons other than natural persons and trusts (non-trading) must use the spot rate on the date that the amount was received in terms of s 25D(1) of the Income Tax Act.
Natural persons or trusts (non-trading) may use the average exchange rate for the year in terms of s 25D(3).
Income tax exemption: section 10(1)(e) – receipts of a body corporate or similar entity
- Our client is a home owners association.
·Our client gets one electricity bill from ESKOM per month for the entire estate’s electricity (for example R100 000).
·Then our client sends out invoices to all the residents for the payment of the electricity bill (for example R125 000).
·The reason why the invoice amount is higher than the actual electricity bill is to make provision for an administration fee as well as in case of the electricity box having to be repaired or replaced.
Our question is whether the difference between the R125 000 and the R100 000, will be taxable income in the hands of the home owners association.
A: A levy which is payable to a body corporate or similar body (share block co, or association) is expressly exempt from Income Tax in terms of s 10(1)(e) of the Income Tax Act. Any receipts and accruals other than levies, received by or accrued to such a body is exempt to the extent that such an amount does not exceed R 50,000 – s 10(1)(e)(B)(ii).
VAT: Commercial accommodation
Q: We have a client who owns a café/restaurant and above the café he has a lodge, which consists of 30 furnished rooms which he hires out on nightly, weekly accommodation.
He is VAT registered and the café and lodge’s VAT are declared on a single VAT return. He declares his café sales and lodge income as taxable sales on his VAT return.
He does not charge VAT to his lodge customers and does not issue tax invoices to them. In other words he does not tell customers the room is R200 plus VAT, he charges them a flat fee of say R200 per night and then declares the R200 as VAT sales together with the shop sales.
However later this year he will be getting a group of students (paid for by government) who are government funded to do a training course in South Africa. The students will be accommodated at his lodge for accommodation and meals. He will be required to submit a tax invoice to government for his services.
We understand there may be a concession applicable to this type of establishment. Kindly advise us on this. If so, how could we go about applying for this concession for the client?
I have read somewhere that the output vat on accommodation is calculated at: 200 x 60% x 14/114, is there such a scenario when it comes to vat on accommodation or did I understand incorrectly?
A: Would you not agree that the accommodation would in any event fall within the definition of “commercial accommodation” and that VAT should be charged at the standard rate on the supply?
“commercial accommodation” means—
(a) lodging or board and lodging, together with domestic goods and services, in any house, flat, apartment, room, hotel, motel, inn, guest house, boarding house, residential establishment, holiday accommodation unit, chalet, tent, caravan, camping site, houseboat, or similar establishment, which is regularly or systematically supplied and where the total annual receipts from the supply thereof exceeds R60 000 in a period of 12 months or is reasonably expected to exceed that amount in a period of 12 months, but excluding a dwelling supplied in terms of an agreement for the letting and hiring thereof;
(b) lodging or board and lodging in a home for the aged, children, physically or mentally handicapped persons; and
(c) lodging or board and lodging in a hospice.
Taxable accommodation (“commercial accommodation”) Board and lodging is not always taxed on the full amount of consideration. This is an attempt to treat people living in commercial accommodation on a similar basis as those living in their own or rented homes. When a person stays for longer than 28 days in any hotel, guesthouse, inn, boarding house, retirement home, or similar establishment, only 60% of an all-inclusive charge for accommodation and domestic goods or services will be subject to VAT. Domestic goods and services include the provision of meals, and certain facilities or amenities such as furniture, fittings, telephone, television, radio, cleaning, maintenance, electricity, gas, air conditioning and heating, where it is included in the price, and as part of the accommodation supplied.
Any domestic goods and services, or other goods and services which are charged or supplied separately, and which are not included in the tariff, will attract VAT at 14%. VAT is calculated on the full tariff only if the person stays for 28 days or less. However, if a person books in for a continuous unbroken period of longer than 28 days, VAT is levied on only 60% of the charge from the first day.
Income tax: deductibility of expenses incurred in the production of commission
Q: Could you please assist us with the following query? When may expenses be deducted from commission income and what expenses are included. Also, may expenses be deducted from incentive income?
A: Any expense actually incurred in the production of the income is tax deductible provided that it is not of a capital nature in terms of section 11(a) of the Income Tax Act. The negative test on the other hand, section 23(m) of the Act however prohibits expenditure in terms of section 11(a) of the Act in the event that the taxpayer’s remuneration is not primarily (more than 50%) derived from commission. The commission must be directly attributable from that person’s sales or turnover attributable to that person. In other words, say for example a sales manager is paid a profit share on sales made by his sales persons, then that profit share will not qualify as commission for purposes of section 23(m).
Income tax: the taxability of trust income
Q: One of our client’s Trust holds 100% of the shares in a company. Can the trust draw a commission/salary from the company and pay the tax thereon. In other words can the Company show that as a tax deductible expense and then the trust or the beneficiaries pay the tax?
A: The trust may well receive salary/commission and distribute to beneficiary/trustee, provided that the trust deed makes provision for income distributions. This may only be done in the event that that salary or commission is distributed to the person who rendered the services relating to the salary/commission.
I wish to refer you to the matter of Meyerowitz v CIR 1963 (3), 25 SATC 287;
The taxpayer received income in a trust of which he was a trustee for services rendered directly by him, and distributed the proceeds to his children. The court found that this was a scheme in terms of section 103 of the Income Tax Act, as one cannot distribute the “fruits” of one’s own labour to someone else. The court ignored the existence of the trust and taxed the taxpayer on the full receipts.
- Our client is a home owners association.
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