What you should know about medical tax credits

medical aidIngé Lamprecht
 
More changes to be introduced from 1 March.

JOHANNESBURG – Over the past two years, the tax benefits individuals enjoy for medical aid contributions and expenses, have gradually changed from a deduction to a tax credit system.

While the deductions for medical aid contributions have already been replaced with a medical credit system for most taxpayer categories, deductions for qualifying medical expenses will also be replaced with a credit system from March 1 this year.

Wessel Smit, member of the South African Institute of Chartered Accountant’s (Saica) national tax committee, explains that a tax credit reduces an individual’s tax liability. This differs from a medical deduction, which lowers an individual’s taxable income.

A medical tax credit allows all taxpayers the same benefit in rand, whereas a medical tax deduction is more beneficial to a taxpayer with a marginal tax rate of 40% than someone who pays 18%, he says.

The disadvantage is that if an individual’s tax liability in a given tax year is not sufficient to utilise all the tax credits available, the benefit will be forfeited and not be carried over to the next year.

Credit on medical fund contributions

Tax credits on medical funds contributions were already introduced on March 1, 2012. Currently the credit is R242 per month for the main member and the first dependent and R162 per month for additional dependents, but it is likely to be adjusted for inflation from March 1, 2014, Smit says.

While the credit system has been in use for taxpayers younger than 65 and taxpayers younger than 65 with a disability or a disabled dependent, it will be applicable to all taxpayers – including taxpayers 65 and older who contribute to a medical fund from March 1, 2014.

Other medical expenses

Up until the end of the current tax year (2014), taxpayers were entitled to a deduction for qualifying medical expenses (other than medical fund contributions) not recovered from the medical scheme. The deduction was determined using a specific formula in the Income Tax Act.

From March 1, 2014, this deduction will also be replaced by a credit, which will be more favourable to taxpayers who are 65 years and older and taxpayers below age 65 who are disabled or who has a dependent with a disability.

Smit says with regards to taxpayers younger than 65, the credit for medical expenses will be determined as follows. The medical tax credit for 12 months (with regards to medical aid contributions) will be multiplied by four and subtracted from the total medical aid contributions for the year. The qualifying medical expenses the taxpayer incurred during the year that exceeds 7,5% of the taxable income will be added to this amount. This total will be multiplied by 25% to derive at the tax credit for medical expenses.

For taxpayers 65 years and older, or younger than 65 but with a disability or a disabled dependent, the benefit will be much more substantial.

The medical tax credit for 12 months will be multiplied by three and subtracted from the total medical aid contributions for the year. All qualifying medical expenses will be added to this amount. This total will be multiplied by 33.3% to derive at the medical expenses credit.

In terms of the Income Tax Act, qualifying medical expenses include services rendered and medicines supplied by registered medical practitioners, as well as specialists and homeopaths, hospitalisation in a registered hospital or nursing clinic, home nursing by a registered nurse, midwife or nursing assistant, prescribed medicines from a pharmacist and medical expenses incurred and paid outside South Africa. 




Amendments to the Tax Administration Act 2013

A diversified Financial Services Group.
A diversified Financial Services Group.

Author: Beric Croome (ENS) 

The Tax Administration Laws Amendment Bill, No. 40 of 2013 was introduced in Parliament on 24 October 2013. The President of the Republic of South Africa must still assent to the Bill and it must then be published in the Government Gazette before it becomes an Act. The Tax Administration Laws Amendment Bill (“TALAB”) contains various amendments of an administrative nature to various tax Acts administered by the Commissioner: South African Revenue Service. In this article it is not possible to deal with all of the amendments contained in the Bill and only the more important changes to the Tax Administration Act, No. 28 of 2011 will be dealt with.

Definitions

Section 1 of the Tax Administration Act (“TAA”) will be amended to define “outstanding tax debt” as meaning a tax debt not paid by the day referred to in section 162 of the TAA. The intention of the new definition seeks to clarify that the recovery powers contained in the TAA may only be used if an amount of tax is not paid within the period prescribed for payment. The definition of “relevant material” which is used extensively throughout the TAA will in future mean any information, document or thing that is foreseeably relevant for the administration of a tax Act as referred to in section 3 of the TAA. The purpose of this amendment is to ensure that there is a nexus between the material or information requested by SARS and the administration of the tax Act for the purposes for which the material is required.

Legal Proceedings and the Commissioner

Section 11 of the TAA is being amended to provide that no legal proceedings may be instituted against the Commissioner unless the applicant has supplied the Commissioner written notice of at least one week of the applicant’s intention to institute the legal proceedings against the Commissioner. Furthermore, the notice or any process whereby the legal proceedings instituted against the Commissioner must be served at the address specified by the Commissioner by public notice. Previously, taxpayers would institute proceedings against the Commissioner and serve documents at the office of the State Attorney, local SARS branch offices or the office of the Commissioner. It is intended that in future all papers relating to litigation must be served at a central point so that they can be properly managed by the Commissioner’s legal representatives.

Returns Required

Section 27 of the TAA is being amended to provide that a senior SARS official may require a person to submit further or a more detailed return regarding any matter for which a return under section 25 or 26 is required or prescribed by a tax Act. In addition, section 25 of the TAA will require a person to submit returns other than those specifically referred to in a tax Act and such returns must contain the information prescribed by a tax Act or by the Commissioner. As a result, the Commissioner will be entitled to direct that certain persons must submit a particular type of return to SARS in the manner prescribed.

Requesting Information

The Bill amends section 46 of the TAA to the effect that a senior SARS official may require that relevant material, if required for purposes of a criminal investigation is supplied under oath or solemn declaration and if necessary, in accordance with the requirements of the Criminal Procedure Act, No. 51 of 1977.

SARS Confidential Information

 

Section 68 of the TAA will be amended such that information relating to the verification or audit selection procedure or method used by SARS which could be expected to jeopardise the effectiveness of SARS’ audit procedures is included in the extensive definition of SARS confidential information. The purpose of the amendment is to ensure that the effectiveness of SARS’ audits and investigations are not prejudiced by a taxpayer becoming aware of the basis on which SARS’ audits and similar enforcement related procedures are undertaken.

 

Withdrawal of Assessments

Section 98 of the TAA will be amended to allow for SARS to reduce an assessment in certain very specific and narrow circumstances even though more than three years may have passed since the date on which the assessment was issued. For a taxpayer to benefit from these new provisions the Commissioner must be satisfied that the assessment in issue was based on an undisputed factual error made by the taxpayer in the return or a processing error made by SARS or a tax return was fraudulently submitted by a person not authorised by the taxpayer. In addition, the assessment imposes an unintended tax debt in respect of an amount that the taxpayer should not have been taxed on and the recovery of the tax debt arising under that assessment would produce an anomalous or inequitable result.

The new rules will only be available where there is no other remedy to the taxpayer and it is in the interest of the good management of the tax system to allow for the assessment to be withdrawn. Where an assessment is withdrawn as envisaged under the amended section 98 it will not be subject to an objection or appeal. The purpose of the amendment is to allow SARS to correct assessments incorrectly issued to a taxpayer which are not rectified within the period of three years or where someone other than the taxpayer has filed a tax return, to the detriment of the taxpayer without the taxpayer’s knowledge and consent.

Rules for Dispute Resolution

 

Section 103 of the TAA is amended to authorise the Commissioner to prescribe the form of the document required to be completed and delivered by a taxpayer under the rules governing dispute resolution. The amendment effectively confers on the Commissioner a limited authority to prescribe the form of documents, such as the notices of objections and appeals required under the dispute resolution rules. It is important to point out that the dispute resolution rules promulgated under 107A of the Income Tax Act 58 of 1962, as amended (“the Act”) will be replaced by a new set of rules governing dispute resolution. SARS has previously published the draft rules for public comment and is consulting with stakeholders with a view to finalising those rules which will in all likelihood be promulgated in the early part of 2014.

 

Jurisdiction of Tax Court

By way of an amendment to section 117 of the TAA the Tax Court will in future be entitled to hear and decide on applications made regarding a procedural matter relating to a dispute under the provisions of chapter 9 of the TAA which deals with dispute resolution. Thus, where SARS fails to deal with an objection or appeal within the time frame specified in the rules governing dispute resolution, a taxpayer will be entitled to approach the Tax Court for relief regarding the breach of procedure and will not be required to launch proceedings in the High Court.

Decision by Tax Court

Section 129 of the TAA is being amended to clarify that the Tax Court in considering an appeal against the imposition of the understatement penalty is not limited to the behavioural category selected be SARS. The Tax Court may decide, based on the evidence heard by the court that another behavioural category in the table contained in section 223 of the TAA is more appropriate and may reduce or increase the understatement penalty. Amendments will also be made to section 129 to clarify the treatment of test cases designated under section 106(6) of the TAA. The explanatory memorandum on the TALAB indicates that the judgment delivered by the Tax Court in a test case will not be binding on other Tax Courts but will only be binding on taxpayers whose objections or appeals were stayed or selected for the test case. The remedies of those taxpayers who are selected by SARS but who do not wish to participate in the test case will be regulated in the new dispute resolution rules which will be issued shortly by SARS under section 103 of the TAA. Those taxpayers who agree to a stay of their disputes, or have been ordered by a Tax Court order to stay their disputes will be bound by a final judgment. In addition, taxpayers who exercise the right to participate as co-appellants in the test case will be entitled to further appeal the test case.

 

 

Furthermore, where a taxpayer is of the opinion that the test case judgment does not apply to the facts and issues of their particular circumstances, the dispute resolution rules will allow the taxpayer to approach the Tax Court for an order to pursue the resolution of their dispute with SARS independently. Furthermore, section 130 of the TAA is being amended to enable the Tax Court to award costs as dealt with in the dispute resolution rules in a test case, interlocutory application or application in a procedural matter instituted under the rules. The dispute resolution rules will also cater for the question of costs
relating to cases stayed pending the outcome of the test case.

 

 

Preservation Orders
 
 
Section 163 of the TAA which deals with the circumstances under which SARS may apply for a preservation order is being amended. The amendment seeks to clarify the purpose of a preservation order which is not to ensure the recovery of tax which is dealt with in chapter 11 of the TAA but rather deals with a situation where a taxpayer is subject to an audit and transfers assets to avoid the payment of tax properly chargeable and the taxpayer takes such steps once there is a quantified tax liability. Where there is an audit on a taxpayer’s affairs that is not completed and the tax debt is not yet quantified the section will now require that a senior SARS official must, on reasonable grounds, be satisfied that tax may be due and payable. Furthermore, the amendments made to section 163 provide for the appointment of a curator bonis by SARS to safeguard the assets seized before the granting of a preservation order under section 163(7) and the ability of the court to confirm the appointment of the curator bonis where one was appointed by SARS or where a curator was not appointed to make such appointment.

 

Payment of Tax Pending Objection and Appeal

 

The TALAB amends section164 to make it clear that the section cannot apply to that part of the assessment which is not disputed. Therefore, where a taxpayer accepts some of the adjustments made to the assessment are correct it will not be possible to postpone the payment thereof as that amount is not in dispute. In addition, the section is clarified to deal with the situation where the taxpayer has requested reasons for the assessment issued by SARS and needs more time to formulate the grounds of objection.

 

Filing of Statement at Court

Under section 172 of the TAA, SARS may file a statement at court which will have the effect of a civil judgment against the taxpayer in respect of outstanding tax. The section is being amended to make it clear that the statement referred to in section 172(2) may only be filed after the period referred to in section 164(6) has expired. Thus, section 172 may only be invoked in respect of an outstanding tax debt. Section 164(6) of the TAA has the result that during the period commencing on the day that SARS receives a request for suspension of payment of tax in dispute from a taxpayer and ending ten business days after the issue of SARS’s decision or revocation no recovery proceedings may be taken against the taxpayer unless SARS has a reasonable belief that there is a risk that the taxpayer will dissipate their assets.

 

Where SARS does not supply the necessary notice under section 164(6) of the TAA, the ten day period does not commence and SARS is not entitled to commence recovery proceedings. The amendment to section to 172 makes it clearer that the statement referred to in subsection (2) may only be filed after the period referred to in section 164(6) has expired. The difficulty that arises in practice is what a taxpayer is entitled to do where SARS does not comply with the procedure set out in section 172 of the TAA. Section 176 is being amended to provide that where SARS is satisfied that a taxpayer has paid the full amount of the tax due reflected in its statement filed under 172 and has no other outstanding tax debt, SARS is compelled to withdraw the statement if requested by the taxpayer in the prescribed form and manner.

 

Refunds

Section 190 of the TAA is being amended to make it clear that where an amount is erroneously paid by SARS as a refund it will be regarded as an outstanding tax debt and recoverable by SARS using the provisions contained in the TAA to do so.

Understatement Penalty

 

The amendments made to section 222 give effect to the announcement contained in the 2013 budget that no understatement penalty will arise as a result of a bona fide inadvertent error made by a taxpayer. It has been proposed that this provision will apply with effect from 1 October 2012 and will also apply to understatements made in returns submitted before 1 October 2012. In the draft memorandum on the objects of the TALAB it was indicated that the following circumstances would be taken into account to
determine if a bona fide inadvertent error has been made:

 

In the context of factual errors –

 

  • If the standard of care taken by the taxpayer in completing the return is commensurate with the taxpayer’s knowledge, education, experience and skill and the care of a reasonable person in the same circumstances would have exercised;
  • The size or quantum, nature and frequency of the error;
  • Where a similar error was made in a return submitted during the preceding year; or
  • In the case of an arithmetical error, whether the taxpayer had procedures in place to detect
    arithmetical errors.

In the case of a legal interpretive error – 

 

  • The relevant provisions of a tax Act is generally regarded as complex;
  • The taxpayer took steps to understand it including following available explanatory material or making reasonable enquiries; or
  • The taxpayer relied on information, that although incorrect or misleading, came from reputable sources and a reasonable person in the same circumstances would be likely to find the relevant information complex.
Unfortunately, in the final version of the explanatory memorandum the abovementioned criteria have been removed. SARS indicated that it will develop guidance regarding the meaning of the phrase “bona fide inadvertent error” and will publish that for the use of taxpayers and SARS officials.

 

 

Furthermore, section 222 is being amended to provide that where there is more than one understatement made in a return it is necessary that the applicable behavioural category is determined in respect of each understatement. Thus, for example, where one understatement may result from reasonable care not taken while another may result from gross negligence, it is necessary to apply the percentage applicable to each category and not to apply the highest penalty percentage to the total understatement.

 

 

The TALAB also amends the quantum of the understatement penalty which may be imposed according to the current table contained in section 223(1) of the TAA. The commentary on the TALAB states that the percentages contained in the amended table table will now be more aligned with comparative tax jurisdictions where similar regimes apply. Taking account of the comments contained in the explanatory memorandum it would have been more equitable if the amendments to the percentages of the understatement penalty took effect from the date on which the TAA took effect namely, 1 October 2012. It is most unfortunate that the reductions in the understatement penalty table will only take effect once the TALAB is promulgated.

 

 

It is important to note that where a taxpayer chooses to rely on an opinion in the manner prescribed in section 223(3) of the TAA that opinion must be procured from an independent tax practitioner and SARS will not take account of opinions prepared by in-house tax practitioners in line with the amendments contained in the TALAB in deciding whether the penalty should be remitted. Section 224 of the TAA is being amended to make it quite clear that where a taxpayer is aggrieved with the understatement penalty imposed they are entitled to object to that decision.

 

Registration of Tax Practitioners and Reporting of Unprofessional Conduct

 

The TALAB contains amendments dealing with the registration of tax practitioners under the TAA. The amendment made to section 240 seeks to address concerns raised by the tax practitioner industry that “intermediate managers” between trainees or articled clerks and the partner or director must also register as tax practitioners. The explanatory memorandum points out that the exclusion from registration for subordinates is required to be balanced against the need to ensure that a registered tax practitioner is accountable for the actions of the subordinate. The amendment will have the effect that a partner or director who is responsible for the intermediate manager will be regarded as accountable for the actions of the persons performing the functions for purposes of complaints by taxpayers or SARS to the relevant recognised controlling body. The TAA is also being amended in section 242 to provide that SARS may disclose the appropriate “taxpayer information” to a controlling body regarding a taxpayer and the tax practitioner against whom a complaint is lodged under the TAA.

 

Transitional Provisions

 

Significant amendments are being made to the transitional provisions contained in section 270 of the TAA to deal largely with the imposition of the understatement penalty as opposed to the additional tax which may have been leviable under another tax Act. It is indicated in the explanatory memorandum on the TALAB that during the drafting of the Tax Administration Bill that SARS consulted with international experts from the International Monetary Fund and that the constitutionality of the Bill was reviewed by both expert constitutional counsel and the state law advisors who certified the Bill as constitutional. The memorandum states that during the Parliamentary process, whereby the TAA was enacted, the general transitional approach in drafting the Tax Administration Bill was that the new act will apply to an act, admission or proceeding taken, occurring on or instituted before the commencement date. It was intended that this applied also to the imposition of the understatement penalty such that that penalty would apply from the outset.
 
It is apparent from the commentary on the TALAB that to have continued these actions or proceedings under the previous legislation would have required different processes and systems within SARS into the indefinite future which would have increased the cost of the tax administration. The view is expressed that the general transitional approach contained in section 270(6) of the TAA was enacted to permit the imposition of additional tax, as opposed to the understatement penalty, if the verification, audit and investigation had been completed before the TAA commenced but the amended assessment had not yet been issued. The section previously required that the additional tax must have been “capable of” being imposed, meaning that all other requirements for the intended imposition of the additional tax must have been met before the TAA commenced but was not yet imposed. The commentary on the TALAB indicates that uncertainty has arisen in practice whether section 270(6) of the TAA means that additional tax must be imposed in respect of all returns containing understatements submitted before the commencement date of the TAA.

 

As a result of the abovementioned uncertainty amendments are being made to section 270(6) to clarify that if an understatement penalty cannot be imposed, additional tax may be imposed. In principle the previous regime whereby additional tax was imposed contained a discretion whereby the Commissioner could levy a penalty ranging from 0 to 200%. In those cases, where it could be shown that there was no intention to evade tax and there were extenuating circumstances, SARS generally levied a nominal penalty ranging from 5 to 10%. Where, however, the taxpayer had intended to evade tax the penalty levied would amount to anything from 100 to 200%.

 

As a result of the uncertainties relating to the imposition of the understatement penalty various new subsections are introduced to section 270(6) of the TAA. The new section 270(6A) of the TAA seeks to clarify that the purpose of 270(6) was that additional tax may be imposed if capable of being imposed which would only be the case where the verification or audit necessary to determine the additional tax, penalty interest had been completed before the commencement date of the TAA, namely, 1 October 2012. The new section 270(6B) of the TAA seeks to address those cases where a taxpayer was not in a position to comply with the tax opinion requirement contained in section 223 of the TAA by virtue of the fact that the tax return, for example, 2010 was filed prior to the enactment of the TAA. Under section 223 no penalty may be imposed where the taxpayer obtains an opinion in the prescribed manner before the filing of the tax return in question. This requirement is done away with in respect of tax returns filed before 1 October 2012. Thus, where the taxpayer obtains an opinion after the return was filed that will assist in mitigating the penalty.

 

Section 270(6C) of the TAA will provide that where taxpayers made a voluntary disclosure before 1 October 2012 they may qualify for relief from an understatement penalty if the audit of their tax affairs was concluded after 1 October 2012. In addition, a new section 270(6D)(a) is being introduced to allow a senior SARS official who considers an objection by the taxpayer against an understatement penalty imposed as a result of an understatement made in a return submitted before 1 October 2012 to reduce that penalty if he is satisfied that there were extenuating circumstances. To some extent this reintroduces the discretion which was available to SARS in section 76 of the Act.

Finally, section 270(6D)(b) of the TAA deals with additional tax imposed under the Value-Added Tax Act which could only be imposed if there was an intent to evade tax. Under the new understatement penalty regime a penalty may be levied if reasonable care was not taken, no reasonable tax position existed or gross negligence existed. Thus, the TAA removes the intent requirement as the basis for levying additional tax under the VAT Act. The explanatory memorandum recognises that it may be difficult for vendors to argue that they had known about the application of the understatement penalty regime to VAT returns submitted before 1 October 2012. The amendment provides that a senior SARS official who considers an objection lodged by a taxpayer against an understatement penalty as a result of an understatement made in a VAT return filed before 1 October 2012 must be reduce the penalty in full where there was no intent to evade tax.

 

Conclusion
The TALAB contains various amendments to the administrative provisions of a variety of tax Acts and significant amendments to the TAA. The reduction in the level of penalties imposed under the penalty table contained in section 223 is to be supported but it is questioned why that reduction does not take place with effect from 1 October 2012. Furthermore, the amendments to the transitional rules may alleviate a number of the concerns raised regarding the imposition of understatement penalties in respect of tax returns filed before 1 October 2012. 

 

This article first appeared on the Jan/Feb edition of TaxTalk.




Employee Tax – Employment tax incentive

employee taxThe Employment Tax Incentive Act, 2013 (the ETIA) was published in the Gazette on 18 December 2013 and gives effect to the proposals to subsidise the cost of hiring younger workers as first announced by Government in 2010. According to the Media Statement on the Draft Employment Tax Incentive Bill, this new incentive is aimed at encouraging employers to hire young and less experienced work seekers, as stated in the National Development Plan. The ETIA represents the first phase of the incentive and after a review of the effectiveness of the incentive, a second phase which could include additional policy features and possible refinement may be implemented after two years. In this article we discuss the legislative provisions of the first phase of the employment tax incentive.

The incentive will operate by reducing the monthly employees’ tax payable by the qualifying employer in terms of the Fourth Schedule to the Income Tax Act No 58 of 1962 (the Act). Thus if the employer hires a qualifying employee, the employer can reduce the employees’ tax payable by that employer to the South African Revenue Service (SARS) by the amount of the incentive. In other words, the full amount of employees’ tax must still be deducted or withheld from the remuneration of all the employees of the employer, but the employer may deduct the amount of the employment tax incentive for which the employer is eligible from the amount of employees’ tax to be paid over to SARS.

The incentive will be available for the first two years of employment of “qualifying employees” as defined in the ETIA and will cover three different categories of employees, i.e. employees between the ages of 18 and 29 years, employees who are employed by an employer located within a special economic zone and employees who are employed by an employer in a designated industry. If the employer is operating in a special economic zone or a designated industry, there will be no age limitation for qualifying employees.

To qualify for the incentive the employee must also be in possession of a South African ID document or an asylum seeker permit and must receive monthly remuneration that is not more than R6 000 per month. For this purpose, remuneration is as defined in the Fourth Schedule to the Act. The employee must also not be a connected person in relation to the employer e.g. they must not be a relative of the employer. Furthermore, this incentive does not apply to domestic workers.

The determination of the incentive amount to be deducted from employees’ tax will be done on a monthly basis and will not result in any additional monetary benefit for the qualifying employee.
For the first twelve months of employment the amount of the incentive will be as follows:

  • 50 per cent of an employee’s monthly remuneration up to R2 000 per month. (This would only be applicable if the minimum wage prescribed by the relevant sector   determination or bargaining council agreement was less than R2 000 per month.)
  • For an employee with a monthly remuneration of between R2 000 and R4 000, the incentive will be R1 000 per month.
  • For employees with monthly remuneration of between R4 000 and R6 000 the value of the incentive will be between R1 000 and zero per month, as determined in terms of a formula.

For the second twelve months the value of the incentive will be half of the amounts mentioned above.

An employer will be eligible to receive the employment tax incentive if the employer is registered with SARS for the purposes of employees’ tax. This excludes employers which do not have to register as an employer with SARS e.g. because all their employees are below the tax threshold, although it is envisaged that the scope of the incentive may be extended in future. Public sector employers are generally excluded from the incentive, but the Minister of Finance may allow certain public entities to participate by notice in the Gazette and on such conditions as may be prescribed by regulation.

An employer can be disqualified from receiving the employment tax incentive due to any of the following:

  • Non-compliance with the minimum wage payable by virtue of a wage regulating measure i.e. a collective agreement or sectoral determination or bargaining council agreement, or if there is no wage regulating measure if the employer does not pay remuneration to that employee of at least R2 000 per month.
  • If it has been found that the employer has “displaced” (i.e. the dismissal of that employee constitutes an automatically unfair dismissal in terms of section 187(f) of the Labour Relations Act) an employee in order to hire a new “qualifying employee”.
  • If the employer has not met such conditions as may be prescribed by the Minister of Finance by regulation.

In addition, where an employer has received the employment tax incentive despite not being eligible by reason of non-compliance with a wage regulating measure, the employer must pay a penalty to SARS of 100% of the employment tax incentive received in respect of that employee. Where it has been determined that an employee has been displaced the employer will be obliged to pay a penalty to SARS of R30 000 and may be disqualified from receiving the employment tax incentive.

It is important to note that an employer may not reduce the employees’ tax payable by that employer in respect of a month by the amount of the employment tax incentive if, on the last day of that month, the employer has failed to submit any tax return or has any tax debt that is outstanding and which is not subject to an agreement entered into with SARS. In these circumstances the employer will be allowed to carry forward the incentive to the next month, subject to certain limits.

The employer cannot deduct more than the total employees’ tax which is due to SARS in a particular month. However, the incentive amount may be rolled over to the next month where the incentive available exceeds the employees’ tax otherwise due in a month, but subject to certain limits. The ETIA also provides for a reimbursement from SARS of the excess amount of the incentive so carried forward at the end of each employees’ tax reconciliation period, although this reimbursement will only be available from a date to be announced in the Gazette.

The ETIA also covers the situation where an employee who qualified for the incentive moved from one employer to another associated employer or where an employee was only employed for part of a month.

The commencement date of the employment tax incentive is 1 January 2014 and the incentive will cease on 1 January 2017. The incentive will apply to all qualifying employees who are employed on or after 1 October 2013.

ENS Africa
ITA: Fourth schedule (definition of ‘remuneration’)
Labour Relations Act: Section 187(f)




Youth Wage Subsidy Comes into Effect Youth Wage Subsidy Comes into Effect

The Employment Tax Incentive Act, commonly known as the youth wage subsidy, came into effect at midnight, SABC news reported on Wednesday.

The government hopes the law will promote employment for young people and create jobs in special economic zones once legislation providing for them has been promulgated. In terms of the act, employers will receive a tax incentive to employ young workers for a maximum of two years under certain conditions.

The Congress of South African Trade Unions (Cosatu) argued that the initial proposal of a wage subsidy and its replacement, the employment tax incentive, would create a two-tier labour market and result in the displacement of older workers. It has threatened to call a general strike to oppose the law but nothing seems to have come of this threat so far.

Economist Iraj Abedian said the act was unlikely to cause labour market instability in the short term.

“We can expect the businesses to begin to plan … the benefits that they can get, it will take some time, so it’s without a doubt not going to have an immediate effect. Typically wage subsidies of this nature take up to nine or 12 months before they take effect in the labour market.”

The Treasury gave the undertaking that early in 2014 the South African Revenue Service (SARS) will publish on its website documentation providing further details of how the scheme will assist employers.

“On-the-job experience is crucial for attaiPresident Jacob Zuma signed the Employment Tax Incentive Act into law in December, to take effect from January 1 — though it will apply to all young workers hired on or after October 1 this year.ning the appropriate skills and for future employment prospects,” the Treasury said. “Government is committed to work with the private sector to enhance employment opportunities and skills development for all workers, but especially for the youth with limited work experience.

“The existing learnership allowance provided for in the Income Tax Act and this employment tax incentive are but two of the initiatives that the government encourages employers to access to increase the levels of employment and skills development.”

The promulgation of the controversial law brings to a close a fierce battle lasting more than two years in which Cosatu fought against it.

Author: Linda Ensor and Sapa (BDlive)




Employment Tax Bill is signed into law

Employment Tax Bill is signed into law

The long-awaited Employment Tax Incentive Bill, to create jobs and provide relevant skills for young, unemployed South Africans has been signed into law.

Employers will receive a tax incentive to employ young workers in special economic zones for a maximum of two years, under certain conditions. The law takes effect on January 1.

Employers will be able to claim the incentive on a sliding scale for any employee between 18 and 29 who was hired on or after October 1 this year and is receiving a monthly salary that is above the relevant minimum wage and less than R6000 a month.

“If there is no legal minimum wage applicable in a particular sector, the monthly salary must be more than R2000.

“Domestic workers and employees connected or related to the employer are not eligible,” the Treasury said yesterday.

The South African Chamber of Commerce and Industry CEO, Neran Rau, said the chamber supported the law.

About 80% of its members indicated they would participate.

“But the government needs to make sure it addresses the issue of administration and red tape so it is done in a manner which will be positive to business.”

Business Unity South Africa has said it supports the skills training opportunities which would stimulate economic growth and reduce unemployment.

The Treasury said the incentive could provide jobs to many matriculants and school leavers who would soon enter the labour market for the first time.

“There will be no change in the wages that the employee receives, but the effective cost of hiring the employee will be lower, making it more attractive for firms to increase employment.”

The Treasury said checks and balances were in place to ensure the incentive did not lead to discrimination against older workers.

Trade unions have opposed the law, with Cosatu saying it would encourage employers to fire experienced workers to employ younger ones to receive the tax concession.




VAT Registration of Foreign e-commerce Suppliers

National Treasury released a tax bill in October 2013, following the Budget Speech in February and draft tax legislation on 4 July 2013, proposing changes to the VAT Act to require VAT registration of certain local and foreign suppliers of electronic services where consumption takes place in South Africa. In terms of the tax bill, local and foreign suppliers of electronic services will be required to register for VAT purposes where the services are supplied from a place in an export country and where a SA resident receives these services. A proxy will also pull local and foreign suppliers of electronic services into the SA VAT net where payment is made through a SA bank. The tax bill makes registration compulsory when the threshold of R50 000 taxable supplies in a consecutive twelve month period is reached. The tax bill also provides for suppliers of electronic services to account for VAT on the payments basis as opposed to the invoice basis.

In terms of the VAT Act, a price which is silent on VAT is deemed to include VAT at 14% (the standard rate). Should a foreign e-commerce service provider required to register for VAT not adjust its pricing to cater for the VAT, this would mean that it would have to calculate and fund the VAT from profits. In order not to impact profits, a VAT unregistered supplier of electronic services would have to ensure that its prices are increased by 14% which would generally place its prices on equal footing (presumably) to those of VAT registered counterparts.

A VAT unregistered supplier of electronic services would also have to change its systems to effect price adjustments resulting from the imposition of 14% VAT; calculate VAT at 14% by applying the tax fraction (14/114) to the VAT inclusive price or add 14% to the value; post the VAT calculated per transaction to a VAT output tax account; identify SA resident customers and payments made through SA bank accounts; and effect source documentation changes (see below). VAT unregistered suppliers of electronic services will face various compliance challenges, including system changes (see above) to cater for these changes, although once-off they could be costly; source documentation changes would also be once-off.

Tax Invoices would need to contain (a) the words “tax invoice” in a prominent place; (b) the name, address and VAT registration number of the supplier; (c) an individual serialized number and the date on which the tax invoice is issued; (d) a description of the services supplied; and (e) either the value of the supply, tax charged and the consideration for the supply or where the tax is calculated by applying the tax fraction (14/114) to the consideration, the consideration for the supply and either the tax charged or a statement that it includes a charge in respect of the tax and the rate at which the tax was charged; marketing presentations (online and other) may also require change as prices are deemed to include VAT at 14%; VAT registration which will be a once-off cost and depending on whether SARS streamlines the VAT registration process can be a fairly expensive and time consuming exercise; VAT filing costs will be a continuous cost and the frequency of filing will depend on whether SARS will create a special category or period within which these suppliers would need to file; and, in the case of a foreign electronic services provider, appointing a VAT representative in SA who needs to be a natural person would be a low but a continuous cost.

Following the release of the draft legislation for comment, National Treasury invited key role-players to workshop the draft legislation. Parliament’s Standing Committee on Finance (SCOF) then heard submissions on the draft legislation. The SCOF considered various comments of the workshop, including the following. The definition of e-commerce services (the previous naming convention) was considered to be too wide and ambiguous as a number of services supplied by foreign service providers would be caught (business- to-business (B2B) and business-to-customer (B2C) transactions), which may not have been intended. Uncertainty also existed with regard to what does the placing of an order entail and when does delivery of a service take place? It was proposed that e-commerce services should be changed to electronically supplied services to align it with international norms.

The SCOF accepted the recommendation to replace the word “e-commerce services” with “electronically supplied services”, although the tax bill now adopted the term “electronic services”. To attenuate uncertainty and provide more clarity, the types of electronically supplied services that would be subject to VAT would be listed in a regulation that will be issued by the Minister of Finance. The list of services should be in keeping with international norms and would most probably include supply of images, text and information and making available of databases; supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events, and supply of distance teaching. It was also proposed that the legislation should not apply to B2Bs as these transactions are catered for under the current reverse charge provisions for imported services. In addition it was proposed that the legislation should not be limited to e-commerce services supplied by non-residents as this could lead to VAT leakage if residents can provide e-commerce services from abroad. The SCOF partially accepted this proposal and accepted that the non-resident requirement should be deleted. The SCOF viewed that a distinction between B2B and B2C will increase compliance for the foreign supplier and could increase fraud (by B2C). The tax bill gave effect to the SCOF’s considerations.

It was also proposed that a monetary VAT registration threshold be introduced. The SCOF accepted that a VAT registration threshold of R50 000 in a period of 12 months should be accepted. The tax bill confirmed the R50 000 threshold. It was also proposed that the effective date of 1 January 2014 be brought forward to 1 November 2013 (or 1 December 2013). The SCOF did not accept this proposal as the implementation of the proposal has to follow the legislative approval process which will not be finalised before the suggested date and the date of implementation has to take account of SARS’ administration system readiness. SARS indicated that 1 January 2014 may not be feasible and 1 April 2014 was proposed as the implementation date. The SCOF accepted that the implementation date will be delayed until 1 April 2014 to allow for SARS system readiness. The tax bill confirmed the effective date to be 1 April 2014. The envisaged changes will broaden the VAT base, address inefficiencies in the reverse charge (imported services) mechanism, and place foreign suppliers and their local counterparts on equal footing.




Ngoepe appointed as new tax ombudsman

 Chantelle Benjamin

Retired Judge Bernard Ngoepe said during his appointment as SA’s new tax ombudsmad that he would like to create confidence with the public.
Judge Bernard Ngoepe. (M&G)
  Judge Bernard Ngoepe. (M&G)

Newly appointed tax ombudsman retired Judge Bernard Ngoepe said on Thursday that his biggest challenge will be creating confidence in the newly established office so the public feel they have someone to assist them with their grievances against the South African Revenue Service (Sars).

“It is important for people to feel that there is now an office that will listen to their complaints with the Sars will do something to resolve them.

“We wont be able to satisfy all the people who approach us, but we will certainly assist where we can when it comes to issues of tax.”

The office is mandated to deal with administrative and service and procedure complaints, and has already resolved its first complaint.

Ngoepe was speaking at a breakfast hosted by the South African Institute of Tax Professionals.

Former president of the high court of South Africa, Ngoepe was appointed on October 1 by Finance minister Pravin Gordhan on a three year term.

Low-cost mechanism
The ombud’s office was set up under the Tax Administration Act with the intention of providing taxpayers with a low-cost mechanism to address administrative difficulties that could not be resolved by Sars.

The act limits the ombudsman’s powers to some extent in that he cannot review legislation or tax policy or Sars policy which does not pertain to a service matter or a procedural or administrative matter, but Ngoepe said he intends to hold Sars to account through his monthly reports that he will be submitting to the Finance minister.

“The report will not stay with the minister but will also be presented to Parliament,” he said.

The report will also contain an outline of the main complaints and the progress around those complaints. The act requires that Ngoepe, who reports to the minister,  report to parliament any service delivery failures by Sars.

Benric Croome, a senior executive at ENS and a tax expert said that it was general in most countries to restrict the jurisdiction of the ombudsman, but that there were indications in the UK that awareness that they would have to account to the House of Commons had led to a better performance from the tax authorities like Sars.




Render unto Caesar – Harsh Tax Penalties Reviewed

JOHANNESBURG – Taxpayers who accidentally reduce their tax liability due to a reasonable mistake without any intent to defraud the Taxman, won’t be subjected to harsh understatement penalties in future.

The Tax Administration Laws Amendment Bill was introduced in the National Assembly last week and revises regulations to such an extent that the South African Revenue Service (Sars) won’t impose penalties in cases where the understatement by the taxpayer “results from a bona fide inadvertent error”.

This follows criticism from tax practitioners and taxpayers on the harsh penalties previously imposed even where taxpayers had no intention of deceiving Sars.

The new penalty regime was introduced through the Tax Administration Act that became effective on October 1 last year but immediately drew widespread criticism due to the punitive nature thereof.

Finance Minister Pravin Gordhan, already indicated in the 2013 Budget Review that the penalties will be refined to allow for bona fide mistakes.

Piet Nel, project director for tax at the South African Institute of Chartered Accountants (Saica), explains that the bill does not define what a “bona fide inadvertent error” is, but Sars will provide guidance on the meaning going forward.

In explanatory documentation issued alongside the bill, the revenue authority notes that proposals to define the term, have the potential to accidentally “exclude deserving cases and include undeserving cases”.

The intent of the amendment is to provide relief to those taxpayers that completed their tax returns with reasonable care, didn’t intentionally aim to mislead Sars and could prove extenuating circumstances.

The proposed amendment will apply with effect from October 1, 2012, but will also pertain to understatements made in a return before that date. However, the expectation is not that Sars will reimburse taxpayers for penalties that have already been levied.

Nel says the changes to the penalty regime also allows for an understatement penalty percentage to be levied to each tax misstatement individually. In the past, the highest percentage applied to all understatements, even if some should have attracted a lower penalty percentage.

The amendments also introduce much lower penalties for a number of categories (see table). The lower percentages are in line with similar tax jurisdiction around the world.

Source: Tax Administration Laws Amendment Bill, p23 (Numbers in square brackets are the higher penalty percentages that previously applied.)

Moreover, prior to the amendments Sars had to remit a penalty imposed for a substantial understatement if the taxpayer relied on a tax opinion. In future, this will only apply if an independent tax practitioner provided the opinion.

Opinion by in-house tax practitioners will not qualify since they have a vested interest in the outcome of the matter.

Nel says the amendments also clarify that a taxpayer may object and appeal against the levying of any understatement penalty and not only against the decision not to remit a substantial understatement penalty.

Nel expects the bill to be signed into law late in November or December.




Experts Welcome Revised Definition Of Incentives In Tax Bill

Author: Amanda Visser (Business Day)

Proposed changes to the definition of the research and development tax incentives have been toned down or not included in the Taxation Laws Amendment Bill that was tabled in Parliament at the end of last month.

Tax experts widely welcomed the revised approach by the Treasury from the initial draft version that was released in July. The previous definition would have excluded all research and development that did not qualify as “world-beating”.

MD of Catalyst Research Solutions Dov Paluch said the government held a workshop with role players and seemed to have paid attention to the concerns raised by industry. There seems to be a softer approach towards IT developments and the legislation now provides room for the science and technology minister to declare certain activities as research and development.

Issues that the minister could designate as research and development include clinical trials, which have been contentious, and generic medicine, he said.

According to Izak Swart, tax director in the research and development division of Deloitte, most of the definition of research and development as it was on October 1 last year was retained. The Treasury seems to have taken a more practical approach to research, with fewer changes than expected.

“The legislation is becoming more stable, which offers taxpayers greater certainty and a better chance of interpreting it correctly,” Mr Swart said on Friday.

The definition that was tabled before Parliament include “systematic investigative or systematic experimental activities” of which the result is uncertain for the purpose of creating an invention, design or computer program that is innovative in nature.

It also includes a “significant and innovative improvement” to any invention, functional design or computer program that will improve performance, reliability or quality.

In terms of the previously proposed definition, these improvements would not have qualified for the incentive.

Mr Swart said under the previous definition a manufacturing company that wanted to “reverse-engineer” new international technology to improve its efficiency, would not have qualified.

Non-qualifying research and development includes routine testing, analysis and collection of information, and the development of internal business processes unless they are intended for sale to third parties.

Oil and gas exploration or prospecting, except for research that is aimed at developing technology used for the prospecting and the creation of financial instruments or financial products, also do not qualify.

Mr Paluch said they were awaiting regulations and guidelines from the Department of Science and Technology in order for industry players to submit clear and better defined applications.

Mr Swart said he found it unusual that the entire 150% tax deduction would in future have to be approved by the department because until now, only the additional 50% deduction had to be approved.

South Africa has set a target of spending 1.5% to 2% of gross domestic product on research and development in five years’ time. The country is currently spending less than 1% on research and development.

This article was first published on businessdaylive.co.za




Youth Wage Subsidy Bill Passed

Parliament adopted the employment tax incentive bill on Thursday as the Treasury prevailed in its three-year battle with trade union movement Cosatu over a youth wage subsidy.Although all opposition parties voted in favour of the bill, they said the standoff had watered it down, let down job-seekers and undermined the National Education Development and Labour Council (Nedlac).

“While this bill was stuck at Nedlac, 218 000 young job seekers joined the ranks of the unemployed. That is the price of [the Congress of SA Trade Unions’] delay,” said Democratic Alliance finance spokesperson Tim Harris.Harris said the cost of the ideological battle in the ruling alliance was evident in the R1.3bn tax break the wage subsidy would give employers, down from R5bn when it was first mooted by Finance Minister Pravin Gordhan.

“It is a good day for young people. That said, it could have been a much, much better day, because the version of the subsidy before this house is significantly watered down from the version tabled in the 2011 policy,” he said.The cost of the subsidy has been reduced by lawmakers scrapping initial plans to extend it to existing workers and to workers in entry level, part-time jobs without sectoral determinations.

Cosatu bitterly opposed the subsidy, arguing that it would encourage employers to fire experienced workers to employ younger ones to receive the tax concession.The National Union of Metalworkers of SA has termed it a neo-liberal economic policy failure of the ANC, and vowed to call strikes if it were implemented.

Cosatu’s influence waning

Congress of the People spokesperson Nic Koornhof said the passage of the bill was a clear sign that Cosatu’s influence within the tripartite alliance was on the wane.Fellow opposition MP Lance Greyling said it was a victory for young DA supporters, who marched on Cosatu’s headquarters last year to support the bill.

Finance Deputy Minister Nhlanhla Nene angrily rejected Harris and Greyling’s contention that the DA had not only beaten the national government to the post by successfully introducing a similar subsidy in the Western Cape, but cared more about the plight of the youth.

“Let me warn you again, stop turning the youth unemployment into a political football. It is because you have no experience. You have no experience of having an unemployed person under your roof, you have no experience of being unemployed yourself.”

Nene said figures showed that Limpopo had reduced unemployment by 4.5% compared to a two percent decline measured in the DA-governed Western Cape.He also dismissed Harris’s criticism that the finance ministry had weakened Nedlac by refusing to submit the bill to the bargaining council, where negotiations on the subsidy in its initial form stretched for three years without consensus being reached.

The unusual step was justified by Treasury director general Lungisa Fuzile, who said last month that the government could not be hamstrung by an obligation to submit proposals to Nedlac. Harris charged: “Here Treasury simply side-stepped. They brought the bill straight to Parliament. Is this the final nail in the coffin for Nedlac?”

The government plans to introduce the tax incentive in January.

This article was first published on fin24.com