Archive for the ‘For the Entrepreneurs’ Category

As from the 1st March 2016, the tax treatment of pension, retirement annuity and provident funds will be changed so that contributions made by the employer will be a fringe benefit.

Basically, it means that there will be an increase in the amount payable for UIF and SDL payable from employees and employers.

These contributions will be allowed as deductions in the employee’s hands and will be limited to 27% of the greater of the remuneration of taxable income (excluding lump sums received) but capped at an annual limit of R350,000.00, Excess contributions will be carried forward into the following year of assessment.

Only the employee may claim contributions (both in respect of the employer and the employee contributions)


Going forward , pension and retirement annuity funds will all be subject to the one third lump sum and two-thirds annuity rules, unless the lump sum is below R150,000.00.The annuitisation threshold for pension and RA fund members increases R247,500 on 1 March 2016 (previously R75,000).

Members may benefit from the new definition of the base against which the deduction is measured. This base is now the higher of “gross remuneration or taxable income”. The base was previously defined as “approved remuneration” for pension funds and “pensionable income” for provident funds (as defined by the employer).

The reference to “taxable income” effectively enables pension and provident fund members who receive outside income (income from rental income, alternate employment or investments) to claim a pension fund deduction against such income. Previously such “outside” income could only be used to claim deductions on RA contributions. Members who wish to top up their retirement fund savings will no longer need to take out a separate RA.


SARS no longer allows claims for income protection for the 2016 year of assessment which used to be claimed under source code 4018. If you manually capture this amount on your ITR12, you will not be able to submit your income tax return. In cases where source code 4018 is pre-populated on your ITR12 for the year of assessment 2016, your income tax return will be received by SARS but this amount will not be allowed on assessment.

Changes to the ITR14 fields

The following changes to fields that need to be completed should be noted:

  • Disclose donations separately in respect of section 18A on the ITR14. For a company that is not a collective investment scheme, the allowable donations will be limited to 10% of taxable income and the remaining balance will be carried forward to the next year of assessment. For collective investment schemes, the allowable section 18A donations will be limited to 0,005 of the average value of the aggregate of all participatory interests held by investors in the portfolio. Donations that are disclosed in the Income Statement will automatically be deducted in the tax computation.
  • The details of investments in venture capital companies are required.
  • Provision has been made for debt reduction in respect of paragraph 12A (4) of the Eighth Schedule.
  • Transfer pricing related transactions have been expanded to request the details of the number of tax jurisdictions, countries and value per country.
  • Additional questions have been added to the ITR14 to assist SARS with the assessment.
  • Where a company claims PAYE credits, the IRP5 numbers related to the company will be pre-populated on the ITR14.
  • The tax computation has been extended to include additional fields aligned to changes in legislation

Not all that glitters is Gold,


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)

What is a VDP?

The VDP is a statutory process where taxpayers, including corporate entities, trusts and individuals, can approach SARS on a voluntary basis with a view to regularise their tax affairs with the prospect of remittance of certain penalties.

Which types of taxes are covered by the VDP?

The VDP is applicable to all taxes administered by SARS (excluding customs and excise).

What are the requirements for the submission of a valid VDP application?

The disclosure must be voluntary.

It must:

  • Involve a default that has not previously been disclosed by the applicant or a representative of the applicant.
  • Be full and complete in all material aspects.
  • Involve the potential imposition of an understatement penalty in respect of the default.
  • Not result in a refund due by SARS.
  • Be made in the prescribed form and manner.

What is the period under review?

The period of review under the VDP is not stipulated in the TAA, although the disclosure must be full and complete in all material respects if it is to be a valid disclosure. Strictly speaking, SARS should go back for as many years as the tax default has occurred.  However in practice SARS will generally not go back further than five years in calculating the tax outstanding in terms of the tax VDP.

What is a default?

A default is the submission of inaccurate or incomplete information to SARS, or the failure to submit information or the adoption of a tax position, where such submission, non-submission, or adoption resulted in:

  • The taxpayer not being assessed for the correct amount of tax.
  • The correct amount of tax not being paid by the taxpayer.
  • An incorrect refund being made by SARS.

A South African tax resident who fails to disclose income tax, interest income, dividends or capital gains tax generated from off-shore assets is an example of a default that may have been committed.

Who is excluded from applying for a VDP?

However, SARS may allow such a person to participate in the VDP when it is of the opinion that the default would not ordinarily have been detected by SARS during the audit/investigation.

A “verification” or “inspection” procedure that was not preceded by the commencement of an audit or by a notice of an impending audit is not regarded as an “audit” for this purpose, and a person will still be able to apply for a VDP in this instance.

Benefits of a VDP

As a result of the disclosure, the Commissioner may not pursue criminal prosecution for any statutory offence under a tax act arising from the “default” or a related common law offence committed by the successful applicant.

The successful applicant will obtain:

  • Relief in respect of understatement penalties to the extent referred to in the understatement penalty percentage table, which provides for a reduction in the percentage of penalties to be levied.
  • 100% relief in respect of an administrative non-compliance penalty that was or may be imposed in terms of the TAA, or a penalty imposed under a tax act, but excluding penalties for the late submission of a return, and penalties for the late payment of tax.

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The current tax framework exempts authors of copyright on revenue amounts received for the foreign assignment or licensing of copyright. More specifically, the exemption applies if the author is a natural person, the first owner of the copyright and the amount received is taxable in another country.   There is no similar exemption if the transfer of copyright is subject to capital gains taxation.

Reasons for change

The copyright blanket exemption for residents is out of sync with the current world-wide taxation paradigm and does not take into consideration the provisions of DTAs. As a general matter, South Africa has a primary taxing right in respect of the foreign transfer of copyright by a resident unless the transfer is attributable to a foreign permanent establishment. On the other hand, royalties received in respect of the foreign licensing of copyright are subject to a residual secondary taxing right. The exercise of the secondary taxing right means that South Africa will generally grant a credit (i.e. rebate) for the foreign taxes paid.

The change

The copyright exemption for authors has been deleted.

Effective date

The amendment will be effective for years of assessment commencing on or after 1 March 2014.

Amendment to section 10(1)(m) of the Income Tax Act and paragraph 64 of the Eighth Schedule


An annual tax that is payable to SARS based on taxable income (net income) that is received by or accrues to individuals, companies, and other taxpayers, after deducting qualifying expenses and allowances.

According to independent research commissioned by SARS and the National Treasury in 2007, South African tax practitioners charge their small business clients an average of R7 030 a year to ensure that tax returns for income tax, provisional tax, VAT and employees’ tax are prepared, completed and submitted as required, Tax compliance costs therefore tend to be regressive, especially for businesses with a turnover under R1 million a year.

The reality is that many small businesses are outside the income tax net either because they generate small profits or because of the big compliance burden. Many were also historically marginalised. Government, therefore, announced a small business amnesty in 2006 to encourage informal and other small businesses with a turnover of up to R10 million a year to enter the tax system and regularise their tax affairs.

Payroll taxes such as employees’ tax (SITE and PAYE) and UIF contributions are excluded as they are taxes generally borne by employees and collected by employers on behalf of the State. In terms of existing law, however, businesses whose employees are not liable for employees’ tax will not be required to register for employees’ tax and businesses with a payroll of up to R500 000 a year will not be liable for the SDL

An important feature of the turnover tax system is that the tax liability imposed is broadly aligned with the tax liability under the current income tax system, but on a simplified base with reduced compliance requirements. However, the tax burden on micro businesses at the higher-end of the turnover range (R750 000 to R1 million) is increased to encourage them, as they grow, to maintain sufficient accounting records to migrate to the normal income tax system. Special consideration was given so as not to artificially or inadvertently encourage micro businesses to remain trapped in the turnover tax system, but to grow and migrate into the standard tax system. As a packaged approach, the compulsory VAT registration threshold will be increased for all vendors to coincide with the turnover tax cap of R1 million. Businesses will not be permitted to register for turnover tax if they are registered for VAT

Specific anti-avoidance rule for qualifying turnover

An anti-avoidance rule to guard against income-splitting by a micro business has been incorporated into the legislation. This will cater for circumstances where the micro business is broken up between connected persons (for example, a family) to ensure that each business component remains within the R1 million cap. In such instances the turnover of the connected persons’ business activities will be added together for purposes of applying the cap.

A business is disqualified from turnover tax if that business, or any shareholder in that business, holds shares or has any interests in another company or close corporation. The specific relief to be afforded in terms of the turnover tax system is aimed at the very small start-up type of business. Multiple shareholdings indicate more complex legal structures belonging to more sophisticated taxpayers and hence have been excluded for purposes of this system. This disqualification is also an anti-avoidance measure to guard against income-splitting where a business is conducted by more than one entity with the same shareholder in order to ensure that each business entity remains below the R1 million cap.

Certain investments are, however, permitted because they are more of a public or social nature and present fewer opportunities for tax arbitrage. These are interests –

  • listed South African companies;
  • Collective investment schemes;
  • Bodies corporate and share block companies;
  • Venture capital companies;
  • Less than 5% in social or consumer co-operatives;
  • in any company that did not trade during any year of assessment, and which did not own assets with a total market value that exceeds R5 000 during any year of assessment; and
  • in any company that has taken steps to liquidate, wind up or deregister.

There are two circumstances when a registered micro business is deregistered from the turnover tax by SARS, namely: 

• Voluntary deregistration, that is, where a registered micro business elects to deregister. Unless it closes down, it may only elect to deregister as a micro business after being registered for turnover tax for at least three years.  

• Compulsory deregistration, that is, where a registered micro business no longer qualifies. The qualifying turnover of this micro business from carrying on business activities exceeds the R1 million cap and it cannot demonstrate that this will be a small and temporary event. The registered micro business must notify SARS within 21 days from the date on which it no longer qualifies as a micro business.

In the event of a compulsory deregistration of the micro business, that micro business will be moved back into the standard income tax system from the first day of the month following the month during which the business no longer qualifies to be a registered micro business. It will therefore be assessed for two periods in the year of assessment – one under the turnover tax system and the other under the normal income tax system. The business will also have to register for VAT where it exceeds, or is likely to exceed, the R1 million threshold at which registration for VAT is compulsory. A micro business that is deregistered from turnover tax, be it voluntary or compulsory deregistration, may not re-enter the turnover tax system for three years. This period matches the minimum period the micro business must remain in the turnover tax system

On our next post, we will be looking at the Small business corporation Tax,