Importers using accredited importing agents can sleep well at night in the knowledge that all VAT issues relating to importation are well under control, as the accommodating importing agent has taken care of it. Business as usual, with VAT being claimed once a valid tax invoice is received from the clearing agent. Or so it would seem…

Even though a valid tax invoice is generally acceptable to substantiate the claim of input tax in respect of expenses incurred in the course or furtherance of a vendor’s enterprise, this is not the case with VAT incurred on imports. The VAT Act requires the vendor to obtain and retain the relevant bill of entry as well as the receipt for the payment of VAT on importation, before an input tax deduction is permissible in this respect. Unfortunately, most importers are unaware of this requirement and claim input tax based on the tax invoice received from the clearing agent. Consequently there may be a timing difference between when the input tax was claimed (the invoice date) and the date the vendor is entitled to claim the input tax (the date the clearing agent pays SARS).

This problem is exacerbated when the clearing agent makes use of the so-called deferment scheme, i.e. it only pays the VAT on importation 30 days after the goods have been cleared for home consumption (the bill of entry date). In many instances, the vendor might not even be aware of the fact that the clearing agent is using a deferment scheme and that VAT had not been paid over at the date the clearing agent issued the invoice, resulting in a potentially costly tax exposure.

SARS has recently started to raise assessments where vendors claim input tax in respect of imported goods before the VAT has been paid over to SARS by the clearing agent, and to levy penalties and interest. Depending on the level of imports, this amount may be quite significant. To mitigate the risk, importers should request clearing agents to supply proof of the VAT on importation being paid, before the related input tax is deducted.

Although there is ultimately no VAT loss to the fiscus, SARS is chasing the penalties and interest on these timing differences. Also important to note is that SARS will raise assessments for a period of five years, despite the fact that the vendor might have been subjected to VAT refund audits on a regular basis.

Am I the only person who thinks that the authorities set us up to fail so that they can charge penalties?

Thanks to Lawrence for pointing out a small but vital error in my last
communication... just shows you shouldn't do these things in t'middle o' the
night.

The correction is to the very first line where I said that the opening of
tax season means that individuals can NOT submit their returns. That was
meant to say they can NOW submit their returns!

The big news from SARS today is that Tax Season 2010 is open. This means
that individuals are now able to submit their tax returns. Deadline for
non-provisional taxpayers is 26 November 2010 and for provisional taxpayers
is 31 January 2011.

A new requirement announced has prompted me to briefly mention medical
expenses, one of the last few things that can help to reduce tax. One of the
great benefits of being poor has always been that you pay less tax. The good
news is that if you're poor and sick you're on an even better wicket.

Seriously, and with apologies for my crude sense of humor, medical expenses
are tax-deductible and especially for middle to lower income earners can
give tax savings.

How the tax deductions for medical expenses work is a bit complex, but let
me explain the basics: a portion of contributions to a medical aid fund
(calculated based on a per month rand value based on the number of
beneficiaries covered by your medical aid) is tax deductible (or a tax-free
fringe benefit if your employer pays it for you). The rest of your medical
aid contributions, together with you medical expenses are deductible to the
extent that they exceed 7.5% of your taxable income: sort of like an excess
system. So, keep a record of your expenses if they start to add up. The
deductible ones are basically:
 - doctor and doctor-ish consultation and service fees and
 - prescribed medicines.

If your medical aid covers any of the costs, even out of your medical
savings, those aren't deductible (the good news regarding medical savings is
that your contributions to the medical savings are treated the same as
medical aid premiums).

If you are over 65, the 7.5% excess falls away. So all your medical expenses
are deductible.

If you are handicapped or have a handicapped member of your family, you also
don't worry about the 7.5%. This is the bit that has changed this year:
well, not a change in the law, just that SARS wants everyone in this boat to
re-register by filling in a form which their doctor also needs to sign. I've
popped the form on my website (www.dfs.co.za) if anyone needs it.

Note that you can claim for all medical expenses that you pay, even if not
for you. So, generally it makes sense in a family for one person to be the
designated-medical-expense-payer. The person with the higher income stands
to gain a higher benefit due to saving tax at a higher rate, whereas the
person earning less will start saving earlier due to the 7.5% threshold. So
you might want to do some sums to decide whose money it actually was that
went to pay the doc. If you're over 65 or have a handicapped family member:
definitely best for the higher earner to pay things.

The question of how cars are taxed can be divided into 2 broad categories
based on who owns the vehicle: the employer or the employee. For those of
you who are sole proprietors, in respect of your own vehicle, this question
perhaps has no meaning but it is answered for you: you may do things as if
it is an employer-owned vehicle. We'll deal with that situation first, often
referred to as a company car.

COMPANY CARS

The company car provision kicks in where you're an employer owns a vehicle
which it lets its employee use. In this case, the default situation is that
the employer is entitled to claim as a tax-deduction all the costs involved
in running the vehicle including a wear & tear allowance and including
finance charges should the vehicle be financed, or lease payments should it
be leased. The employee, subject to certain exceptions, is taxed on what is
called a fringe benefit, calculated at 2.5% per month of the value of the
vehicle (the value is a defined thing in terms of the law, but basically
boils down most of the time to the cost of the vehicle excluding VAT). 2.5%
per month multiplies out to 30% per year, which is pretty significant and so
it kinda sucks. If the same employee is given a second vehicle, e.g. a
director given a vehicle for his wife, or indeed a 3rd, 4th, 5th... vehicle,
the percentage is 4%: pretty huge.

A small adjustment can be made reducing the fringe benefit where the
employee is required to pay in for petrol or maintenance, but it is minor
and not worth bothering about. Far more interesting are the situations
whereby you can get out of the fringe benefit altogether. These are premised
on the fact that the fringe benefit is intended to put a value on the
*private use* of the vehicle. So, if there is no private use, there is no
value and the benefit falls away. The only way that this can be achieved is
to prevent the private use of the vehicle. Most obviously, if the vehicle
stays at the business premises so that the employee is required to use his
own transport to get to and from work and for his personal travel. A
sneakier option is to implement a policy whereby employees are forbidden
from using the vehicle for private use. They must sign acknowledgement of
this, and the policy must be genuine, policed and implemented (i.e. not a
sham) or SARS will ignore it.

The situation regarding company cars is touted to change, I believe from 1
March 2011. The revisions are two-fold:

First, the rate that will apply is now 4% for the first vehicle, and I
believe the same for the rest (I might be wrong here: I can't remember if
they said they were considering increasing the rate for additional vehicles.
Quite likely I guess!)

Second, there will be a way to reduce the taxable benefit to the extent that
the vehicle is actually used for business. This will require a logbook of
business travel, and if I remember correctly an apportionment of the rand
value of the fringe benefit will then be made on the basis of the ratio of
business to private travel. So, if you actually use the vehicle 80% of the
time (or of the kilometers actually!) for business, only 20% of the fringe
benefit will ultimately be taxed. In terms of the monthly PAYE tax for
employees, the proposal is that only 80% of the 4% will be taxed then, the
balance to be taxed on assessment: allowing a bit of a buffer for the
potential business travel deduction.

Oh, I just remembered: there is a third leg to the proposal: they want to
bring VAT into the vehicle cost as well as the cost of a maintenance plan.
So that fringe benefit value is just looking higher and higher!!!

TRAVEL ALLOWANCES

The second broad category is where an employee owns his own vehicle. In this
case, we are already living under the new dispensation: it kicked in from 1
March.

The changes since 1 March are pretty small, but with far-reaching effect. So
what I'll do is sketch the old system and then the understanding of the new
system will be pretty straight-forward (as much as these things ever are!)

So, on the old system, the idea was that the costs of the vehicle, being
privately owned, were borne by the employee not the company. To the extent
that the vehicle was used for legitimate business however, it was fair that
this should be paid by the employer without penalising the employee. Hence,
a tax-free payment by the employer to the company to cover that cost is
reasonable. In terms of the tax law there are 2 ways to do this and then a
combination of them both. In practice, employers might make payments with
reference to specific costs (e.g. paying employees petrol or maintenance for
them) - especially popular when the employee in question is a member or
director of the CC/company - but these schemes generally slot into the ways
that the taxman recognises somehow.

The 2 options basically are: reimbursive or "the rest". Under a
reimbursement scheme, the employee keeps a track of business km travelled
and is reimbursed at a rate per km for those km. For purposes of calculating
PAYE, these amounts never have tax deducted. However, if the rate exceeds
R2.90 per km or the total km's in a year exceeds 8000 or the employee is
getting any other allowance for his vehicle costs (including, for example
the company paying his petrol) then the reimbursements are subject to tax on
assessment. However, the employee might get some deductions against them and
we'll get that.

"The rest" option usually takes the form of a set monthly "travel allowance"
often done on a salary sacrifice or package basis (i.e. it's actually salary
by another name). However, payments of fuel and maintenance for the employee
would also fall into this scheme. And as mentioned, if reimbursements exceed
the limits mentioned above, they'll also get considered under this category.
A set month travel allowance is subject to PAYE. I seem to think payment of
fuel etc is also subject to PAYE. If anyone seeks specific advice on this,
I'll look it up for you. Up to 28 Feb 2010, only 60% of the amount was
subject to PAYE so as to provide a buffer for a probably expense claim on
assessment. The full amount would be taxable on assessment after the
taxpayer has determined the amount that he can deduct.

Regarding that deduction, the idea is to work out the cost of using the
vehicle for business purposes. This is calculated by the formula: business
km X rate per km. Up to Feb 2010, there were 2 ways of calculating each
component of the formula
   Business km: (a) keep a log book OR (b) assume the first 18000km are
private, the next 14000km are business and the rest are private.
   Rate per km: (a) keep a record of your expenses and divide by total km OR
(b) use a formula supplied by SARS

This is the point where I can mention the change. Basically, option (b) on
the calculation of business km is scrapped. You now must keep a logbook
record in order to get a benefit. Also, anticipating fewer people
legitimately qualifying for the benefit, and simultaneously improving cash
flow, SARS went ahead and increase the PAYE component to be applicable to
80% of a fixed allowance.

SUMMARY

So what does this all mean. Well, for those in receipt of travel allowance
(except a reimbursive allowance less than the limits I mentioned) you MUST
now keep a logbook of your travel. I guess those being reimbursed are
already having to do so, cos how else would they know how much reimbursement to
get. And, for now, those with company cars don't need to bother, but from next
year, the tax on your company car will be a bit crazy but with the option to
reduce it by... keeping a logbook.

Finally then, what is a logbook. Well, it ain't defined so the line I take
is that it needs to provide sufficient detail to achieve what it sets out to
do, and that is to distinguish business and private travel. Hence, I believe
that a record of just business travel is sufficient (then the private travel
is the balancing figure). The log should record each trip, who it was to,
where they are, what the opening and closing mileage on the odometer was
before and after and from that, the mileage actually travelled. SARS has a
logbook available for download. I'll try to get a copy and put it on my
website (www.dfs.co.za).

This message is for those of you who are employers. SARS has implemented new
procedures in respect of the reconciliation of PAYE, SDL and UIF. In
particular, they now expect us to reconcile twice a year. The first such
reconciliation will cover the 6 months to August 2010, and will probably be
due in October. SARS has decided to go the rather time-intensive route of
requiring that everyone who is employed be registered as a taxpayer and
issued with a tax number whether they earn sufficient to pay tax or not: the
reconciliation process will insist on a tax number for every person
included. My understanding is that as part of the recon process, we will be
able to register those not yet registered, however, it will be helpful to be
proactive about this. For those of you who use our payroll services, please
can you start to find out from your staff what their tax numbers are if you
have not already provided that information to me. If they don't have tax
numbers, it would be good if they can try to register themselves with SARS
especially if they earn more than R60K per year or receive any allowances
(as they are liable to be registered already).

To register with SARS I believe a payslip, a copy of ID and a bank statement
or cancelled cheque or letter from the bank together with an IT77 form
(downloadable from www.dfs.co.za I hope) should suffice. In the unlikely
event that the individual has no bank account, I guess an affidavit
confirming that fact is what SARS would want.