Tax

Tax Freedom Day: How Many Days Did You Work for The Taxman in 2020?

14/05/2021

“Tax Freedom Day” is a concept telling us taxpayers just how long we have to work every year to pay the Taxman his share before we start earning for ourselves. 

Normally our “Freedom Day” gets later and later every year in line with the general trend towards more and more taxation, but 2020 as it turns out has been an exception. In fact this year it arrived signifcantly earlier than it did in 2019.  

Why is this, and why is it bad news for us all? We discuss the answers to those questions in the context of the pandemic, the lockdown and the resulting economic crisis, with some (as you’d expect, rather gloomy) pointers to the future trajectory of our embattled economy.  

“I Have Bad News and – No, Actually I Just Have Bad News” (Rick Riordan) 

In the current year it has taken the average South African 126 days to pay off their taxes and only from the next day did the taxpayer then work for him or herself. This date fell on 6 May this year and is globally known as Tax Freedom Day (TFD).  

So, what does this tell us?  

This should be good news as last year TFD took 11 days longer to achieve than in 2020. However, this 11 day drop reflects the calamitous fall–off in the economy due to the COVID-19 crisis. Peoples’ incomes are dropping in 2020 which means less tax will be paid – this is the main reason for the 11 day improvement over last year.  

This is not good news as the impact of lower taxes on government finances will push South Africa into a worse debt crisis. Some economists are predicting that our budget deficit to GDP will be 17% versus the 6.8% in the Budget presented by the Finance Minister in February – this shows just how fast our economy is tumbling. At least we are in good company – the USA shed 36 million jobs in the first seven weeks of their lockdown. Across the world, virtually every economy has slipped into recession. 

The problem is it will take, depending on how long the pandemic lasts, some years for South Africa and the global economy to recover. This will not be good news for TFD, as taxpayers will probably be required to shoulder a higher burden of taxes to pay off the debt incurred due to the pandemic. 

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

Life Made Easier (and Safer) For Non-eFilers

14/05/2021

When SARS have requested documentation from taxpayers who do not use eFiling, the taxpayers have had to take these documents into a SARS Branch. Now SARS have launched on online form that taxpayers can complete and upload with the documentation requested by SARS. 

The online form can take ten documents which need to be 5MB or less in size.  

The process is very simple, and taxpayers merely need to follow the instructions set out.  

As a trip to SARS can take a full morning, this is a time saver for taxpayers and is safer as taxpayers are less at risk of catching COVID-19.

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

Be Ready for a SARS Lifestyle Audit 

14/05/2021

Being suddenly subjected to a SARS “Lifestyle Audit” is a nerve wracking business with the risk of penalties of up to 200%, backdated interest, and criminal prosecution.  

What external sources of information does SARS have access to? How does SARS select targets for lifestyle audit? If you are unlucky enough to be selected, what will happen and how can you be prepared? Can you refuse to co-operate and/or demand access to information from SARS before complying? 

We address those questions and discuss a High Court decision in which an individual faced the imprisonment for failing to answer a lifestyle questionnaire.  

We read about Eskom staff having to undergo lifestyle audits so that corruption can be identified and stamped out.  

SARS have been conducting lifestyle audits since 2007. These audits are conducted when SARS suspects that the taxpayer is not declaring all his or her income and thus is underpaying tax due. 

SARS have access to many sources of information  

Data can be accessed from: 

  • Your banks 
  • The Deeds Office for property transactions 
  • Financial institutions for mortgage loans or motor vehicle finance 
  • Vehicle registrations 
  • Social and other media where your lifestyle can be ascertained 
  • Perhaps most significantly jealous neighbours or “friends” who tip off SARS that your lifestyle exceeds the purported income you earn (SARS actively encourage people to tip them off when they think people they know are living beyond their means).  

How do SARS select people for lifestyle audits?  

SARS does not disclose the criteria it uses to start probing taxpayer’s affairs or how it selects those who have to complete a lifestyle audit. If you are selected, you have to complete the audit in the time set out by SARS.  

One individual selected demanded to know the reasons why he was picked, and refused to complete the 26 page “lifestyle questionnaire” sent to him by SARS (seemingly after a ‘third party’ tip off). He had never registered as a taxpayer, nor had he ever submitted tax returns. The matter went to the High Court which rejected the individual’s right to demand “SARS confidential information” and ordered him to provide the information required by SARS, on pain of committal to prison for contempt of court until he submitted the lifestyle questionnaire. 

What to expect if you are selected 

You will need to provide details of day to day living expenses including rent or bond payments, groceries, entertainment, vehicle expenses, holidays – in fact every item of cost you and people related to you incur. These will be reconciled to bank statements. In addition, SARS will probe all sources of your income. 

In doing this process SARS can request information going back five years. If you don’t have the necessary documentation to justify income or expenditure, then SARS can levy taxes on these amounts. Keep good records.  

It pays to be honest and as thorough as possible when completing this process. As noted above SARS have many sources of information to check the data provided by you. 

The bad news 

If a taxpayer has been under-declaring income or cannot justify expenses that have been claimed, then SARS will issue assessments for these amounts. Penalties of up to 200%, plus interest may be levied by SARS who can also report the taxpayer to the National Prosecuting Authority for potential criminal proceedings. The only bit of good news is that SARS do not use search and seizure operations when conducting lifestyle audits – these are for criminal cases that SARS pursues. 

Lifestyle audits are nerve racking and risky for taxpayers. Keep good records and consult your accountant before submitting information to SARS.  

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

On a Lighter Note – Some Entertaining Tax Stories

14/05/2021

UK Revenue officials recently released some entertaining excuses from taxpayers:

  • One taxpayer claimed their mother-in law was a witch and had cursed them.
  • Some said that hamsters and dogs had eaten the post.
  • A taxpayer was up a mountain and without internet access.
  • Some strange expense claims were received, such as pet food for a Shih Tzu ‘guard dog’ and a meals claim of 250 days of sausages and chips eaten at a cost of £4.50 per day.

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

Budget 2020: Tips for Tito – Make Your Voice Count!

14/05/2021

Every year the Minister of Finance asks us what we would like to see in the budget and a “Budget Tips” portal on the National Treasury website is open. This year he asks in particular for our views on “What can government do to achieve faster and more equitable economic growth?”

Your voice is important! We’ll show you how to be heard, with hyperlinks to the channels you can choose from.

To give you the idea, last year there were many differing tips ranging from the amusing and the serious to the overly optimistic….

On 26 February 2020 the Minister of Finance, Tito Mboweni, will be making his annual budget speech.

Traditionally, the Minister asks the public what they would like to see in the budget and a “Budget Tips” portal on the National Treasury website is open. Citizens are encouraged to submit their tips to the Minister either on that Portal or by Twitter @TreasuryRSA with the hashtag #TipsForMinFin and “#RSABudget2019” (presumably Treasury will update that hashtag to 2020). This year he asks in particular for your views on “What can government do to achieve faster and more equitable economic growth?”

If you have ideas, make your voice count! Last year there were many differing tips, from the amusing (give free Lotto tickets to regular electricity payers) and the serious (reduce corporate tax to 15% for companies with a turnover of less than R10 million to encourage job creation) to the overly optimistic (give a tax rebate to those who have upgraded security in their homes).

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

Take Advantage of the Venture Capital Company Allowance While You Can

14/05/2021

Here’s some good news in the form of a way to save tax (a lot of tax), make a good investment, and directly boost both our economy and our SMEs – all in one go.

That’s where the VCC (Venture Capital Company) Allowance comes in. We’ll have a look at the substantial savings you (or your trust or company) can achieve by using the allowance correctly; at how it works both initially and subsequently; at the need to beware of costs; and at how “finding a gem” could give you a (very) substantial after-tax return.

We share some practical examples to illustrate, and end off with a warning to act quickly – the allowance is planned to fall away at the end of June 2021.

“There are two systems of taxation in our country: one for the informed and one for the uninformed” (U.S. Judge Learned Hand)

Small and medium-sized enterprises (SMEs) have limited access to capital markets. As SMEs are considered to be the cheapest and most cost-effective sector in creating jobs, the Revenue authorities sought to address this by creating an attractive allowance for Venture Capital Companies (VCC) in 2009.

The VCC allowance gave a massive boost to venture capital in South Africa, and also to SMEs who have received R6 billion in investment since 2009. Venture capital now accounts for 2% of GDP (in the USA this is 4%).

For you the taxpayer it offers an attractive way to reduce your tax as you are allowed to deduct R2.5 million from your taxable income if you invest in a VCC. This is in your own capacity or via a trust; if you use a company to make the investment, it can deduct R5 million.

How it works initially

Note: The examples below relate to an investment in your own personal name, and different tax rates and net returns will apply if you invest through a trust or company.

Assume you have R2.5 million in taxable income. It is 20 February, you have little more than a week before you will have to pay provisional tax and you want to reduce your tax liability and make a good investment.

You have researched the VCCs and decide to invest R2.5 million in a VCC which invests in solar power.

You have saved yourself R1.125 million in tax.
To avoid having this tax deduction of R1.125 million reversed, you will need to be invested with the VCC for five years.

How it works in subsequent years
The VCC onward invests the R2.5 million in a qualifying SME (the SMEs need to be registered with SARS) which then installs solar power in, say, a block of flats. Of interest here is that the SME also gets a 100% deduction on the R2.5 million.

If you cash in on the investment after 5 years, this will be the position:

In summary, you received a tax deduction of R1.125 million and 5 years later paid R450 000 in capital gains tax. Your investment of R2.5 million has been refunded to you. If you discount these cash flows, this equates to an after-tax return of just over 10% over five years which is pretty good as inflation is currently just below 4%, i.e. a real return of 6%. As a comparative the stock market delivered a return of just below 6% in the last decade.

This excludes any costs you may be charged.

Beware of costs
There are many VCCs out there and they charge varying fees, so be very careful of these costs as they come in many guises such as performance fees, administration costs, annual charge etc.

It is worth getting your accountant to check these costs.

Look for the gems
As we saw above, the qualifying SME (the entity that installs the solar power), gets a 100% upfront write-off of the investment (R2.5 million in this example for a tax saving of R700 000). Some creative VCCs have used this tax saving to return income to you the investor. Take the example of a residential complex where the qualifying company installs solar power in the complex and then charges the owners of the complex for the electricity they consume using solar power (this charge is at a substantial discount to Eskom’s rate). The qualifying company returns this charge to the VCC which then pays these amounts as dividends to you, the investor.

Thus, everybody scores:

  • Residents of the complex don’t pay for the installation of the solar power and get cheap electricity,
  • The qualifying company takes its profit out of the R2 500 000 investment and tax saving of R700 000,
  • The VCC makes money from charging you fees, and
  • You, the investor, get a return (after-tax and net of all costs) of over 20% over the 5 year period, which is excellent.

Don’t delay, the clock is ticking!
The only downside to this is that the allowances will fall away in June 2021. VCC companies are lobbying government to extend this program past June 2021, but even if they are unsuccessful, you have just under 18 months to take advantage of this scheme.

Of course this sort of investment isn’t for everyone; ask your accountant whether it might suit you.

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

Your Tax Returns Are Due: Make Sure You Fill In Your Return Correctly

14/05/2021

The last thing you need is to have the Taxman after you with his armoury of penalties and threats of criminal prosecution; and the likelihood of that happening if you put a foot wrong is higher than ever now with SARS missing its collection targets and pressured to up its game substantially.

So do not take your tax return deadlines – your next one is 31 January if you are a provisional taxpayer using eFiling – lightly!

We share some thoughts on “the need for speed” and on the nightmare scenario that awaits taxpayers who fail to tick the right tick box in the right part of the online form and are as a result deemed guilty of “material non-disclosure”.

“The hardest thing in the world to understand is the income tax” (Albert Einstein)

Provisional taxpayers using eFiling need to have completed and submitted their 2019 income tax return on or by 31 January.

Make sure you are prepared for this and don’t underestimate the time needed to put the return together. As a starting point you should have a good filing system which makes it easy to find documentation needed to both fill in the return and upload to SARS in terms of supporting schedules.

The income tax return form runs to more than thirty pages, so there is plenty of work to be done – don’t leave it to the last minute!

Your return must be complete

The onus is on you to satisfy SARS that your return is comprehensively and completely filled in. Thus, even if you supply SARS with all the documentation and explanations required, not ticking a box in the form that is applicable can lead to SARS deducing that you have not met your obligation of full disclosure.

This is important as if SARS deems there to be a material non-disclosure in your return (remembering that SARS tends to apply a very narrow interpretation of this) then the three year prescription period for your tax return is waived and SARS can go back and start raising queries on your 2010 return for example. This can put you onto a nightmare road, so take extra care.

We are all aware that SARS has been missing its collection targets in recent years and is under enormous pressure to maximise revenue from taxpayers.

Your accountant is there to assist you – this is a good time to make use of his or her services.

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

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