PETER DICKS
TAX ATTORNEY
VAT COMPUTATION
OUTPUT TAX (SALES)
LESS INPUT TAX (PURCHASES) =NET TAX DUE / REFUND
OUTPUT TAX
COMPRISES OF:
STANDARD RATED SUPPLIES -14%
ZERO RATED SUPPLIES – 0%
EXEMPT SUPPLIES
NON - SUPPLIES
EXAMPLES OF OUTPUT TAX
Board and Lodging/Accommodation – 14% / 8.4%
Meals – 14%
Nursing Services – 14%
Government Subsidies - 0%
Levies - Exempt
Life Right Sales - Exempt
Staff Accommodation - Exempt
Fundraising - Exempt
INPUT TAX
The classification of output tax determines the input tax consequence.
Example:
Input tax can be claimed when it relates to
making standard or zero rated supplies.
Input tax cannot be claimed when it relates to
Therefore, the correct VAT classification of all income (ie. output tax classification) is vitally important in determining when input tax may be claimed.
This classification is complex for PBO’s in that PBO’s generally make EVERY type of supply
Standard Rate (Including accommodation)
Zero Rate
Exempt
Non – Supply
This usually results in PBO’s NOT CLAIMING ALL THE VAT THAT THEY ARE ENTITLED TO CLAIM as input tax
SOLUTION
We have developed a tax methodology (or product) that ensures PBO’s claim all the input VAT that they are entitled to claim AND only pay output VAT that is legally due to
SARS.
This tax product is called the PBO VAT REVIEW. Scope of PBO VAT Review
We will review a PBO’s VAT account in order to identify VAT savings. We will then claim any retrospective VAT savings from SARS. The VAT Act allows us to claim under deducted Input VAT over at least the past five years.
CONFIDENTIALITY
Our standard engagement proposal for the
PBO VAT Review contains a confidentiality
clause to safeguard the interests of both
ourselves and the PBO concerned.
COST
The PBO VAT review is charged on a success (or contingent ) fee basis. Our success fee includes disbursements (eg. travelling) but excludes VAT. WIN – WIN
Our fee is aimed at a win – win situation. If we do not achieve a VAT refund from SARS, we are not entitled to a fee or disbursements. If we achieve a VAT refund, our fee will be based on a percentage of the refund. Our fee is calculated on
retrospective VAT savings only. Any prospective VAT savings are for the benefit of the PBO.
INCOME TAX
BACKGROUND
2001 - Concept of a PBO introduced
- Strict rules narrowly defined trading - Non-compliance - lose tax exemption 1 April 2006- New Trading rules introduced
- Concept of partial taxation of trading income introduced.
- Certain trading income remains exempt from tax.
- Other trading income is taxed subject to an exemption.
- New rules apply to financial years commencing
on or after 1 April 2006 (most PBO’s 2007 financial year).
TAX EXEMPT TRADING INCOME
(section 10(1)(cN)
1. A TRADE IS :
Ø Integral and directly related to the sole or
principal object of the PBO; and
Ø Is carried out or conducted on a basis
substantially the whole of which is directed towards the recovery of cost; and
Ø Does not result in unfair competition in relation to
1.1. INTEGRAL AND DIRECTLY RELATED:
Ø The trade must be directly connected, linked and associated with the
approved public benefit activity which is conducted by the PBO.
1.2. SUBSTANTIALLY WHOLE OF THE TRADING ACTIVITY IS CONDUCTED ON A COST RECOVERY BASIS:
Ø Substantially the whole – not less than 85%
Ø Recovery of cost – goods not sold to maximise profits but rather to
recover costs.
1.3. UNFAIR COMPETITION IN RELATION TO TAXABLE ENTITIES:
Ø The PBO must not have an unfair advantage over a taxable entity.
2. OCCASIONAL TRADE:
Ø The trade is of an occasional nature and
undertaken substantially with assistance on a voluntary basis without compensation.
3. MINISTERIAL APPROVAL
Ø The trade is approved by the Minister of Finance
by notice in the Government Gazette.
THE TAXATION OF TRADING INCOME:
Ø If none of the previous exemptions apply,
Ø trading income will be subject to tax if it exceeds
the greater of :
- 5% of total receipts and accruals or; - R200 000.
Ø Total receipts and accruals include all income such as donations, bequests and subsidies.
EXAMPLE
FACTS: A PBO conducting retirement village PBA’s operates a Garden Centre. An analysis of the gross receipts as reflected in the income statement:
Board and lodging R 850 000
Interest R 60 000
Bequest R 40 000
Letting of parking during week days R 35 000
Gross receipts from Garden Centre R 480 000
Annual fete R 140 000
Total receipts and accruals R 1 605 000
Determine: The basic exemption of trading income which will not be taxable.
Result:
An amount not exceeding the greater of R200 000
or 5% of the total receipts and accruals will be exempt from tax.
5% of the total receipts of R1 605 000 amounts to
R80 250. This means that R200 000 of total receipts and accruals derived from the taxable
trading activities (parking R35 000 and R480 000 Garden Centre) will be excluded from calculating the taxable income derived from the trading
activities.
The total gross receipts which will be taxable
amount to R315 000 (R35 000 + R 480 000 = R515 000 – R200 000 = R315 000).
APPORTIONMENT OF EXPENDITURE
Expenditure incurred in the production of
trade income must be apportioned
between exempt and taxable amounts.
General expenditure, example
administration and overhead costs must be
allocated
pro rata
to total receipts ,
INCOME FROM A TRUST WHERE THE PBO IS A BENEFICIARY
Receipts and accruals derived from any trading activity
undertaken by the Trust will constitute trading income for the PBO.
Donations from the Trust will constitute exempt
income.
LOSSES INCURRED
Where trade expenditure exceeds trade income
resulting in an assess loss, this loss may be carried forward to the next tax year.
Assessed losses incurred prior to 1 April 2006 may not
be carried forward.
RATE OF TAX
Current rate of tax for a PBO is 28% on trading
income, irrespective of whether the PBO is a section 21 company, trust or association.
VALUATION OF ASSETS FOR PURPOSES OF
TAX DEPRECIATION
Cost of assets used prior to 1 April 2006 must
be apportioned when calculating depreciation.
PROVISIONAL TAX
PBO’s are not liable for Provisional Tax
A PBO is still liable for Income Tax upon
TRANSFER DUTY
PBO’s are liable for Transfer Duty on immovable property
used for trade purposes subsequent to 1 April 2006.
Value of property may be apportioned between exempt and
trade use.
CAPITAL GAINS TAX
PBO’s became liable for CGT from 1 April 2006.
Assets used solely to produce income exempt from normal
tax or substantially the whole of the use of the assets is used for carrying on a PBA are exempt from CGT.
SARS accepts a percentage of not less than 85% in
TRADE ASSETS
Assets used to produce trade income will be subject to CGT upon
disposal.
CGT VALUATION DATE
In terms of CGT law the base cost of an asset is used to determine
the capital gain upon disposal of this asset.
EXAMPLE:
Base cost R100 000
Disposal R250 000
Capital gain R150 000
The base cost of an asset is determined at a specific date. This
date is called the valuation date.
DETERMINING BASE COST
METHODS FOR DETERMINING BASE COST:
Market value of asset on valuation date
(1 April 2006)
20% of the proceeds from the disposal of the
asset.
MARKET VALUE:
It is usually beneficial to determine the
market value of an asset at valuation date
as this may give a better result than using
the time apportionment method.
A PBO may not use the market value of an
asset unless it has valued the asset within
2 years of the valuation date.
Summary of valuation dates for PBOs in existence on 1 April 2006:
Tax year ending on
the last day of Valuation date Final day for completion of
valuation
MARCH 1 APRIL 2006 31 MARCH 2008
APRIL 1 MAY 2006 31 APRIL 2008
MAY 1 JUNE 2006 31 MAY 2008
JUNE 1 JULY 2006 31 JUNE 2008
JULY 1 AUGUST 2006 31 JULY 2008
AUGUST 1 SEPTEMBER 2006 31 AUGUST 2008 SEPTEMBER 1 OCTOBER 2006 31 SEPTEMBER 2008 OCTOBER 1 NOVEMBER 2006 31 OCTOBER 2008 NOVEMBER 1 DECEMBER 2006 31 NOVEMBER 2008 DECEMBER 1 JANUARY 2006 31 DECEMBER 2008 JANUARY 1 FEBRUARY 2007 31 JANUARY 2009
ASSETS ACQUIRED POST 1 APRIL
2006
Valued at date of acquisition
RATE OF CGT
The effective rate of CGT is 18.648% (66.6%
of 28%)
This means that any capital gain will be taxed
RISK :
Should you have conducted a trade which is
unrelated to your PBA you may be liable for Income Tax and CGT from 1 April 2006.
If you have not declared your trading income from
your 2007 tax return onwards you may be at risk of incurring interest and penalties.
CONTACT DETAILS:
