Category: SARS

Disappointingly, there is material fiscal slippage relative to the Budget initially read in February 2018. A main budget deficit of -4.4% of GDP is projected for 2018/19, compared with the initial estimate of -3.8% of GDP. The deficit increases to -4.7% of GDP in 2019/20. This compares with an estimated deficit of -3.8% of GDP for 2019/20 projected in February last year.

Following fiscal year 2019/20, the deficit does decline a little, but remains wide at -4.55 of GDP in 2020/21 and -4.3% of GDP in 2021/22.

The consolidated budget deficit also remains wide, increasing to 4.5% of GDP in 2019/20 from 4.2% of GDP in 2018/19, before easing to 4.0% of GDP by 2021/22.

Also, after accounting for the borrowing requirement of SOCs and municipalities the total public sector borrowing requirement is 6.5% of GDP in 2018/19, which declines in 2021/22, but remains elevated at 5.5% of GDP.

Worryingly, the main budget primary deficit (revenue less non-interest spending) increases to -1.0% of GDP in 2019/20 from -0,8% in 2018/19 and remains in deficit over the medium term. Accordingly, the government’s debt ratio continues to increase.

Specifically, the gross loan debt is projected to increase to 56.2% of GDP at end 2019/20 from 55.6% of GDP at end 2018/19. Note that the government’s borrowing requirement in 2019/20 is partially funded by running down its cash balances by R71.6 billion. Hence, its net debt ratio (gross loan debt less cash balances) increases faster than the gross loan debt ratio – from 49.9% of GDP at end 2018/19 to 52.3% of GDP at end 2019/20.

Ultimately, the gross loan debt ratio only stabilises in 2023/24 at a projected level of close to 60% of GDP.

Government gross loan debt

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Source: SA Reserve Bank, SA National Treasury

The debt level, in itself is not especially high relative to GDP. However, given persistent sovereign debt rating downgrades the real interest rate government pays on new debt is high relative to GDP. Hence, in the absence of a substantial improvement in the primary budget balance, the debt level can only be stabilised over time should the real interest rate on debt decline relative to the real GDP growth rate.

But, at present, the ratio of debt servicing cost to main budget revenue continues to increase – from an already high 14.2% of revenue in 2018/19 to 15.2% of revenue in 2021/22.

The clearest path to changing this unsustainable path would be to improve South Africa’s sovereign debt ratings or to lift real GDP growth. The former is hardly likely under current conditions, while the latter is difficult given high real interest rates and a situation in which the government is absorbing a large share of available savings to fund itself.

It should be noted that the support for state owned companies is (almost) deficit neutral. But, the point is this support is preventing expenditure saving measures elsewhere from lowering the budget deficit and constraining the level of borrowing. The build-up in off-balance sheet contingent liabilities and the accompanying deterioration in the public sector’s balance sheet are now preventing the National Treasury from sticking to its fiscal consolidation path.

Government guarantees to public institutions amount to R483.1 billion of which current exposure amounts to R372.4 billion. Eskom’s guarantees amount to R350 billion (with an exposure of R294.7 billion).

Other contingent liabilities include post-retirement medical assistance to government employees (an estimated present value of R69.9 billion), legal claims against government departments (R28.7 billion) and obligations for the Road Accident Fund (which increased by R76.9 billion to R216.1 billion in 2018/19).

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New revenue raising measures amount to R15 billion in 2019/20, mainly by not compensating for bracket creep, which effectively raises personal income tax and produces an additional R12.8 billion. Meanwhile, medical tax credits are not increased, which nets an additional R1 billion in tax revenue. Changes in the general fuel levy, the road accident fund levy and the introduction of a carbon tax on fuel result in a net increase of 29c per litre in the total fuel levy. Apart from increases in excise duties (which raise revenue by R1 billion) and the “sugar” tax, additional zero rating of VAT items reduces revenue by R1.1 billion. An additional R10 billion in revenue raising measures will be announced in the 2020/21 budget.

Overall, main budget revenue increases from 25.4% of GDP in 2018/19 to 25.9% in 2019/20. Consolidated revenue increases from 28.8% of GDP to 29.3% of GDP over the same period.

Main budget balances

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Source: SA National Treasury

Note, in tandem with improvements in tax administration the revenue raising measures announced result in an increase in tax buoyancy (growth in tax revenue relative to GDP growth) from 0.98 in 2018/19 to 1.31 in 2019/20. But, tax buoyancy has surprised on the low side in recent years, suggesting an element of risk, especially if tax administration does not improve.

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unnamed (7)You sell your house/apartment/office/factory/plot of land. You instruct your conveyancer to pass transfer to the buyer, and start dreaming of what you will do with the proceeds.
But then your lawyer says “Hang on, you didn’t give me the property’s original title deed and I need it before I can pass transfer – where is it?”

Panic! 

You can’t find it. The bank doesn’t have it (bondholders normally insist on keeping the title deeds of properties bonded to them as a security measure, at least until the loan is repaid in full and the bond cancelled). You didn’t leave it with your lawyer for safekeeping (perhaps you should have). You search high and low both at home and in the office, to no avail. Your spouse has a vague memory that you may have left it with Uncle Festus to lock away in his vault; but Uncle F died 10 years ago and his house and all his worldly goods are long gone. Or perhaps it was stored in your holiday home and went up in smoke (literally) in that bush fire in ’93? Panic!

Relax. There is – for a short while longer anyway – a quick and cost-effective remedy. Have your lawyer apply for a certified copy of the Title Deed. All you need to do is attest to an affidavit, say that a “diligent search” has failed to locate the title deed, and confirm that it isn’t pledged or held as security by anyone.

All being well, a few weeks and a reasonable legal fee later, the Deeds Office issues a certified copy of the title deed and the transfer proceeds.

Act now, before it all changes

What has thrown the cat amongst the pigeons is a recent change to the applicable Regulations which will, from 25 February, require that –

  1. Your affidavit now has to be “attested by a notary public”. A Notary Public is a specialised attorney who “notarises” documents in a formal recording and certification process that carries more weight than would attach to a normal affidavit signed before a Commissioner of Oaths. That translates into extra cost and delay.
  2. Your application must now be advertised in the Government Gazette, and for 2 weeks after publication must lie open for inspection by the public at the Deeds Registry. Again, that’s more cost. And a lot more delay.

Owners, buyers and agents: Your urgent action plan

In a property transfer, time really is of the essence. The last thing any of the parties wants is delay, or extra cost. So here’s what you should do right now –

  • If you own property, and whether or not you have thoughts of selling in the near future, this is a great time to confirm that you know where your original title deed is. If you can’t find it, ask your lawyer for help.
  • If you are buying property, forward this to the seller or estate agent with a request that they confirm possession of the title deed or act to replace it immediately.
  • If you are an agent, do the same – forward this to everyone with a property on your books (you’re doing them a favour as well as yourself).

And a note for bondholders 

The new Regulations apply equally to lost mortgage bonds, notarial bonds, registered leases, holders of real rights etc, so what is said above applies equally to you.

These new requirements kick in on 25 February, so your window of opportunity here is a narrow one.

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unnamed (6) Asof eiendom-ontwikkelaars nie in die huidige swak ekonomiese toestande genoeg uitdagings in die gesig staar nie, is hulle, hul prokureurs en ouditeure, teen einde verlede jaar  begroet met die Appèlhof uitspraak in die saak Milnerton Estates Limited v Commissioner for the South African Revenue Service (1159/2017) [2018] ZASCA 155, wat vir hul verreikende kontantvloei uitdagings mag inhou.

In this matter the Appeal Court rejected the appeal of the appellant against its challenge of an income tax assessment by SARS requiring it to include the proceeds of the sales of a number of properties deemed to have accrued to the developer in terms of section 2(1) of the Income Tax Act in the year the agreements were signed despite the fact that transfer of the properties sold was only passed in the subsequent tax period.

Die uitspraak bevestig die beginsel neergelê in ‘n vroeëre uitspraak van die appèlhof in SIR v Silverglen Investments (Pty) Ltd 1969 (1)( SA 365 (A) dat waar ‘n ooreenkoms vir die verkoop van onroerende goed ‘n opskortende voorwaarde bevat waarvolgens oordrag van eienaarskap in die Aktekantoor vertraag word tot betaling van enige gedeelte van die koopprys, word die aankoopprys geag in die belastingjaar te val wat die ooreenkoms gesluit is ongeag die appellant se finale argument dat die laasgenoemde uitspraak regtens verkeerd was omdat artikel 24(1) van voormelde wet eintlik net van toepassing is op vaste eiendom wat op krediet terme verkoop was.

Property developers should therefore take note of this judgment and its interpretation of section 24(1) of the Act and ensure that where a sale agreement falls within the scope of this provision, they declare the income from the sale in the tax year that the agreement was concluded, even if payment of the purchase price and transfer of ownership only takes place in the following tax year.

Ontwikkelaars word aangeraai om kennis te neem van hierdie uitspraak vir hul beplanning vorentoe en veral ag te slaan op die kontantvloei implikasies daarvan met betrekking tot hul inkomstebelasting opgawes. Hul moet bewus wees dat die volle opbrengs van die verkoop in hul inkomstebelastingopgawes ingesluit moet word vir die jaar waarin die ooreenkoms onderteken is,  in gevalle waar die betaling van die koopprys opgeskort word in lyn met die feite in die onderhawige saak.  Steek gerus kers op by jou prokureur en of ouditeur om onaangename verassings vorentoe te vermy.

For an in-depth discussion of this judgement and in particular the reasoning of the judges please refer to the article in “The primacy of precedent” in PWC’s Synopsis for November / December 2018, by following the link hereunder.

https://www.pwc.co.za/en/assets/pdf/synopsis-nov-dec-2018.pdf

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reading word whistleblower office magnifying glass 3d illustration

For many years now the “Whistleblower’s Act” (actually the Protected Disclosures Act or “PDA”) has been providing protection to employees who report unlawful or improper conduct by their employers or fellow employees.

Recent updates to the PDA have extended protection to independent contractors, consultants, agents and workers employed by labour brokers. There is also a new requirement for employers to put in place “internal procedures for receiving and dealing with information about improprieties”.

Reprisals against a whistleblower (in the form of any type of “occupational detriment”) will land an employer in very hot water indeed. For example if the reprisal takes the form of a dismissal, it is “automatically unfair” and that carries substantial risk such as a compensation order of up to 24 months’ salary.

A case of incompatibility or retaliation?

  • An employee of a large organisation came to believe that several of her subordinates’ positions had been re-graded to a lower grade, without their knowledge or consultation, and that this both negatively impacted on their future salaries and distorted the accuracy of the company’s employment equity report. She reported this to her immediate superiors, then to the company’s internal audit department and to senior executives, but received no feedback.
  • Out of the blue she was presented with a termination offer, and when she didn’t accept it she was summarily dismissed for “incompatibility with colleagues”.
  • Her claim for automatically unfair dismissal in terms of the PDA was rejected by the Labour Court, but on appeal to the Labour Appeal Court her claim was upheld and she was awarded compensation of 18 months’ salary, with her employer ordered to pay all legal costs.
  • In reaching this decision, the Court considered several important questions –
    • Was the whistleblower’s disclosure made in good faith, in accordance with procedure, and based on a reasonable belief that it was substantially true? If so, the disclosure is a protected one. Importantly, said the Court, the whistleblower need not prove a factual basis for the belief “because a belief can still be reasonable even if the information turns out to be inaccurate.”
    • Was it reasonable in all the circumstances for the whistleblower to have made the disclosure? On the facts, held the Court, the whistleblower had acted reasonably and the employer’s contention that the dismissal was based on incompatibility was “nothing short of fiction and the only probability is that the appellant’s dismissal was in retaliation for her disclosure of the irregularities in the re-grading process.”

The lesson for whistleblowers

The PDA provides you with strong protections if you follow the correct procedures; just be sure you will be able to pass the tests posed by the above questions.

The lesson for employers

Don’t take action against a whistleblower just because a disclosure is factually incorrect – it is the reasonableness or not of the employee’s belief, and the “good faith” requirement, that you should concentrate on. Make sure also to have a whistleblower policy in place and to tell all your employees about it – not only is that now a legal requirement, but your business can only benefit from uncovering any improper or criminal conduct going on behind your back.

As always, with our labour laws being so complicated, and the penalties for breaching them so severe, take specific advice on your particular situation.

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The area of zero-rated VAT for a commercial property transaction can be confusing and must be properly understood if one wishes to avoid confusion and delays.

“Previously, it was common industry practice that a brief clause or addendum was utilised with the agreement of sale for a commercial property transaction in order to apply for the zero-rating of VAT,” says Jason Gregoriades, a member of the Rawson Property Group’s Commercial Business Development Team in Cape Town. These previously used methods are, however, no longer acceptable due to a more stringent set of requirements by SARS.

Misconceptions

Some misconceptions must first be dispelled, with regard to zero-rated VAT transactions, before looking at this subject in any depth. “The structuring of the sale of a commercial property with the VAT rated at 0%,” Gregoriades explains, “is a benefit offered by SARS to the seller and buyer of a specific property, should certain criteria be met to their satisfaction.”

First, it is often presumed that if VAT is applicable to a commercial property transaction, it will be simple to structure the Agreement of Sale in order to qualify for the VAT to be rated at zero percent. Sadly, this is not the case.

Second, there is the misconception that if one correctly structures the agreement of sale that the transaction qualifies for a zero-rating of VAT, that there are no additional costs relating to the transfer of the property. This is also most definitely not the case.

Facts

To begin with, a tax clearance certificate is required for the transfer of a property, thus problems and delays may arise in the event where either of the legal entities’ tax affairs are not up to date. Thereafter, SARS has a number of specific criteria which must be met in order for a commercial property transaction to be considered for a VAT rating of 0%. “The agreement of sale must be properly structured,” states Gregoriades, “containing all the necessary information and specifics.

Regarding the other costs applicable to the transfer of the property, such as the Deeds Office fee and the additional respective clearance certificates, these costs will still be applicable and payable should SARS permit the transaction to benefit from a zero-rating for VAT.

SARS Requirement

“SARS’ current requirements for the transaction of a commercial property sale to be considered for a zero VAT rating,are quite specific and important to know,”says Gregoriades.

These requirements include, but are not limited to the following:

All necessary information to be provided as part of the original agreement of sale and not as an addendum or annexure.
Both parties must be VAT vendors, thus, it is recommended that both parties include in the agreement their VAT registration numbers, a declaration that they are still registered for VAT and that their tax affairs are up to date.
The nature of the contract must take the form of a sale of business which includes the property, as opposed to the traditional sale of property only. Both parties must state their agreement that the enterprise will be sold as a going concern and that a zero rating of VAT will be applied. In this case, the business practice is the letting of space within the property and the business itself is often described as a rental enterprise.
The entire business, including any part of it which is capable of separate operation, must be disposed of as part of the transaction. In other words, the sale of the enterprise must include the property and all existing contracts must remain in place, such as the cleaning and security services.
The business must be an income generating enterprise at the time of sale, with a strong likelihood that this income generation will continue up to the date of transfer and beyond.
The Risk

Should the application for a zero VAT rating be deemed unsuccessful by SARS, they have the authority to effect that the full VAT amount be applicable to the sale. A clause to this end must be included in the agreement, stating that the purchase price will increase to cover the potential addition of VAT to the sale price. “Buyers and sellers must be aware of the implications of this possibility,” says Gregoriades, “should their submission be rejected by SARS for whatever reason.”

“One needs a well-constructed agreement of sale, making sure all the boxes are ticked,” suggests Gregoriades, “to take advantage of the zero-rated VAT benefit offered by SARS.” In order to ensure all the criteria are met, it is recommended that you enlist the aid of an experienced commercial agent.

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More savings for the middle property market, but no relief for top-end market.

The changes to transfer duties are likely to boost first-time homebuyers in the affordable property market, but not buyers in the top-end.

This follows the announcement by Finance Minister Nhlanhla Nene on Wednesday that the rates and brackets for transfer duties on the acquisition and sale of property will be adjusted from March 1.

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