Tax Advice

tax-advice

Better safe than sorry

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Laws change frequently. Such changes are routinely brought to your attention via your professional advisory team. Sometimes, however, it’s not the change to the laws that gives rise to problems, but a change in the farmer’s operation. So the prudent farmer will consult his advisors before making any change to his operation.

When it comes to Value Added Tax (VAT), certain rebates are given to farmers who deal primarily in agriculture. In terms of the VAT regulations, the rebates operate as input taxes. In other words, if a farmer sells certain produce or services and has to charge VAT under the Value-Added Tax Act, such VAT (termed “output VAT”) must be paid to the Receiver of Revenue.

However, the amount is reduced by the amount of “input VAT” the farmer has paid in the VAT period to which the output VAT corresponds. Input VAT is the VAT that is paid by a purchaser when they pay for goods that are not exempt from VAT. Should input VAT be claimed in error, the VAT lost by the Receiver of Revenue will be reclaimed. Interest will be charged on the amount that has to be repaid, thereby compounding the problem.

Refunds
Fuel levies and Road Accident Fund refunds on diesel fuel are claimable by farmers only if the farmer operates within South Africa and produces primary agricultural produce. That is, the farmer doesn’t add value to the primary produce by, for example, making wine or raisins out of grapes, or making biltong out of the beef produced.

According to the SARS quick reference guide, the farmer may obtain a diesel refund on the diesel fuel used in his home generator. Any transport operation run by the farmer, however, doesn’t qualify for the refund. (Note that transport of cut timber from a plantation does qualify the user of the diesel for a rebate under certain conditions.)

The danger faced by a farmer who changes his operation is that the changed operation may not meet the requirements of the statute with respect to certain refunds such as the diesel and Road Accident Fund levy refund. The conditions under which these are claimable as input VAT are very narrow as it is.

If an audit is conducted, the amounts claimed can and will be clawed back by the Receiver of Revenue. Farmers who wish to avoid problems with the Receiver would do well to ensure, from time to time, that their activities are still within the parameters under which levies and rebates are claimable.

Interest
The VAT Act provides for interest to be claimed by the Receiver of Revenue upon amounts that are clawed back. But interest isn’t payable by the Receiver upon unclaimed inputs. The farmer therefore must make sure that the correct amount of inputs are claimed at the correct time intervals.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact Peter on [email protected] Please state “Tax” in the subject line of your email. FW

Stealing land

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Many criticisms of the Green Paper address the unconstitutionality of its proposals. One example of this is the establishment of a body of civil servants to assess land use and another body to evaluate farm property.

These would be unconstitutional if such bodies circumvented the authority of a court to review any case.
These and other arguments certainly seem valid. But the objection to the Green Paper I’ll discuss relates to the tone, or language, used in it.

The Green Paper proposes “the crafting of a new pragmatic but fundamentally altered land tenure system for the country”. In other words, as I see it, the abolition of true ownership rights relating to farming land – at least for white Africans.

The paper speaks of the taking of land by “deceit” and by force by colonists. Clearly, then, white title holders are the target of the proposals.

However, if we look at the Constitution of South Africa and examine the history of its drafting, we find that 34 “constitutional principles” emerged from the negotiations, each one of which was a potential deal-breaker.

Those principles became the basis upon which the interim and then the final Constitution was drafted.
There seems to be a naïve faith among otherwise rational South Africans that the country’s rulers act in terms of general constitutional norms by default.

A reading of the Green Paper and reports in the media that relate the utterances of various government ministers would indicate otherwise, however.

Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.

 

The Green Paper on Land Reform

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I encourage all landowners to read the recently published Green Paper on Land Reform in South Africa very carefully. It can be found at www.info.gov.za.

A Green Paper is a discussion document that sets out the direction a new set of rules might take. Green Papers precede White Papers, which are more formal publications of government policy.

White Papers lead to draft bills, which, after discussion, may be referred to the National Council of Provinces and the National Assembly for passing, before finally being sent to the president, who has the power to sign the bill, thereby making it law.

The views expressed in this Green Paper on Land Reform are very one-sided, in my view. It seems that those who drafted the document were acting under the assumption that the people whose interests are represented by the Green Paper have some sort of inherent right to land.

In South Africa, real rights in fixed property are registered at deeds offices around the country and title to such land is proof against all comers. Should the sentiments underpinning the Green Paper on Land Reform become law, the property rights of landowners would be seriously curtailed.

For one thing, it suggests appointing a land-use commissioner. This civil servant will have the power to determine whether optimal use is being made of land, with a view to expropriation of unused land.

Another appointee envisaged is a valuer-general, who would determine the price at which land might be bought by the state. Thus the time-honoured rights of property owners, enabling them to use their properties as they wish, with due regard for the others’ rights (in the sense of the law of neighbours), would disappear if the Green Paper on Land Reform became law.

One wonders what the banks would do when it came to lending money against fixed property if the property title and value were not secure anymore. However, it seems the proposals of the Green Paper on Land Reform are out of line with the provisions of Section 25 of the Constitution, which states that where land is expropriated, the landowner has to be compensated.

The amount of compensation will be agreed upon by the parties involved, or determined by a court. In TAU v Minister of Land Affairs (1997, 2 SA 621 CC), the court held that the action, which had been brought in order to question the constitutionality of certain sections of the Land Restitution Act, was not “urgent”.

It was said that the parties involved should have objected to the sections they disagreed with before the act was promulgated. South Africa’s farmers are in fact in a battle for their land.

In light of the ruling in the above case, I urge them to get involved now and make submissions to government on the Green Paper as soon as possible. Apathy at this point might be extremely costly in the long run.

Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.

 

Know your property rights

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Earlier this year, the ANC Youth League (ANCYL) effectively declared war on farm owners.

In its “Final Document for the ANC Youth League 24th National Congress”, Clause 31 states: “With balance of forces having shifted in favour of the forces of change, the ANC carries a responsibility and an obligation to move more decisively towards all Freedom Charter objectives. This can only happen through enabling the state to expropriate private property, particularly land and mines without compensation for redistribution purposes.”

Clause 34 states: “The Constitution says that public interest includes the nation’s commitment to land reform and to reform to bring about equitable access to all South Africa’s natural resources, and property refers to all South Africa’s natural resources. These, the state should expropriate strategic sectors of the economy (sic) without compensation because paying all key and strategic resources stolen from the black majority and Africans in particular will take more than a lifetime to realise.”

The problem I have with the above is the use of the word “stolen”. My parents bought a farm in the Cape in 1981. My father had been a businessperson all his life and had started earning money (and paying tax) in 1955. Thus, he worked for 26 years before he had enough money to buy a farm.

Fortunately, our Constitution has guarantees against landowners being dispossessed of their land without compensation. Sub-Section 25(2) provides that: “Property may be expropriated only in terms of law of general application – a) For a public purpose and in the public interest; and b) Subject to compensation, the amount of which and the time and manner of payment of which have been either agreed to by those affected or decided or approved by a court.”

As long as the Constitution survives in its present form, the rights of landowners are secure, at least as far as dispossession without fair compensation is concerned. However, the ANCYL document referred to above contains further alarming utterances. Section 25 of the Constitution is referred to as the “property clause”.

Clause 35 makes it plain that: “Amendment of the property clause to empower the state to expropriate for public purpose and in the public interest is therefore vital for this particular purpose.” The popularity of the ANCYL is such that a constitutional change might not be far-fetched. I urge all property owners to find and read the document.

While the blame for SA’s ills are placed at the door of a certain segment of the population, which is tired of being portrayed this way, no mention is made of the fact that tax paying South Africans contributed to the building of the nation. Nor is there any acknowledgment that development of the country was undertaken by said embattled segment.
Know your rights!

Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.

Tax and trips

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In 1950, a South African farmer went to Switzerland to buy a stud bull in order to improve his herd, and combined the business trip with a holiday with his wife.

The bull was shipped to South Africa, but the “bare cost” of the farmer’s trip was refused as an income tax deduction. On appeal, the judge ruled that because the trip had had a dual purpose – it was undertaken for the purchase of a bull and for a holiday – the bare cost deduction claim had to be denied.

The tax payer had not proved that the expenses were “exclusively laid out or expended for the purposes of trade”.

What’s the position today? If a SA cattle breeder were to go overseas to buy an animal and also enjoy a holiday with his family while there, would their expenses, or any part thereof, be allowable as a deduction for income tax purposes?

The answer is yes!

In the 1984 case of the Nemojim company, the tax payer had a brilliant scheme involving the buying and selling of companies. Once it had acquired a company, Nemojim distributed the dividends to itself and sold the company.

Naturally, the sale price was less than the purchase price, the stripped company not having the same appeal as a company rich in cash and assets. So, on paper, the tax payer made losses for tax purposes – and enjoyed a dividend income, which is free of tax.

This continued until the revenue services changed the rules: They disallowed the deduction of the purchase consideration insofar as it related to cash-rich companies.

Part of the income the tax payer earned from its trade in such companies was tax-free dividends. With the change, only deductions earned in the production of taxable income are allowable for tax purposes. In the deduction formula in Section 11(a) of the present Income Tax Act, the word “exclusively” is not used. Instead, expenditure has to be “actually” incurred in the production of income.

In addition, the deduction has to be apportioned between taxable and non-taxable income. Thus, if a farmer were to go abroad to buy stock necessary for producing taxable income, the expenses associated with that purchase would be allowable as a deduction.

Money spent on a holiday enjoyed at the same time would not be expenses that went into the production of income and would be disallowed. So, if you’re planning a dual purpose trip, get separate invoices for yourself and your family to make claiming easier.

Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.

A broker is your first investment

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Investment-savvy business people know there’s much, much more to building a satisfactory investment portfolio than just knowing a bit about psychology and the three basic asset types. (Equity, bonds and cash).

A really smart investment advisor will consider the timing of acquisitions and carefully analyse the underlying agreements to try and remove volatility.

Tax planning goes hand in hand with investment portfolio choices. The tax effect of all major purchases needs to be carefully considered against the backdrop of rising taxable income over time and the repayment of tax-deductible, interest-generating loans.

Choose your investments wisely
The one common denominator when looking at taxable passive, income-earning investments is that the assets that underpin these income streams will need maintenance and refurbishment.

Tax-free returns, such as dividend flows, are generally realised after the company that declares the dividend has already made the necessary inputs to keep its capital base healthy.

In a sense, investing in equities is more passive because you should be able to rely on the company’s leadership to take whatever steps will make the company profitable over the

longer term. Such investments can almost be said to think for themselves. Clever investors can get much more for much less, if they include taxable income-generating assets in their portfolios. If a financial institution partners with the investor in the purchase, this is known as “gearing”.

Equities of course are normally bought with cold hard cash, but passive investments, like real estate, ships or aircraft might be bought with a view to their ability to float – that is, change value – based upon the US dollar, for their capital appreciation potential or both.

Banks lend money on good capital-appreciating assets and even aircraft can be financed fairly easily.

Peter O’Halloran is head of tax at BDO, Gaborone. Call 00267 390 2779 or email [email protected] with the heading “Farmer’s Weekly tax issues”.

Be aware of VAT

When starting a new venture, the aspiring business owner has to be vigilant. Making mistakes is a costly way to learn. You can afford to pay such “school fees” if you have deep pockets and a sympathetic banker, but more often than not, the reason for the venture in the first place is a distinct lack of money.

Most aspiring businesspeople just can’t afford many mistakes. One common misstep is addressing value added tax (VAT) issues too late. Some businesses require costly capital items, such as special equipment, that are often vital. If these are bought on loan, the cost of VAT is enough to make a difference to the business.

If the equipment is very expensive, the business’s projected turnover would have to be high too, or the business will be in severe financial difficulty and might have to close. It’s only mandatory to register as a VAT vendor if the expected turnover is R1 million, but you can register voluntarily with less. Note that VAT registration isn’t a given. You have to apply for it and the requirements do change from time to time.

When starting your business, timing is vital from the VAT point of view. When you register your new business for VAT, you can retrospectively claim back the VAT you spent on its expenses from the SA Revenue Service (SARS). However, those expenses are only eligible if they were incurred less than six months before the registration. You also can’t claim back VAT on capital items. If you need to quickly buy a large machine, this can put you out of pocket.

Buying a farm can also be a VAT transaction. Although fixed property transactions are subject to special rules, if the VAT registration is delayed, VAT can be a potentially devastating additional cost. The message is clear: speak to a VAT expert before committing to buying capital equipment. If you don’t, you may end up footing the bill for the VAT.

The carrot and the stick

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Those who may find relief under the new voluntary disclosure programme announced by the finance ministry include individuals, sole proprietors, partnerships, deceased estates, insolvent estates, South African trusts, former South African citizens, companies, close corporations and facilitators who have defaulted on their tax affairs before 17 February 2010.

Exchange control and tax contraventions that were committed before 17 February 2010 may be forgiven to the extent that certain penalties and interest will be waived. The tax contraventions covered relate to all the types of tax administered by the SARS, including diesel refunds and the like.Regarding exchange control, the finance ministry has stated that its ability to pursue those who have been non-compliant continues to be reinforced.

Furthermore, it said that authorities all over the world are cooperating like never before, with exchange of information agreements assisting tax authorities to track down international tax offenders. I welcome the amnesty and I’m all for tax compliance. But when one looks at the state of government institutions and roads, it seems that our tax money isn’t being well spent.Be that as it may, the statements by the authorities might have more bark than bite. At a recent tax conference in Madrid, I spoke to a Swiss chartered accountant about the issue of Swiss banks and the confidentiality of numbered accounts.

I was under the impression that this had been eroded. But he told me about a case involving certain German taxpayers who placed funds offshore to evade tax. The German tax authorities got the information from a banker and followed the trail to a Lichtenstein bank. But the bank refused to divulge any information about its clients. Its rationale was that the information hadn’t been honestly obtained and it was under no obligation to give out information.

Likewise, the Swiss chartered accountant told me, a Swiss bank will under no circumstances divulge anything relating to a client unless very specific information is requested. If the “tip off” is illegal in the eyes of the Swiss, the request will be refused as it was in the Lichtenstein case. So, when gathering information internationally, the tax authority’s position might not be as strong as they claim it is. Tax authorities won’t divulge information to other tax authorities that are on a “fishing expedition”. Only specific requests for specific information regarding specific taxpayers may be divulged in terms of the exchange of information articles in Double Tax Avoidance Agreements.

And I reckon the tax collection efforts by the authorities might prove more fruitful if they focused on proper service delivery and guaranteed the rights of all South Africans to their property and capital. The Voluntary Disclosure Programme runs until October next year. The necessary forms and details are available on the SARS website (www.sars.gov.za).

Tax breaks for wildlife farmers

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Game farmers must prove they’re bona fide game farmers to access tax concessions. The South African Revenue Service (SARS) Practice Note 6 of 1999 states: “The same tests used to determine whether a person is carrying on ordinary farming operation are applicable for game farming.

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When a person who owns land and occasionally allows hunters, for example, to cull the game thereon, such activities cannot, on that account alone, be accepted as constituting farming with game. Such person will have to convince the Commissioner that game is purchased, sold, bred etc on a regular basis before the activities can be regarded as bona fide farming operations.”

Broadly, the tax concessions are similar. Capital allowances for a domestic livestock or crops farmer also apply to game farmers. Income from game hunting or the sale of carcasses, hides or trophies is “farming income”. But accommodation of hunters, for example, and all hospitality activities of the game farmer’s operation aren’t farming income. They’re classed separately.

Opening and closing accounts for domestic livestock are added back at the standard rates for the livestock, as provided in the Income Tax Act, at the end of each year. Game aren’t added back, because of the difficulty around accurate game counts. This creates another tax benefit for the game farmer. Wild animals are more mobile than domestic animals.

The purchase consideration of new wildlife stock would usually constitute a full deduction. But this expenditure is ring fenced in terms of Paragraph 8 to the first schedule of the Income Tax Act and the deduction is limited to farming income. If a portion of the purchase consideration for wildlife remains after year end, this excess is carried over to the next year to be offset against the farming income.

But for wildlife, where losses don’t arise from a sale or voluntary disposition, the limiting provisions of Paragraph 8 don’t apply (as per subparagraph 8(2) of the first schedule). So, where a game farmer shows involuntary losses that aren’t sale-related, these can be claimed as a tax deduction in the normal course.

Legally retrieving strayed game
It’s difficult to identify which animals belong to a certain farming operation, as game often stray. I’m often asked how game farmers can legally retrieve their game from an adjoining national park that neglects its fences. Common law states wild animals in a natural state of freedom become the property of their captor wherever captured.

A captor needs two things to take ownership of the animal – physical control of the animal and the desire to be its owner. If the animal is marked or tagged, it’s not in a “natural state of freedom” and its captor can’t own it by means of capture. The owner could then prove ownership and may legally demand the animal’s return.

This article was originally published on 26 November 2010 in Farmer’s Weekly.

Let the seller beware!

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For the seller of goods orservices it used to be a case of “let the buyer beware”. The onus was on the purchaser to make sure the product or service bought was of good quality. And so competition in commerce got rid of shady dealers over time.But a new set of rules for commerce has been drafted. Due to come into effect in April 2011, the new Consumer Protection Act puts the onus on the providers of goods or services to ensure that their customers are treated fairly. So if a person promises more than they deliver, or if goods are sold on onerous terms, or if a consumer is hurt by shoddy products or services, the provisions of the Act may be triggered.

Consumers with fixed-term contracts, as with cellphones, will have better rights when it comes to cancelling such contracts. It seems that automatic rollover of such contracts will be a thing of the past.
But I imagine that the average South African farmer supplies high-quality produce in any event. And it seems hard to imagine how food producers on a primary level might be negatively affected by the Act’s provisions. In fact, the agricultural community might actually benefit by the application of this law.

Two areas where the new Act is an improvement on the status quo are:
Losing the Latin. Farmers use financial institutions’ products to get finance. The new Act states that the language of any agreement relating to goods or services in commerce must be clear to the recipient of the goods or services. The Latin clauses in banking and loan agreements must be a thing of the past, because these are far from clear to most consumers. The Latin clauses in loan and surety agreements especially serve to limit the defences a consumer might have against the bank. More equitable contracts. The new Act states that any inequitable contract – one that favours the supplier over the consumer – is liable to be set aside.

These provisions are a positive step as far as insurance or financial products are concerned. But the Act’s preamble is worrisome. It states that the Act is put in place to alleviate the effects of poverty caused by the discriminatory laws of the past. When will South Africa ever shrug off that past and move forward? Sanctions that might be imposed under the Act are fines of up to R1 million, damages awarded against “sharp” sales practitioners, and court action. I strongly suggest that every farmer find a copy of the Act on the internet and study it. Farmers who run guesthouses, for example, should note the provisions regarding the right of consumers to cancel bookings. But that’s just the tip of the iceberg. Read the Act, protect yourself, and see how you’re protected in turn.     |fw

 

Why Botswana is good for business

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The Botswana Innovation Hub (BIH) is certainly worth looking into. It offers fiscal advantages including a low tax rate, tax and cash incentives for hiring and training graduate and other staff in Botswana, a beneficial regime when it comes to work and resident permits, and generous discounts on telecommunication costs. But why are the Botswana authorities making these facilities available?

Because Botswana has realised its mineral wealth isn’t infinite. Consequently, the government wants to ensure the economy is diversified. The country’s natural and geographical attributes are there to be used to investors’ advantage, which is why scientists and researchers in the region are being encouraged to network. This idea comes from a Finnish firm that consulted with the government and which has established numerous similar innovation hubs or technology parks throughout Europe.

The BIH itself is an aesthetically pleasing set of buildings close to the Sir Seretse Khama International Airport and was designed by a firm of architects from New York. It blends in with its surroundings and much of it is below ground. Like a university campus, it will house offices, laboratories, testing facilities and so on. A shared reception area will be available to smaller firms and manufacturers, and research and development businesses can also rent warehouse space.

The 440ha park will be a free-trade zone and will operate under the auspices of Botswana’s ministry of trade and industry.Although it’s acknowledged that firms want to protect their intellectual property, the BIH will facilitate technology sharing.

The five basic operational lines catered for are:
 

  • information and communication technologies (ICT) and ICT-enabled services,
  • mining technologies,
  • biotechnology,
  • energy and environment,
  • the knowledge-intensive business services that support all this.

The BIH prefers a business registered with it to have a presence in the hub itself, such as an office at the least. But it also accepts that companies in the process of designing top-secret technology might want to set up a base in a more remote location – another major advantage of operating from Botswana. The tax rate for BIH companies is currently at 15%. Combined with the other advantages, that’s a very attractive rate.

And the fiscal advantages might well be improved in the future.BIH companies can also marry up their output to the tax-friendly Botswana International Financial Services Centre companies, which can propagate the results of the efforts of the BIH companies into the region and internationally.Funds generated by the firms that operate in Botswana can be repatriated or invested anywhere in the world.   

Keeping it simple

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A recent article in a financial journal underscored the fact that many of the world’s economies are far from healthy. Words such as “sovereign debt” were used, and it was pointed out how too much activity, or the wrong sort of activity, on the part of governments could exacerbate the fragile financial position the world found itself in.The basic reason for the initial crises was overextension of credit on a global scale.

I think most analysts would agree on that. Fiscal and financial imbalances are said to exist in the world as a result of the recent financial crises. Mishandling these imbalances could trigger quite severe repercussions in the world economy, according to the article.Governments, it said, are looking at cost-cutting and trying to find ways of doing more with less, so that the national debt of their countries returns to manageable levels. Taxes must be cut to stimulate economies, while at the same time tax is needed to fund government debt and stimulus packages.

So what now? What impact does this have on the average Southern African businessperson? What should we be doing to minimise potential future problems? How about simply applying a little common sense?

Firstly, conserve and save funds and resources as far as possible. A lack of financial discipline caused the financial crises, so the antidote must be a move back to financial discipline.Irrespective of the advance of technology, the basic laws of life still apply. Spend more than you earn, and you’ll run into problems.

Short-term gratification comes at a price that might be unaffordable in the long run. Secondly, remember that cash is king. Every person and business needs a safety net of available cash. Without this, problems are magnified and become more expensive than necessary to fix. Saving is essential. If saving is impossible, build strong credit lines, but use these sparingly.

How to simplify
Work together. Sharing skills and resources in these times is a good idea. The business environment is over-regulated, and compliance requires time and effort. Farmers are faced with complex land and other issues daily. A group of farmers can operate as a company – pooling their skills, equipment, land and water, thereby creating time for them to deal with the onslaught of the legislature in a more robust manner.

Fortify your position. Protect essential assets to the business through trusts. Wealth must be made safe, protected from all who would seek to deprive one of it.Plan ahead. Family and business succession plans are vital. Insurance to see the family through in case of unexpected demise is essential. Stay informed. Watch the press and take note of prices, tax changes, weather patterns and the state of the world to guide business decisions.   
 

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