Most of us expected that the New Year would have brought some new tax problems. But it was not to be – it seems that taxpayers continue to struggle with the same old issues they have in previous years. Property, VAT, pensions, cars, independent contractors – the more things change, the more they stay the same!
The one thing that re-appears and surfaces all the time is the issue of SARS’ ongoing disallowance of rental losses. In most cases, this is due to the ring-fencing provisions in section 20a of the Income Tax act, which provide that losses from certain trades are only available for off-set against future income from the trade concerned. This means that if you have incurred a rental loss and this section of the act applies, you can only utilise the loss by earning rental profits in future rental; and if it is not available for set-off against other income.
Section 20a only applies to taxpayers who are in the maximum 40% of marginal rate. This means their income exceeds R522 000 per annum. There are, however, other reasons that SARS will disallow a rental loss. Losses will be disallowed if a property investment has no commercial substance as a rental income generator and where these losses where sustained over a number of years.
The willingness to sustain losses of such nature points to a focus of obtaining tax benefits and concerning tax, the onus of proving otherwise rests with the taxpayer.
Looking at VAT and the aspects thereof; there is a concern about renting out a commercial property from a private and not a registered VAT entity perspective. Should VAT be charged? The answer is “no” and does apply to any form of the trade. If you are not registered as a VAT vendor, you may not charge VAT. Case closed.
Questions have been raised about the taxability of employer pension fund contributions and the impact made upon withdrawal. To give a short answer, the tax treatment of member contributions differs between pension and provident funds. Provident funds are non-deductible. The rule is that any employer contributions are not taxed when paid to retirement funds, but you will be taxed when the fund pays out. There are exemptions and deductions that are allowable.
Company car and travel allowances cause numerous debates and the fact is that it will always depend on the specific set of circumstances. For the majority of taxpayers who are on “cost to company” packages; the benefits of a travel allowance outweighs the option of taking a company car. Trips between work and home are regarded as private travel and if you want to claim for travel expenses for your company in work hours, you must keep an up to date log book.
It is feasible to taking travel allowance route if you use a “pool-car”; that is left at the employer’s premises or if you are a sales representative or in a similar position where your day to day job requires a huge amount of travel.
If this does not describe you, then despite doing the sums, you will find that the convoluted “salary sacrifices” inherent in company car schemes are extremely complicated and not particularly tax efficient. This puts the employer at risk of getting it wrong more often than not.
What about independent contractors? There is just no “best of both worlds” when it comes to tax. Either you are truly independent meaning that you set your own hours, supply your own equipment; and issue invoices based on actual jobs completed or time spent or you are an employee. An employee is supplied with equipment, works at the employer’s premises and takes instructions regarding work activities from their employer.
The lines are often blurred and much depends on the intention and relationship between the parties. A consulting firm for example can deploy staff at a client’s premises and will not lose its independence purely by virtue of such deployment; even if staff makes use of equipment supplied by the client and the engagement is of a long-term nature. In this case the relationship will most probably be based on whether the firm can and does obtain work from other clients; and whether supervision of staff is the primary responsibility of the client or the firm.
As far as tax is concerned, the “one man show” that contracts to only one client is prevented from taking on other clients. Thus working from the clients premises, uses the client’s equipment and falls under the client’s supervision and fall under the employee tax bracket. SARS will not be easily convinced in this case that such individual is an independent contractor.
These “employees” complain that they do not receive employee benefits such as leave, overtime and membership of benefit funds; yet this issue still falls within the domain of labour law rather than tax.