A low hanging fruit, as an idiom, refers to the most easily achieved of a set of tasks, measures, or goals. Targeting this may seem lazy; however, it is an effective way to ensure productivity, and in some cases profitability, when push comes to shove.
This has been the regular script of the South African economy over the past few years. The equation is simple, we are experiencing low growth and the South African Revenue Services (SARS) is struggling to collect income tax.
A motorist’s bugbear
One of the special taxes that has been increased on a yearly basis has been the fuel levy. This has proven to be a bugbear to motorists who feel that they are not seeing much for the tax that they are paying on fuel for their vehicles.
Perhaps they should count their blessings. Currently, the fuel is a zero rated Value Added Tax (VAT) item; but what if Treasury woke up tomorrow with a change of heart on this standpoint?
In a release to the media Leonard Willemse, Senior Tax Consultant at Mazars South Africa, pointed out that if a motorist filled up their tank in Cape Town (correct as of 2 March), they would pay R13 per litre for 93 unleaded. If VAT were to be levied at 14%, this cost would increase to R14.82 per litre, assuming that the value on which the VAT is levied is the price per litre inclusive of the General Fuel Levy as well as the Road Accident Fund Levy. If it isn’t, it will be R15.21 as of 1 April when the announced 39c increase kicks in.
"Let’s add in the fuel levy and the RAF increase from the start. Mr A fills up his tank with a capacity of 55 litres once a week. He would pay R13.39 per litre which results in a total cost of R736.45 to fill up his tank. If he fills up on average four times per month, his total spend on fuel would be R2 945.80 per month. If one applies the VAT rate at 14%, Mr A’s fuel cost per month would increase to R3 358.21, an increase of R412.41 per month – which, effectively translates to almost more than half a tank of fuel under current circumstances,” said Willemse.
In other words, with R412.41, Mr A could have purchased more than half a tank of petrol. The VAT proposal is therefore effectively costing Mr A more than half a tank of petrol per month.
In addition to this, Mr A would not be able to claim the VAT levied as an input VAT deduction if he is a regular salaried employee as he is not incurring the fuel cost in respect of the making of a taxable supply. A registered VAT vendor making taxable supplies would however be able to claim the VAT levied as an input.
Trusts have also been a major issue for government in recent times. In a release to the media, Etienne Louw – Senior Tax Consultant at Mazars South Africa – said that at no point in recent memory has SARS been so persistent in targeting the perceived abuse of trusts.
Section 7C is an anti-avoidance measure primarily aimed at curbing the tax free transfer of wealth to trusts through the use of low or interest free loans. Any interest foregone as a result of the low or interest free loan, which was provided by a connected person in relation to the trust, is treated as a donation which will be subject to a 20% donations tax rate. It is important to note that section 7C does not apply where the loan is owed by a company to an individual.
Not so fast buddy
A solution proposed by a number of tax advisors was to utilise the corporate roll-over relief provisions set forth in the Income Tax Act to transfer assets (acquired by the trust on interest free loan account) to a newly incorporated company (“Newco”). As part and parcel to the transfer of the assets, the Newco also assumes the loan as part settlement of the purchase price. This transaction (colloquially known as an asset-for-share transaction) involves the disposal by the trust of an asset and in exchange Newco issues equity shares to the trust and assumes the loan claim.
Unfortunately it seems that SARS has got wind of the aforementioned solution. During the Budget Speech it was held that additional measures will be implemented to counter the perceived abuse. It would be interesting to see what exactly these measures will be as such measures could have unintended consequences for legitimate transactions involving corporate restructures.
Last year, we hinted that an outright tax revolt was imminent. If the above measures are put in place, can we say that this is revolt will never happen? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts email@example.com.