SOUTH AFRICA: Think Tax compliance is simple? Think again (PART 2)
The article was written and published by: ReganVanRooy
10 common mistakes in SA corporate taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The...tax returnsA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations... – Part II
Last week we unveiled the first five of our greatest hits in terms of common, and costly, errors in South African tax returnsA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations.... For those who’ve been waiting with bated breath, here are the final five.
All references are to sections of the South African Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act, no 58 of 1962. References to “SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...” are to the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... and to “IFRS” are to our beloved International Financial Reporting Standards.
6. Tax treatment of foreign exchange differences
Section 24I governs the treatment of foreign exchange differences for tax purposes. Typically the tax treatment of exchange differences in terms of section 24I accords with the accounting treatment and no adjustment is required in the taxpayer’s tax returnA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations... assuming the “exchange differences” are recognised in profit or loss for accounting purposes. However, there are exceptions. One such exception is found in section 24I(10A) which provides that the recognition of unrealised exchange differences with non-resident connected persons must be deferred until realised, provided that certain requirements are met. One of these requirements is that no portion of the “exchange item” represents a non-current asset or liability in terms of IFRS. Therefore, if the full balance of the “exchange item” with the non-resident connected person is disclosed in the taxpayer’s annual financial statements as a current asset or a current liability (as the case may be) the deferral rule does not apply. If all the requirements are met, the unrealised exchange differences must be deferred for tax purposes, giving rise to related deferred tax consequences.
7. Donations to section 18A organisations
Taxpayers, including companies, can claim as a deduction from their taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... amounts donated to any section 18A-approved organisation up to a value of 10% of their taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,.... Any donation made in excess of the 10% limit in any year of assessment will be carried forward and deemed a donation in the following year of assessment eligible for deduction subject to the same limitation. Taxpayers sometimes overlook the following important points concerning section 18A deductions:
For cash donations the amount must be actually paid during the relevant tax year the deduction is claimed – an undertaking/commitment to make the donation followed by payment after year-end is insufficient to claim a deduction in the earlier year;
A section 18A receipt/certificate issued by the section 18 approved organisation to whom the donor made the donation must be available to support the donation. The certificate must specify certain information. If certain information is not contained on the certificate it will be invalid and the deduction may be denied.
8. Leases vs instalment sales
Companies that apply IFRS account for “leases” as defined in IFRS 16 as Right of Use assets and a related lease liability in their financial statements whereas companies that apply IFRS for SMEs recognise “finance leases” as assets and a related lease liability in their financial statements. Tangible assets acquired under instalment sale agreements i.e. an agreement where ownership passes to the debtor on payment of the final instalment are similarly accounted for as assets and related liability. Whereas the accounting treatment for leases/finance leases of tangible assets may be similar to that of tangible assets acquired under an instalment sale agreement, the tax treatment is different. Leases/finance leases are accounted for according to economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit... and not their legal form. For tax purposes, the legal form of the transaction should be followed. Therefore, suitable adjustments to reverse the depreciation and finance charges recognised for accounting purposes and to claim lease payments made should be processed in the taxpayer’s return. Taxpayers often fail to make such tax adjustments. While the adjustments are in the nature of temporary differences which will fully reverse in subsequent years and overall the same deductions will be claimed the pattern of recording is different and taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... may be understated or overstated in a particular tax year.
9. Items recognised in Other Comprehensive Income (“OCI”)
Taxpayers normally determine taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... using profit or before tax as reported in the statement of comprehensive income as a starting point and making the necessary adjustments required for tax purposes. OCI forms part of the statement of comprehensive income and comprises items of income and expense that are not recognised in profit or loss as required or permitted by IFRS. Since the components of OCI are not considered in determining the net income or loss before tax the normal “mechanics” used to make tax adjustments may not yield the correct tax effect. For example, simply respectively adding back and deducting the closing and opening balances on a post-retirement medical aid provision where actuarial gains or losses are recognised in OCI will not produce the correct tax effect without also adjusting for such gains or losses. Taxpayers, therefore, need to carefully consider the potential impact of components of OCI on the tax computation.
10. Foreign Tax Credits (“FTCs”)
South African domestic legislation (section 6quat) permits an FTC to be claimed against a resident’s SA tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure... for foreign tax suffered on non-SA source income. However, a limitation is imposed according to the following formula: Taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... from foreign sources/Total taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... x SA tax payable. Any excess foreign tax credit may be carried forward for seven years. The SA domestic relief may be applied as an alternative to the relief afforded by an applicable Double Taxation AgreementA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... ( DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and...). However, certain DTAs e.g. the DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and Namibia, contain a similar limitation. We have noted that in claiming FTCs corporate taxpayers often overlook applying the limitation in either section 6quat or the applicable DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and....
So there you have it, our top ten tips to check in your tax returnA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations....
At Regan van Rooy, we conduct deep-dive tax health checks on your corporate taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The...tax returnsA Tax Return is a formal statement filed by an individual or entity that details income, expenses, and other pertinent tax information to a tax authority. Its primary purpose is to assess tax liability, determine refunds owed, or highlight outstanding taxes due. Tax returns may include information about earnings, capital gains, allowable deductions, and credits, depending on the tax regulations..., either before submission to SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... annually, or as a regular check-in to mitigate risks. We cover all these items in detail.
