Zero-Rating for VAT

by Vicky | 14, 07, 14 | Uncategorized

1. WHEN VAT BECOMES PAYABLE

If you are a VAT vendor and are selling an asset, a business or part of a business, you may not always be required to charge Value Added Tax (VAT) on the purchase price. Whether VAT is to be charged will depend on the circumstances of the transaction. For example, a sole proprietor who is VAT registered can sell his/her machinery and charge VAT, but can’t charge VAT on the sale of his/her personal house. A VAT vendor can only charge VAT on the sale of an asset if that asset forms part of the vendor’s enterprise.

2. REGISTRATION FOR VAT

Registration for VAT is compulsory if a person carries on an enterprise and the total value of taxable supplies exceeds or will exceed R1 000 000,00 (One Million Rand) in any 12 month period. Voluntary registration for VAT is possible for enterprises under this threshold. The standard rate of VAT is 14%.

3. ZERO-RATING

There are some instances where VAT can be charged at 0% instead of 14%. This is known as zero-rating.

Section 11(1)(e) of the Value Added Tax Act No 89 of 1991 (“the VAT Act”) sets out the requirements for zero-rating to apply:

(a)          The seller must be a registered vendor or be obliged in terms of the VAT Act to register as a vendor at the date of conclusion of the sale.

(b)          The Purchaser is not required to be a registered vendor at the date of conclusion of the agreement but must have made application for such registration at that time. The registration must, however, take place by the “time of supply”, which is the date of invoice or the date upon which a portion of the purchase price is paid, whichever is the earlier.

(c)          The supply must consist of an enterprise or part of an enterprise which is capable of being operated separately.

(d)          The parties must agree that the supply is a going concern. In order to be a going concern:

i.             The enterprise must be an income-earning activity on the date of transfer.

ii.             The assets necessary for carrying on the enterprise must be handed over to the purchaser.

iii.             The consideration for the supply must include VAT at the rate of zero percent.

The above requirements must be included in a written agreement of sale.

When determining whether VAT at the rate of 14% must be charged or whether the transaction may be zero-rated, you therefore need to look at what you are selling. If it is an asset forming part of an enterprise then you are liable to charge VAT at 14%. If however, you are selling the “enterprise” itself as a going concern you may zero-rate the VAT provided you meet all of the requirements as set out above.

4. RESIDENTIAL LETTING OPERATIONS

In terms of section 12(c) of the VAT Act, rentals charged to a tenant in terms of a residential lease is an exempt supply and one cannot charge VAT on the rental.

An “enterprise” is defined in section 1(v) of the VAT Act as a taxable supply of goods or services. A residential letting operation does not fall within the definition of an “enterprise”. Neither does a lease of commercial property where the annual rental income does not exceed R60 000,00 (section 1(ix) of the VAT Act).

Section 11(1)(e) of the VAT Act states that only the sale of an enterprise can be zero-rated. Accordingly, sales of properties which are subject to a residential lease or a commercial lease where the annual rental is less than R60 000,00 cannot be zero-rated in terms of the VAT Act.

Purchasers of the above tenanted properties will therefore need to pay either transfer duty or VAT on the acquisition of these properties, depending on the facts of each transaction.

It is advisable to consult your attorney and accountant before concluding a sale agreement where VAT could be involved, especially if you are contemplating zero-rating the transaction.

For professional but personal advice on, and assistance with sale agreements and the zero-rating of transactions, please contact Stuart Fourie (stuart@fouriestott.co.za) or Vicky Stott (vicky@fouriestott.co.za) or visit our website for further information about our Firm and areas of expertise.

Compliance Certificates

by Vicky | 27, 05, 14 | Uncategorized

When an immovable property (“property”) is sold, certain compliance certificates must be obtained prior to registration of transfer of the property. Some compliance certificates are obligatory in terms of legislation, depending on the particulars of the transaction and property. A summary of each of the compliance certificates in the context of conveyancing is set out below.

ELECTRICAL COMPLIANCE CERTIFICATE

During May 2009 it became a legal requirement for homeowners to be in possession of a valid electrical compliance certificate (“ECC”). ECCs are certificates issued by a registered electrician certifying that the electrical installations in the property are safe according to certain prescribed standards. No immovable property is to be transferred or let without a valid ECC.

When there is to be a change in ownership of the property, the ECC is valid for a 2 (two) year period. If any alterations or renovations are made to the electrical installations during that 2 (two) year period, the homeowner is required to obtain an additional ECC for such alterations. If the property is not sold and no alterations or renovations have been made to the electrical installation, then the ECC remains valid.

The seller is typically responsible for obtaining the ECC and paying any costs associated with the ECC and any repairs required for the ECC to be issued. Although this requirement may not be waived, the responsibility for attending to the ECC and payment of the costs associated with the ECC, may be shifted to the purchaser by agreement.

ENTOMOLOGIST CERTIFICATE

Property sale agreements typically include a provision requiring the seller to obtain an entomologist certificate (“EC”) certifying that the property is free from wood-destroying insects. An EC is also known as a pest or beetle certificate and must be issued by an entomologist registered with the South African Pest Control Association.

If upon inspection of the property, an infestation is found, the entomologist will submit a quotation for work to be performed to eradicate the problem. Once the problem has been attended to, they will issue the EC which will be valid for 3 (three) months.

An EC is not a legal requirement for the transfer of property. It is however advisable for a purchaser to request that an EC be obtained. If a bank is involved with the financing of the purchase of the property, particularly in KwaZulu-Natal, the bank will usually insist on receiving a certified copy of the EC prior to lodgement of the transfer documents in the Deeds Office.

The seller is typically responsible for obtaining the EC and paying any costs associated with the EC including work to be performed to eradicate any infestations. This requirement may be waived or the responsibility placed onto the purchaser by agreement between the parties.

GAS CERTIFICATES OF COMPLIANCE

In terms of Regulation 17(3) of the Pressure Equipment Regulations to the Occupational Health and Safety Act 85 of 1993, any person disposing of a property on which a gas appliance is installed, must obtain a certificate of compliance (“COC”) in respect of such appliance. Gas and gas systems are very broadly defined and include anything that uses any amount of gas.

A COC in respect of gas installations ensures that all gas fittings are safe and in proper working order. The COC must be issued by an authorised person registered with the Liquified Petroleum Gas Safety Association of Southern Africa. The regulations do not specify the period of validity of the COC but it is advisable to obtain an updated COC prior to any transfer of property requiring a COC.

The seller is typically responsible for obtaining the COC and paying any costs associated with the COC and any repairs that may be required in order for the COC to be issued. This requirement may not be waived as it is a legal obligation for the gas installation to have a valid COC. The responsibility may however be shifted contractually to the purchaser in the sale agreement.

ELECTRIC FENCE SYSTEM COMPLIANCE CERTIFICATE

Regulation 12 of the 2011 Electrical Machinery Regulations, to the Occupational Health and Act 85 of 1993 requires that the user of an electrical fence system installed on or after 1 October 2012 have an electric fence system compliance certificate (“EFSCC”). Only Electric Fencing Installers registered with the Department of Labour are authorized to issue EFSCCs.

It is not clear whether the certificate is a prerequisite for transfer – the legislation indicates that a certificate is required before an electric fence can be used but another section indicates that a fence should be compliant before it is sold. The safe route to follow would be to require a certificate before transfer and to record in the sale agreement who is obliged to obtain (and pay for) the certificate.

A certificate will be valid (and transferable to successors in title) until a change is made to the electric fence, in which case a new certificate must be obtained.

For professional but personal advice on, and assistance with conveyancing, please contact Stuart Fourie or Vicky Stott (stuart@fouriestott.co.za / Vicky@fouriestott.co.za) or visit our website for further information – www.fouriestott.co.za.

Antenuptial Contracts

by Vicky | 05, 07, 13 | Uncategorized

1. INTRODUCTION

Planning for your wedding and marriage is exciting. While much time and focus is directed at planning the wedding itself, it is vital that time and energy also be directed at planning for your marriage and in particular the proprietary consequences of your marriage.

No one goes into a marriage contemplating a divorce but when you consider that the Antenuptial Contract (ANC) governs what will happen to your assets and liabilities on divorce or death and regulates whether creditors have any rights to attach assets belonging to your spouse, it makes sense that proper consideration be given to whether or not an ANC would be appropriate in your circumstances and if so, the particular contents of your ANC. Unfortunately, often people are more drawn into the eyes of their spouse-to-be prior to the marriage than to the importance of considering whether an ANC should be concluded prior to the wedding day.

Concluding an ANC does not indicate a troubled relationship or untrusting spouse. We regularly encounter spouses who are married in community of property and would prefer to be married out of community of property. Either they neglected to consider whether an ANC would be appropriate for their circumstances prior to their marriage, or they were ill-advised on the various options available to them, or they simply ran out of time and funds to conclude an ANC timeously.

The consequences of failing to conclude an ANC prior to your marriage is that your marriage will automatically be one in community of property. If you do conclude an ANC prior to your marriage you will be married out of community of property. The principle of accrual will apply to a marriage out of community of property unless it is specifically excluded in the ANC.

If you determine that concluding an ANC would be the most appropriate alternative for you, the ANC must be concluded prior to your marriage. It is possible to convert a marriage that is in community of property to one that is out of community of property. The process does however involve inter alia, an application to court and notice to all of your creditors which is time consuming and costly. There are also no guarantees that the court will grant the order as requested.

A brief discussion of the legal consequences and some advantages and disadvantages of the different marriage systems are set out below. Further guidance should be sought from your attorney.

2. MARRIAGE IN COMMUNITY OF PROPERTY

In a marriage that is ‘in community of property’, any money or possessions belonging to either of the spouses at the time of the marriage, or acquired by them at any time thereafter, cease to be the private property of the one person and become part of a joint estate in which each of the spouses has an equal, undivided share. The same applies to their debts. On termination of the marriage (whether by divorce or death), the spouses are each entitled to a half-share of the joint estate and they are jointly liable for any liabilities.

A major disadvantage of this marriage system is that, if one spouse becomes insolvent, anything in the joint estate may be attached and sold off to pay creditors. Another disadvantage is that, although both spouses have equal powers with regard to inter alia the disposal of assets and management of the joint estate, neither spouse may perform certain acts without the written consent of the other spouse. These acts include inter alia purchasing, selling and/or mortgaging immovable property and concluding credit agreements in terms of the National Credit Act.

3. MARRIAGE OUT OF COMMUNITY OF PROPERTY (EXCLUDING ACCRUAL)

A marriage that is “out of community of property” excluding accrual is at the opposite end of the spectrum to a marriage that is in community of property. In the former, there is no sharing of profits and losses and each spouse retains his/her own assets and liabilities whether acquired before or during marriage. Both spouses have full and independent contractual capacity. Upon death or divorce, the spouses keep control over their own assets. The operation of accrual must be specifically excluded in the ANC.

The big advantage of this marriage system is that the spouses have independent contractual capacity and are protected against claims by the other spouse’s creditors. A disadvantage is that there is no sharing of the growth experienced by the spouses in their respective estates during the marriage on death or divorce.

In 1984 Parliament decided this rigid form of separation of estates was often unfair, particularly to a wife who stayed at home to raise a family. The accrual was therefore introduced into our law.

4. MARRIAGE OUT OF COMMUNITY OF PROPERTY WITH ACCRUAL

We find that the accrual system is, perhaps, the fairest marriage system for the majority of couples we assist. The Matrimonial Property Act 88 of 1984 brought with it the “accrual” system which permits a form of sharing, consistent with a primary objective of marriage, but permitting retention of each party’s independence of contract and ability to retain their separate estates. A marriage out of community of property with accrual essentially enables the spouses to share in the growth of their estates at the end of the marriage while protecting them during the marriage from the other spouse’s creditors.

4.1. What does accrual mean?
“Accrual” means increase. The accrual system is a form of sharing, at the end of the marriage, of the assets that are built up during the marriage. The underlying philosophy in respect of the accrual system is that each spouse is entitled to take out the asset value that that spouse brought into the marriage, and then they share what they have built up together.

4.2. Exclusions from the accrual
(a) Certain assets belonging to either spouse are automatically excluded from the accrual calculations, for example:

(i) any damages awarded to either spouse for defamation or for pain and suffering;

(ii) any inheritances, legacies or gifts that either spouse has received during the marriage, unless the parties have agreed in their ANC to include these or the donor has stipulated their inclusion;

(iii) donations made by one spouse to the other.

(b) In addition to the exclusions set out in 4.2(a) above, the spouses may also elect to exclude other assets and/or interests from the accrual calculations. These exclusions   must be specifically listed in the ANC and require discussion prior to conclusion of the ANC.

4.3. When is accrual relevant?
Accrual only becomes relevant at the end of the marriage (on death or divorce).

4.4. Calculating the accrual
The accrual is calculated by subtracting the net asset value of spouse’s estate at the commencement of marriage (as adjusted for inflation) from the net asset value of that spouse’s estate at dissolution of the marriage.

For example, if one spouse (“spouse A”) had a net asset value of R10 000.00 at the commencement of the marriage (“commencement value”) and a net asset value of R100 000.00 at dissolution of marriage (“dissolution value”) then the accrual to that spouse A’s estate is R90 000.00. If the other spouse’s (“spouse B”) commencement value was R20 000.00 and the dissolution value is R200 000.00, it follows that the accrual to that spouse B’s estate is R180 000.00.

The net accrual is calculated by subtracting the “smaller” accrual from the “larger” accrual. In the above example: R180 000.00 – R90 000.00 = R90 000.00. In accordance with the Act, spouse A (the spouse with the smaller accrual) acquires a claim against spouse B (the spouse with the larger accrual) for one half of the net accrual, namely R45 000.00.

4.5. Summary of some important features of an accrual marriage
(a) Each spouse retains his/her own estate. Each party may accumulate assets and incur liabilities without interference from or assistance of the other spouse. The estate of each party is determinable separately.

(b) An accrual calculation is performed on death or divorce in order for the spouses to share equally in the growth of their estates during the marriage.

(c) When drafting the ANC, the spouses may decide to exclude certain assets. The effect of excluding an asset will be that it does not feature on the asset statement at commencement or dissolution of the marriage and is completely excluded from the calculation. Assets which are not properly described can cause problems for the executor or the divorce attorney who must decide what to do with it in calculating the net accrual value.

(d) Parties not wishing to exclude specific assets may exclude a certain sum of money which is the agreed equivalent of assets which they do not wish to share, and which is termed a “commencement value”.

(e) One spouse’s property cannot be sold to pay the other’s creditors if the other becomes insolvent – in contrast to the case where the parties are married in community of property.

5. CONCLUSION

In order for a marriage to be out of community of property (whether with or without accrual), an ANC must be signed before the marriage is concluded, in the presence of a notary public and two competent witnesses. The notary must then register the ANC in the local registry of deeds within 3 (three) months of the date of signature of the ANC.

It is of utmost importance that parties wishing to conclude an ANC fully understand what it is they are signing. It is for this reason that a standard form contract cannot be used and that the services of a knowledgeable and reputable notary public should be utilised.

For professional but personal advice on, and assistance with, concluding an ANC, please contact Stuart Fourie, Vicky Stott or Eilene Bekker – www.fouriestott.co.za.