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SPONSORED POST: KZN riots – the tax implications

Home Business Management Disaster Management SPONSORED POST: KZN riots - the tax implications

By Tusani Mnyandu

IN the midst of grappling with the devastation of a year-long national lockdown, job losses, and business closures following the worldwide outbreak of COVID-19, taxpayers in KZN were dealt another blow when violent unrest and looting swept the province.

The government acted swiftly to avert further damage and resuscitate the ailing economy. It extended emergency tax relief measures, intended to curb the impact of COVID 19, A few examples of relief measures are:

  • Expanding the Employment Tax Incentive (ETI) by four months; incentivising employers to retain low-income employees who would otherwise have lost employment and a livelihood.
  • Deferring payment of Pay As you Earn (PAYE) tax liabilities for compliant small to medium-sized businesses. Employers were afforded relief by not having to pay 35% of the employee’s tax withheld from their employees for a period of 3 months. The deferred amount is however expected to be repaid in equal instalments starting from November 2021.
  • Deferring excise duties on alcoholic beverages for three months.

The government also assured businesses that the South African Special Risks Insurance Association (SASRIA) would pay out insurance claims to businesses that are insured, while uninsured businesses would be assisted through dedicated funds which would be set aside for that purpose. How this will be implemented is still unclear.

Besides normal business implications, the destruction of business properties, equipment, machinery and the theft of stock result in tax events and will thus have certain tax implications, as will the payment of insurance claims from SASRIA and other insurers.

Taxpayers will need to properly account for these tax events which in many instances will become complex.

Consider this an example how the destruction of a capital asset would have the following tax implications:

  1. Capital gains/loss

In accordance with the 8th schedule to the Income Tax Act, the destruction is regarded as a disposal of that asset, which means that the taxpayer needs to calculate the capital gain or loss on that asset. If there is a capital gain (usually due to an insurance pay-outs), there will be tax payable while a capital loss will have to be carried forward to future years if there are no other capital gains against which to set it off.

  1. Recoupment:

If the taxpayer had claimed capital allowances on that destroyed asset, the taxpayer may have to add back those capital allowances to the taxable income.

  1. Output Tax

If the taxpayer receives a payout from the insurer, this will be deemed to be a supply of the destroyed asset and therefore output tax will have to be levied at the normal rate of 15%. This means that a portion of the money received will have to be paid over to the South African Revenue Service (SARS). There may be further tax implications, depending on whether or not the destroyed asset is replaced.

Damaged and looted trading stock has its own unique tax implications, depending on whether it is replaced or whether an insurance pay-out has been received.

Another challenge facing taxpayers is the damage and destruction of accounting records. This means that declarations that were made to SARS cannot be supported by credible evidence and any declarations that were yet to be made can also not be backed up by sufficient documentary evidence. SARS and taxpayers are faced with the monumental task of having to estimate the assessments.

There has, in turn, not been much relief for individual taxpayers, especially salaried employees. The national lockdown forced many employees who would have normally worked in offices to work from home.

Such employees would have incurred certain expenses such as buying office furniture, communication equipment, stationery, internet etc. Many of these employees are hoping to claim a deduction for these expenses by virtue of working from home, within a pandemic outside of their control.

The eligibility to claim this deduction is however not automatic as there are very strict requirements that the taxpayer has to meet in order to qualify for this deduction. The SARS has also come out to warn taxpayers against claiming home office expenses following a surge in such claims.

SARS has released an updated Interpretation Note No.28 as guidance on what they will accept as allowable expenditure and how the deduction must be determined. The Interpretation Note is still subject to public comment.

Generally, the deductibility of expenses relating to a home office must be determined with reference to section 11 of the Income Tax Act 58 of 1962 (ITA), read with sections 23(b) and 23(m).

Section 23(b) sets out the circumstances under which expenses related to a home office can be claimed.  Section 23(m) limits the types of expenses that can be claimed where the taxpayer is in employment or the holder of an office and 50% or less of the taxpayer’s remuneration is in the form of commission.

What is certain is that taxpayers may need to engage the services of a registered tax practitioner to navigate the complexities that come with complying with tax legislation and paying what is due to the fiscus.

Tusani Mnyandu (ACCA) is a tax manager at Mazars and a registered tax practitioner

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