The carnage was widespread, with trucks, warehouses, storage facilities and buildings looted and set ablaze. Among the items looted were consumables, fancy goods and work stations. Computers containing vital information were stolen. That which couldn’t be stolen was smashed to bits.
The full tax implications will emerge over the next few months, but this article seeks to point out the immediately apparent ones.
Trading stock – income tax implications
The retailers that were looted, including opticians, pharmacies, supermarkets and funeral parlours, lost all their stock.
The value of trading stock at the end of the year will be the cost price of the stock, less any amount by which the value of the stock has been diminished, for example, theft, damage, deterioration, change of fashion, obsolescence, decrease in market value, or any other reason.
Any reason would have to pass the test of what the commissioner of the South African Revenue Service (Sars) thinks is just and reasonable.
According to Joon Chong, tax partner at Webber Wentzel: “In our view, the looting of trading stock is an inherent risk of carrying on business in South Africa. The reduction in value of trading stock as a result of the looting and violence should be accepted by the commissioner as a reason for the diminution in value of closing stock.”
Where the cost to replace the damaged or looted stock is covered by an insurance policy, the value of such stock would not be deductible for tax purposes. It is more complicated when stock is destroyed as a result of public unrest, terrorism and public violence, as Sasria is the only company that covers this risk.
Taxpayers should check whether they have cover with Sasria.
If Sasria’s cover doesn’t pay back 100% of the value of the stock destroyed or lost, the taxpayer can claim the difference as a deduction for tax.
If the taxpayer’s financial year-end occurs before the insurance claim has been finalised, the taxpayer should claim the full amount of the value of the stock looted or damaged as a deduction for tax in that financial year, and disclose the insurance payment as income in the year in which it receives the insurance payout.
Chong further advises that: “The value of closing stock for this financial year may be diminished due to damage or loss, with no corresponding increase of turnover which would usually be the case where there is a sale of stock. In addition to the loss of trading stock, the loss of revenue and costs of repairs is likely to result in an assessed loss for the taxpayer, which would be carried forward to the next financial year.”
Trading stock – Vat implications
If the taxpayer is a value-added tax (Vat) vendor, the vendor will claim input Vat on the trading stock purchased. This is done on the monthly or bi-monthly Vat return.
Where the trading stock is destroyed, damaged or lost this will not result in a deemed supply.
Where the input Vat amount is larger than the output Vat amount, this will result in a Vat credit, which is a Vat refund to be refunded by Sars.
The receipt of the insurance payout from Sasria would be a deemed supply, and the taxpayer would have to declare the output Vat on this amount.
Chong advises that “where the insurance payment was for a total reinstatement of goods stolen or damaged beyond economic repair – where the vendor would not have been able to claim input Vat on the acquisition on these goods in the first place (such as motor vehicles) – there would then not be a deemed supply on the receipt of the insurance payment”.
Plant and machinery and other assets
Assets used in the production of income such as plant and machinery, and other assets like computer equipment, are deducted for tax over the periods allowed for in the Tax Administration Act. Where the asset has been destroyed or damaged beyond repair, the net value after the deduction of the accumulated wear and tear allowance can be deducted for tax.
Chong explains: “Insurance payments from Sasria to replace the lost plant and machinery would be a deemed supply where the vendor claimed input Vat on the acquisition of the plant and machinery. The taxpayer would need to declare output Vat on receipt on the insurance payments as a result of the deemed supply.”
She adds: “The insurance payments could also give rise to recoupments of the historic allowances claimed where the value of the insurance payout is greater than the tax written-down value. Where the insurance payout is greater than the initial acquisition cost of the plant and machinery [for example, due to inflation], the difference between insurance payout and acquisition cost would also be a capital gain.”
Where the insurance payout is used to acquire replacement assets within 12 months, and the replacement assets are brought into use within three years, the capital gain is spread over the new write-off period of the new asset.
Filing the returns for payroll taxes and Vat
Employers are required to file the return regarding payroll taxes on a monthly basis. Vat returns must be filed on a monthly or bi-monthly (small entities) basis.
Chong mentions the late payment penalties: “Late payments of payroll taxes and Vat after the due dates would result in a 10% late payment penalty and interest from the first of the following month at the current rate of 7% per annum. Late payment of provisional taxes would also result in the 10% late-payment penalty.”
She advises that: “Employers and vendors who are unable to meet their payment obligations should apply for deferral of their payment obligations or a compromise/waiver of tax debts.” If this is not done Sars will take steps to recover the debt.
The Tax Administration Act provides for the remittance of the 10% late payment penalty where there were exceptional circumstances.
Employers and Vat vendors should apply for remittance of the 10% late payment penalty on the basis of exceptional circumstances, which includes “civil disturbance or disruption in services”. This will also allow for interest to be remitted.
Taxpayers impacted by the recent civil unrest should apply to Sars for the remittance of the penalty and interest as soon as possible.
Moneyweb reached out to Sars for comment
- Some smaller entities would have lost all their records, as computers were stolen and/or smashed to bits. Physical documents, including Vat invoices, may have been destroyed by fire. Many offsite storage facilities housing motor vehicles, goods and records were also looted and set ablaze. Do you have any comment?
- Vat registered enterprises which have lost all their stock, as well as business premises that were destroyed, will not have any taxable supplies after this month. This may result in a Vat refund for this month, and Vat returns with no taxable supplies thereafter. Vat refunds often spark an immediate Vat audit. Will implicated taxpayers be similarly treated?
- Will Sars consider automatically waiving the late payment of payroll taxes and Vat for implicated taxpayers?
- Has Sars considered setting up a special unit to deal with all the tax implications of implicated taxpayers?
- There will be many complex tax issues, and many small enterprises have been affected. Has Sars considered putting out a practice note to deal with all the common tax issues?
Moneyweb is still awaiting Sars’s response.