Tax implications for Cryptocurrency

A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the
transfer of assets.

Cryptocurrencies are increasingly becoming more popular today. This is a kind of currency that does not have any physical substance and only exists in the digital world. Investors see it as a great investment opportunity since the value of a digital coin like ‘bitcoin’ fluctuates over time. For instance, the value of bitcoin rose from USD32 in 2011 to USD19000 in 2017. However, recent price fluctuations and the lack of a regulated market has caused some uncertainty on how to account for crypto currencies. It is therefore important to understand its legal status and tax implications.

Legal Status of Cryptocurrency

The legal status of cryptocurrency is not yet fully established as it varies from country to country. According to SARS guidelines, cryptocurrencies are neither an official South African tender nor widely used and accepted in South Africa as a medium of payment or exchange. As such, cryptocurrencies are not regarded as a currency for income tax purposes or Capital Gains Tax (CGT). Instead, cryptocurrencies are regarded by SARS as assets of an intangible nature.

Are cryptocurrencies taxable?

The short answer is Yes. The South African Revenue Service (SARS) stated in a guideline issued that it will apply normal income tax rules to cryptocurrencies and will expect affected taxpayers to declare cryptocurrency gains or losses as part of their taxable income. The onus is on taxpayers to declare all cryptocurrency-related taxable income in the tax year in which it is received or accrued. Failure to do so could result in interest and penalties. Taxpayers who are uncertain about specific transactions involving cryptocurrencies may seek guidance from SARS through channels such as Binding Private Rulings (depending on the nature of the transaction).

Tax treatment

Whilst not constituting cash, cryptocurrencies can be valued to ascertain an amount received or accrued as envisaged in the definition of “gross income” in the Act. Following normal income tax rules, income received or accrued from cryptocurrency transactions can be taxed on revenue account under “gross income”. Alternatively such gains may also be regarded as “capital” in nature, and be subjected to “capital gains tax”. Determination of whether an accrual or receipt is revenue or capital in nature is tested depending on the circumstances of each case.

Taxpayers are also entitled to claim expenses associated with cryptocurrency accruals or receipts, provided such expenditure is incurred in the production of the taxpayer’s income and for purposes of trade. If the gain is recognised as capital in nature then base cost adjustments can also be made if falling within the CGT paradigm.

Classification of Gains or Losses

Gains or losses in relation to cryptocurrencies can broadly be categorised with reference to three types of scenarios, each of which potentially gives rise to distinct tax consequences:

(i) A cryptocurrency can be acquired through so called “mining”. Mining is conducted by the verification of transactions in a computer-generated public ledger, achieved through the solving of complex computer algorithms. By verifying these transactions the “miner” is rewarded with ownership of new coins which become part of the networked ledger.

This gives rise to an immediate accrual or receipt on successful mining of the cryptocurrency. This means that until the newly acquired cryptocurrency is sold or exchanged for cash, it is held as trading stock which can subsequently be realized through either a normal cash transaction (as described in (ii) or a barter transaction as described in (iii) below.

(ii) Investors can exchange local currency for a cryptocurrency (or vice versa) by using cryptocurrency exchanges, which are essentially markets for cryptocurrencies, or through private transactions.

(iii) Goods or services can be exchanged for cryptocurrencies. This transaction is regarded as a barter transaction. Therefore the normal barter transaction rules apply.

Value Added Tax (VAT) implications

The 2018 annual budget review indicated that the VAT treatment of cryptocurrencies still needs to be reviewed. Pending policy clarity in this regard, SARS has directed that it will not require VAT registration as a vendor for purposes of the supply of cryptocurrencies.

Things to consider with the VAT increase

As of 1 April 2018, the effective VAT rate will rise from 14% to 15%. There are important aspects to consider as a result of the increase. The VAT rate to apply to transactions depends on the “time of supply rules”. This is the date on which the transaction is deemed to occur according to the VAT Act. The general time of supply rule is the “earlier” of when (a) an invoice is issued or (b) payment is received.

Accounting Systems

Accounting systems must be updated to process transactions at the new VAT rate of 15% from 1 April 2018. However, in some instances, transactions processed after 1 April 2018 may be subject to the VAT rate of 14%. It must therefore be ensured that the accounting system is able to accommodate the different rates. The following are examples of such transactions:

  • Goods delivered or services performed before 1 April 2018 – VAT at the rate of 14% applies to goods (excluding non-residential fixed property) delivered, or services actually performed before 1 April 2018, even though the time of supply is triggered on or after 1 April 2018. This rate specific rule, however, does not apply if the time of supply has been triggered (for example, by the issuing of an invoice or payment being made) before 1 April 2018.
  • Supplies starting before and ending on or after 1 April 2018 – Where goods are delivered or services are performed during a period commencing before 1 April 2018 and ending on or after 1 April 2018, the VAT-exclusive price of the supply must be apportioned on a fair and reasonable basis and allocated to the respective periods. The VAT rate is then applied accordingly. That is, the rate of 14% is applied to the value of supplies before 1 April 2018 and the rate of 15% is applied to the value of supplies from 1 April 2018 onwards. This rule does not apply if the time of supply is triggered before 1 April 2018.This rate specific rule applies to – goods supplied under rental agreements; goods supplied progressively or periodically; goods or services supplied in construction activities; and services rendered over the period concerned, but does not apply to supplies of fixed property (including residential fixed property).
  • Goods delivered or services actually performed on or after 1 April 2018 where the time of supply is triggered between 21 February 2018 and 31 March 2018 – Rate specific rules also apply where the time of supply occurs between 21 February and 31 March 2018 (that is, on or after the date of the announcement of the increased VAT rate, but before the effective date of the increased rate). Under this rule, when goods are delivered on or after 23 April 2018, or services are performed on or after 1 April 2018, but the time of supply is triggered between 21 February and 31 March 2018 as a result of any invoicing or payment in relation to the supply, then VAT at the rate of 15% applies. However, if the goods are delivered before 23 April 2018 (that is, within 21
    days after 1 April 2018), or the services are rendered before 1 April 2018, then the supplies concerned will be subject to VAT at 14%. These rate specific rules do not apply –
    – where it is an established business practice for payments to be made, or invoices to be issued before the supplies are made;
    – in respect of the sale of residential property, certain real rights in residential property and shares in residential share block companies;
    – to the construction of a new dwelling by a construction enterprise.The rate specific rules do, however, apply to non-residential fixed property.
  • Supply of residential fixed property
    Even if the time of supply is triggered after 1 April 2018 due to payment or registration of the property in the purchaser’s name in a Deeds Registry taking place, the supply of residential fixed property could be subject to VAT at 14%. This rate specific rule only applies if –
    – the contract for the supply was concluded before 1 April 2018; and
    –  both the payment of the purchase price and the registration of the property will occur on or after 1 April 2018; and
    – the VAT-inclusive purchase price was determined and stated as such in the agreement.For purposes of this rule, “residential property” includes a dwelling and certain real rights and shares in share block companies relating to a right of occupation of or interest in a dwelling. The construction of a new dwelling by a construction enterprise is also included.
  • Lay-by agreements
    The VAT rate of 14% applies in the case of goods supplied under a lay-by agreement if that agreement was concluded before 1 April 2018 and the lay-by amount to set aside the goods was also paid by that date. The supply of goods under lay-by agreements concluded on or after 1 April 2018 is subject to VAT at 15%.If the lay-by agreement is later cancelled or terminated, the supplier must account for VAT on any amount retained in the VAT reporting period concerned. The old tax fraction of 14/114 must be used where the agreement was concluded and the amount to set aside the goods was paid before 1 April 2018. Otherwise the new tax fraction of 15/115 must be used.

Review existing agreements

Existing agreements and those relating to offers accepted before 1 April 2018 must be reviewed and the other parties to the agreement should be informed of the increase in the total contract price as a result of the increase in the VAT rate. All new agreements entered into from 1 April 2018 should reflect the new VAT rate of 15%.

Using Data Analytics in Audits

Data Analytics is the process of inspecting, cleansing, transforming and modeling raw data with the purpose of discovering useful information, drawing conclusions and supporting decision making.

Traditional audit methods served auditors for decades but as technology advances and stakeholders’ expectations evolve, so does the need for auditors to innovate and transform their approaches in order to keep pace with demand. Advances in technology and software solutions like Computer Aided Audit Tools (CAATS) and Audit Data Analytics (ADA) make it possible for auditors to fundamentally change the way a financial statement audit is done.

What is new about Audit Data Analytics (ADA)?

Classical analytical procedures consist of absolute comparisons of balances with prior year balances or with budgets and forecasts, ratio comparisons and trend analyses. They may also consist of comparisons based on financial or operational data designed to predict the balance in a financial statement classification and form part of the audit judgment process by challenging financial information or the lack of such information.

Audit data analytics is much broader and deeper than traditional analytical procedures. It involves using powerful software tools and statistically complex procedures. These can include: cluster analysis; predictive models; data layering; visualizations; and “what if” scenarios that allow the exploration of new ways to analyse large sets of audit relevant data sourced from internal and external sources in order to produce audit evidence during risk assessment, analytical procedures, substantive procedures and control testing.

What benefits do ADA bring to auditors?

The advances in technologies and software solutions in ADA will enable auditors to improve audit quality in a number of ways, including:

  • deepening the auditor’s understanding of the entity;
  • facilitating the focus of audit testing on the areas of highest risk through stratification of large populations;
  • aiding the exercise of professional skepticism;
  • improving consistency and central oversight in group audits;
  • enabling the auditor to perform tests on large or complex datasets where a manual approach would not be feasible;
  • improving audit efficiency;
  • identifying instances of fraud; and
  • enhancing communications with audit committees.

How ADA can enhance audit quality?

ADA techniques and methods enable audit teams to start analysing client data early in the audit process and begin identifying areas that need further investigation. This enables problems to be identified as early as possible, and audit teams can tailor the audit approach to deliver a more relevant audit by adapting their audit plans accordingly.

ADA can be used to evaluate and assess large volumes of information quickly and can result in better understanding the entity and its systems. This provides opportunity for auditors to make better informed risk assessments so that further audit procedures responsive to those risks are more focused and effective. Since more time is spent focusing on the areas where greater risk is detected, a better and more sophisticated risk analysis, fraud identification and monitoring is possible, enabling increased auditors’ focus.

ADA techniques can also enable auditors to perform more frequent testing at shorter intervals, rather than concentrating audit work around year-end. Engaging in continuous testing and monitoring of data again leads to better risk identification, more accurate control assessments, and more timely and relevant audit reporting.

What is important to ensure that ADA can be used successfully?

It is important to first confirm the feasibility of ADA in an audit. The following would need to be considered:

  • Availability of data
  • Transportability of data
  • The client’s data media and format
  • Costs of using ADA

Once the feasibility of ADA is confirmed the next steps would need to be taken:

  • Decide which areas will be subjected to ADA (amend audit plan accordingly)
  • Define the objectives of each procedure (what outcome is required?)
  • Involve the IT specialists (where necessary)
  • Identify the data fields that would be needed to produce the required reports
  • Discuss the objectives and benefits with the client and identify a primary client contact person that will assist the audit engagement team
  • Request the data files in an acceptable format
  • Perform a test run (where ADA is being used for the first time) to ensure that data is correct
  • Develop and run the test on the data (as developed to address audit objectives)
  • Inspect reports with test results and follow up on any exceptions
  • Evaluate the results and conclude
  • Communicate findings to the client in an understandable manner (charts and graphs with simple notes can be used)

Tax compliance for Small Businesses

Many SMEs face tax-related regulatory burden, and there is little doubt that navigating through all the tax requirements can be a daunting. Tax is levied on income and profit received by a  taxpayer, which includes individuals, companies and trusts.

The three types of taxes that small businesses are required to pay are as follows: (a) turnover tax, (b) employee taxes (PAYE, UIF and SDL) and (c) value-added tax (VAT).

The following is a brief overview of small businesses’ tax obligations, the process and taxation laws.

How do small businesses qualify to pay for taxes?

If a small business is trading as a company or close corporation, it must register for income tax. If the business employs staff it must also register for PAYE, UIF and SDL (if total annual payroll exceeds R500k per annum). If the small business has turnover exceeding R1 million per annum it is required to register as a VAT vendor.

What is Turnover Tax?

Turnover tax is a simplified tax system for small businesses with a qualifying turnover of not more than R1 million per annum. It is a tax based on the taxable turnover of a business and is available to sole proprietors (individuals), partnerships, close corporations, companies and co-operatives. Turnover tax takes the place of VAT (in the instance that you have not decided to elect back into the VAT system), provisional tax, income tax, capital gains tax, secondary tax on companies (STC) and dividends tax. So qualifying businesses pay a single tax instead of various other taxes. It’s elective – so you may choose whether to participate. Below are the tax rates for financial years ending on any date between 1 April 2017 and 31 March 2018:

How do small businesses register for turnover tax?

Small businesses or individuals will need to complete a short test to see if they quality for turnover tax, which is available on the SARS website. If they qualify for turnover tax, they will need to complete and submit the relevant application form. The application should be submitted before the beginning of a year of assessment, which runs from 1 March to 28 February.

Should a new micro business start trading during a year of assessment and wishes to register for turnover tax, an application must be submitted within two months from the date that the business started. Existing micro businesses can register for, or switch to turnover tax before the start of a new tax year.

How do small businesses account for VAT?

In accordance with the VAT Act, if registered for VAT, small businesses have to issue proper tax invoices and charge their customers VAT at 14%, and pay any calculated net VAT amounts over to SARS on a monthly or bi-monthly basis. This payment is calculated by reducing the VAT charged with the input VAT that the small business paid to its suppliers.

What type of records should small business owners keep for tax purposes?

If you’re a small to medium sized business owner, it’s up to you to maintain records of all documents pertaining to your tax return, such as bank statements, sales invoices, credit notes, suppliers invoices and payroll records. These records should not only be kept during the course of the tax year for filing purposes, but you are also required to keep these records.

What are the consequences of not complying with tax requirements?

Interest on unpaid taxes and severe penalties, an Administrative Non-Compliance Penalty is a penalty a taxpayer must pay for non-compliance with various requirements. An admin penalty comprises of fixed amount penalties as well as percentage-based penalties. The penalty amount that will be charged depends on a taxpayer’s taxable income, for each month that the non-compliance continues.

Why is the tax process for small businesses still so complicated?

There are far too many regulations and statutory requirements. The registration system for VAT and payroll taxes is very detailed and can become a long process. Small businesses may consider to acquire the services of an accountant or tax practitioner to assist them in this process.

Has SARS made it easier for small business owners to register and pay for taxes independently, or are they still reliant on tax practitioners?

It is still far too complicated and involved to register for taxes. E-filing has made things easier to process and pay taxes, however this system can still be complicated in certain areas. Many small businesses therefore prefer to make use of tax practitioners, or go to a SARS office for assistance.

IFRS 9 Impairments – Interim and Transitional arrangements applicable to Banks

IFRS 9 will become effective on 1 January 2018 and represents a fundamental change in the impairment of financial instruments. This will have a significant impact on how banks are required to calculate provisions for credit losses (impairments). The South African Reserve Bank (SARB) issued Directive 5 as a transitional arrangement and to provide clarity to banks in South Africa on how to categorise expected credit loss provisions. The transitional arrangement only applies to new provisions that did not exist prior to the adoption of the expected credit loss model.

Categorisation of provisions

As banks transition from the previous “incurred loss approach” in terms of IAS 39 to the “expected credit loss” (ECL) model in terms of IFRS 9, banks must still distinguish which portions must be regarded as “general provisions” and those regarded as “specific provisions”. The accounting provisions should be categorised as follows:

  • Provisions with no significant increase in credit risk since initial recognition as at reporting date (Stage 1 exposures as per IFRS 9) = General provisions
  • Provisions with no significant increase in credit risk since initial recognition as at reporting date but which are credit-impaired (Stage 2 exposures as per IFRS 9) = General provisions
  • Provisions that are credit-impaired as at reporting date (Stage 3 exposures as per IFRS 9) = Specific provisions

Transitional arrangements

The transitional arrangements are as follows:

  • Banks can apply a transition period by sending a notification to SARB before adopting IFRS 9.
  • Banks must apply a 3-year transition period, amortised on a straight-line basis, on a bank legal entity and a bank controlling company (consolidated basis).
  • A once-off calculation needs to be done as follows:
    o A comparison of the common equity tier1 (CET1) capital (which is based on the opening balance sheet by using IFRS 9) with the CET1 capital (which is based on the closing balance sheet by using IAS 39 ie 1 day prior to opening day).
    o The above calculation is made to isolate the impact of using the ECL model in terms of IFRS 9.
    o The decrease in the net qualifying CET1 (reflected as pre- and post-implementation) shall be phased in over a 3-year period (line item 64 of the form BA700).
    o The impact must be reflected net of the tax effect and all deductions such as shortfalls of eligible provisions compared to expected loss and threshold deductions.
    o No separate adjustments shall be made in respect of banks showing changes to shortfalls of eligible provisions compared to expected loss (since this impact would already be included in line item 64 of the form BA700).
    o The IFRS 9 transitional adjustment amount (as explained above) must be shown as follows for each year of the transitional period (as per line item204, column 1 of the BA700 form and line item 12 of the BA600 form):
    Year 1 : 3/4 of adjustment amount
    Year 2 : 2/4 of adjustment amount
    Year 3 : 1/4 of adjustment amount
    o The additional amount of special provisions (not phased in yet) shall be risk-weighted at a risk weight of 100% (this must be included in line item 5, column 1 of the BA700 form) post the adoption of IFRS 9. This amount shall be decreased annually on a straight-line basis over a 3-year period.
  • The impact of deferred tax assets as a result of the adoption of IFRS 9 and changes to taxation rules must be phased-in over a 3-year period.
  • Banks must calculate the difference between deferred tax assets arising from temporary differences, based on opening balance sheet by using IFRS 9, and closing balance under IAS 39 (ie one day prior to the opening day).
  • A portion of the deferred tax difference (which must be calculated as per the table above) shall be deducted (line item 110 of form BA700) from the deferred tax amount arising from temporary differences, net of deferred tax liabilities.
  • Banks using the SA to measure credit risk shall, on a static basis, calculate the difference between the combined stages 1 & 2 provisions (based on opening balance using IFRS 9 and closing balance of general provisions under IAS 39). The increase in general provisions as a result of IFRS 9 must be phased-in over 3 years using the table above. During the transitional period a portion of the increase in line with the table must be deducted from total general provisions before applying the limit of 1.25% of credit risk-weighted assets. 
  • Banks using the internal ratings-based (IRB) approach to measure credit risk must phase in all the new excess provisions exceeding expected losses amounts over the 3-year transitional period using the table above. A portion of the excess amount (in line with the table) must be deducted from total eligible provisions before determine the maximum amount that can be added to Tier 2 capital (0.6% of credit risk-weighted assets).
  • Banks must prepare a set of special purpose financial information within the first 5 months of implementing IFRS 9 for the 1st time, demonstrating the impact of IFRS 9 on opening retained earnings of the first year. This must include a reconciliation from the previously audited retained earnings (before IFRS 9) to the retained earnings balance at that date as adjusted for the IFRS 9 impact.
  • The information must contain a basis of preparation note setting out all the accounting policies relevant to the calculation of the IFRS 9 retained earnings adjustment, and other relevant notes as necessary.
  • The special purpose financial information must be audited within the first 5 months in accordance with ISA 805.

 

Making Materiality Judgements – Practice Statement 2

The IFRS Practice Statement 2 was issued in September 2017 by the IASB to provide companies with guidance on making materiality judgements when preparing financial statements. The practice statement is non-mandatory guidance and is aimed at promoting greater application of judgement. Companies are permitted to apply the guidance in the Practice Statement to financial statements prepared any time after 14 September 2017.
What is meant by “materiality”?

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information.

The need for materiality judgements is pervasive in the preparation of financial statements. It is required to make materiality judgements when making decisions about presentation, disclosure, recognition and measurements. The requirements contained in IFRS standards only need to be applied if their effect if material.

The Materiality Process

The materiality process is a four-step process and incorporates the materiality requirements that a company must apply to state compliance with IFRS Standards.

STEP 1 – Identify information that has the potential to be material

Identify information about transactions, other events and conditions that primary users might need to understand to make decisions about providing resources to the entity. In identifying this information, an entity considers, as a starting point, the requirements of the IFRS Standards applicable to its transactions, other events and conditions.

STEP 2 – Assess whether the information identified in Step 1 is material

In making this assessment, the entity needs to consider whether its primary users could reasonably be expected to be influenced by the information when making decisions about providing resources to the entity on the basis of the financial statements. The entity performs this assessment in the context of the financial statements as a whole. An entity might conclude that an item of information is material for various reasons. Those reasons include the item’s nature or size, or a combination of both, judged in relation to the particular circumstances of the entity. Therefore, making materiality judgements involves both quantitative and qualitative considerations. It would not be appropriate for the entity to rely on purely numerical guidelines or to apply a uniform quantitative threshold for materiality.

Quantitative factors – assessing whether information is quantitatively material is done by considering the size of the impact of the transaction, other event or condition against measures of the entity’s financial position, financial performance and cash flows. Consideration should also be given to any unrecognised items that could overall perception of the entity’s financial position, financial performance and cash flows (eg contingent liabilities or contingent assets). The entity needs to assess whether the impact is of such a size that information about the transaction, other event or condition could reasonably be expected to influence its primary users’ decisions about providing resources to the entity.

Qualitative factors – qualitative factors are characteristics of an entity’s transactions, other events or conditions, or of their context, that, if present, make information more likely to influence the decisions of the primary users of the entity’s financial statements. The mere presence of a qualitative factor will not necessarily make the information material, but is likely to increase primary users’ interest in that information.

STEP 3 – Organise the information within the draft financial statements in a way that communicates the information clearly and concisely to primary users

An entity exercises judgement when deciding how to communicate information clearly and concisely. An entity considers the different roles of primary financial statements and notes in deciding whether to present an item of information separately in the primary financial statements, to aggregate it with other information or to disclose the information in the notes.

STEP 4 – Review the draft financial statements to determine whether all the material information has been identified and materiality considered from a wide perspective and in aggregate, on the basis of the complete set of financial statements.

When reviewing its draft financial statements, an entity draws on its knowledge and experience of its transactions, other events and conditions to identify whether all material information has been provided in the financial statements, and with appropriate prominence.

Revenue recognition – how to account for free gifts and loyalty programmes

IFRS 15 includes specific requirements related to “customer options for additional goods or services” – for example free gifts, discount vouchers, etc – and requires a distinction to be made as to whether this option confers a “material right”. We will look at what is a “material right” and how do you make this assessment.

Performance obligations

A promise deemed to be free or deemed to be a marketing tool is probably a PO. One of the steps of IFRS 15 is the identification of performance obligations in the contract to enable the recognition of revenue. Performance obligations (POs) are promises to a customer that arise every time they enter a contract to supply a good or service. Not all POs need to be explicitly stated in the contract. Contracts may provide customers with the option to acquire additional goods or services either for free or at a discount through loyalty point programmes, customer award credits, sales incentives, contract renewal options, etc. Where the buyer has a valid expectation of an ‘extra’ or ‘free’ good or service being provided this is an additional PO and needs to be considered in the application of IFRS 15.

Material right

Retailers transfer goods directly to their customers on or close to the date the goods are paid for, so many retailers believe that the implementation of IFRS 15 will be straightforward. However, where incentives are offered, like free goods, coupons or loyalty points to keep customers returning this future offer is referred to as a material right under IFRS 15.

If the option provides a right the customer would not have received had they not entered into this contract, (e.g., a right incremental to the rights provided to other customers in the same region or market), the customer is in effect paying in advance for future goods and services. If such an option provides the customer with a “material right”, then the option should be accounted for as a separate performance obligation.

Entities may argue that the cost of the free goods is a marketing expenses. However, if a free good is promised to a customer, then it should be treated as a separate PO.

Accounting requirements

Once the determination has been made that a material right exists and it is a separate PO, a portion of the total transaction price must be allocated to this right. If the stand-alone selling price of the material right is not directly observable, it must be estimated. In determining this value, entities should factor into their estimate:

  • any discounts that could be obtained without exercising the option
  • the likelihood the option will be exercised.

How much is allocated to each item (or PO), will depend on how the transaction price is allocated.

Loyalty points are in substance the same as a coupon or free good. Some of the consideration received in exchange for the goods sold at the time when the points are earned should be deferred until the points are exchanged for goods or services in the future. The loyalty point is providing a right to a good or service to the customer, and therefore is a distinct PO.

Example – Free gift: If a customer buys a football and receives a voucher for a free cap if they buy another football in the following month, part of the consideration for the initial football would need to be allocated to the free cap.

What to consider?

In the process to determine when and how much revenue should be recognised, consideration should be given to all the promises being offered to the customer, those POs must be identified, including those which are implicit.

Example – Customer Loyalty Programme: A customer loyalty programme rewards a customer with one loyalty point for every R10 of purchases. Each point is redeemable for a R1 discount on any future purchases. During a reporting period, customers purchase products for R100,000 and earn 10,000 points that are redeemable for future purchases. The consideration is fixed and the stand-alone selling price of the purchased products is R100,000. The entity expects 9,500 points to be redeemed. The entity estimates a stand-alone selling price of 95 cents per point (totalling R9,500) on the basis of the likelihood of redemption. It was concluded that the promise to provide points to the customer is a PO. The entity allocates the transaction price (R100,000) to the product and the points on a relative stand-alone selling price basis as follows: 

  • Product = R91,324 [R100,000 × (R100,000 selling price ÷ R109,500)] 
  • Points = R8,676 [R100,000 × (R9,500 selling price ÷ R109,500)]

End of Year 1: 

  • 4,500 points have been redeemed and the expectation is still that 9,500 points will be redeemed in total. 
  • The entity recognizes revenue for the loyalty points of R4,110 [(4,500 points ÷ 9,500 points) × R8,676] and recognizes a contract liability of R4,566 (R8,676 less R4,110) for the unredeemed points at the end of the first reporting period.

End of Year 2: 

  • 8,500 points have been redeemed cumulatively. The entity updates its estimate of the points that will be redeemed and now expects that 9,700 points will be redeemed. 
  • The entity recognizes revenue for the loyalty points of R3,493 {[(8,500 total points redeemed ÷ 9,700 total points expected to be redeemed) × R8,676 initial allocation] less R4,110 recognized in the first reporting period}. 
  • The contract liability balance is R1,073 (R8,676 initial allocation less R7,603 [R4110 + R3493] of cumulative revenue recognized).

VAT on Non-Executive Director Fees

What is the Binding General Ruling (BGR) about?

As no control or supervision is exercised by a company over the manner in which a non-executive director (NED) performs his or her duties or the NED’s hours of work NEDs are not regarded as common law employees.

The fees earned for services rendered as a NED do not constitute “remuneration” and should therefore not be subject to the mandatory deduction of employees’ tax (PAYE) by the company concerned. It was clarified that NEDs are carrying on an “enterprise” in respect of services rendered as a NED and should therefore register for VAT where the fees exceed the VAT registration threshold.

Who does the BGR apply to?

The Ruling applies to any person appointed as an NED under the Companies Act 71 of 2008. It does not matter what type of company the NED serves – whether it be a public, private, state owned or non-profit company. This also applies to the extent that the member is a NED, serving in the various committees of a company. This includes, for example, Board committees, Risk and Audit committees, Remuneration committees and Social and Ethics committees.

What about executive directors?

Executive directors are normally regarded as employees of the company which they serve. The BGR only deals with individuals that are appointed as NEDs to serve on the board of a company as contemplated in the Companies Act. As such, NEDs are regarded as independent contractors (sole proprietors) that provide services to the company concerned in their personal capacity and are therefore treated differently to employees of the company.

Should all NEDs register for VAT?

Only those NEDs that earn NED fees and other income from taxable supplies that have, in total, exceeded the compulsory VAT registration threshold of R1 million in any consecutive period of 12 months (or will exceed that amount in terms of a written contractual arrangement). NEDs that earn fees below the compulsory VAT registration threshold can choose to register voluntarily if the minimum threshold of R50 000 has been exceeded and all the other requirements for voluntary registration have been met.

How to determine total fees and income from taxable supplies?

  • The value of all taxable supplies of goods or services made in the course or furtherance of the enterprises conducted by the NED as a sole proprietor must be added together.
  • For example, if, in addition to your NED fees for serving on the board of a company, you also supply forensic accounting services to other clients in the normal course of conducting an enterprise as a sole proprietor, then you need to add the total value of NED fees and the total value of service charges from the forensic accounting business together. The resultant total value of income from taxable supplies in a 12 month consecutive period must then be compared to the R1 million compulsory VAT registration threshold to see if you have to register.
  • Any salary (or any other type of remuneration) earned in the capacity as an employee is not taken into account when determining the VAT registration liability. The reason is that NED fees or other charges for goods or services supplied constitute consideration received for the taxable supply of goods or services, whereas remuneration earned for services supplied to your employer is not.
  • The value of other benefits (for example company car) received by the NED forms part of the calculation of the consideration charged in respect of the NED services. The NED is therefore required to account for VAT based on the open market value of the benefit as well as any other component of consideration which is used to calculate the total of the NED fees.

What about income tax?

The fact that the payments to an NED are not subject to PAYE, does not mean they are not subject to normal tax. The normal tax liability arising from the income earned must be settled via the provisional tax system during the year of assessment.

Effective Date

The levying and accounting for VAT on NED fees earned was already effective from 1 June 2017.

Those NEDs that became liable to register before 1 June 2017, but have not done so, will be required to register and start accounting for VAT from 1 June 2017 on NED fees earned from this date, unless the NED chooses an earlier date of registration.

IFRIC 22 – Foreign Currency Transactions and Advance Consideration

IFRIC 22 Foreign Currency Transactions and Advance Consideration clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after 1 January 2018.

What is the interpretation about?

IAS 21, The Effects of Changes in Foreign Exchange Rates requires an entity to record a foreign currency transaction, on initial recognition in its functional currency by applying to the foreign currency amount, the spot rate at the date of transaction. However, there are circumstances when an entity pays or receives consideration in advance in a foreign currency. This gives rise to a non-monetary asset or liability before recognition of the related asset, expense or income.

Scope of IFRIC 22

  • This Interpretation applies to a foreign currency transaction (or part of it) when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income (or part of it).
  • This Interpretation does not apply when an entity measures the related asset, expense or income on initial recognition:
    • at fair value (FV); or
    • at the FV of the consideration paid or received at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability arising from advance consideration (for example, the measurement of goodwill applying IFRS 3 Business Combinations).
  • An entity is not required to apply this Interpretation to income taxes or insurance contracts (including reinsurance contracts) that it issues or reinsurance contracts that it holds.

What is the Date of Transaction?

The ‘date of the transaction’ for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration. In case there are multiple payments or receipts in advance, the entity should determine a date of transaction for each payment or receipt of advance consideration.

Illustrative Examples

Example 1: On 1/2/2017, Entity A enters into a contract with Supplier B to purchase machinery. Entity A pays Supplier B in advance $1000 on 1/3/2017 and takes delivery of the machinery on 27/3/2017.

Entity A would recognise a non-monetary asset converting the $1000 at the spot exchange rate on 1/3/2017. When Entity A receives delivery of machinery on 27/3/2017, it will derecognise the non-monetary asset and recognise the machinery as an asset (applying IAS 16) at the same exchange rate used at the date of initial recognition (1/3/2017).

Example 2: On 1/2/2017 Entity B enters into a contract to supply machinery for $10,000. The terms of the contract stipulate that an advance payment of 40% should be paid on 1/3/2017 and balance on 30/4/2017. The machinery will be delivered on 1/4/2017.

On 1/3/2017 Entity B receives $4000 and recognizes a non-monetary liability by converting the advance receipt at the spot exchange rate on 1/3/2017.

On 1/4/2017 Entity B:

  • derecognizes the contract liability of $4000 and recognizes revenue using the exchange rate on 1/3/2017; and
  • recognizes revenue of $6000 and a corresponding receivable using the exchange rate on that date (1/4/2017).

The receivable of $6000 recognized on 1/4/2017 is a monetary item. Entity B updates the translated amount of the receivable until the receivable is settled.

Effective Date and transitional provisions

An entity shall apply this Interpretation for annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted. If an entity applies this Interpretation for an earlier period, it shall disclose that fact.

An entity could apply IFRIC 22 initially either:

  • Retrospectively applying IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, or
  • Prospectively to all assets, expenses and incomes in the scope of the Interpretation initially recognised on or after
    • The beginning of the reporting period in which an entity first applies the interpretation or;
    • The beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which an entity first applies the interpretation.

On prospective application of IFRIC 22, an entity should apply it to assets, expenses and incomes initially recognised on or after the beginning of the reporting period as given above for which non-monetary assets and non-monetary liabilities arising from advance considerations have been recognised before that date.