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.