Can a third party collect my taxes?

In SIP Project Managers (Pty) Ltd v CSARS (29 April 2020), the Gauteng Division of the High Court ruled against SARS on the appointment of a third-party (Standard Bank, in this case) to collect tax debts from taxpayers’ accounts. The matter was an application for declaratory relief against SARS for such an appointment to be set aside and declared null and void, and that SARS repays an amount of R1,261,007 which was paid over by Standard Bank as the third-party agent to SARS.

In its application, SIP contended that no letter of demand was received from SARS as is required in section 179 of the Tax Administration Act. SIP also submitted that if the Court found that the letters were delivered, then these were premature, and that no debt was yet due or payable at that time, and that the 10 business days (as is required in the Admin Act) had not expired before the delivery of the third-party notice.

The Tax Administration Act stipulates that a notice to a third party may only be issued after delivery of final demand for payment, which must be delivered at least 10 business days before the issue of the notice, as well as recovery steps that SARS may take and also further relief mechanisms available to the taxpayer. This is a peremptory step required to be taken before issuing a third-party notice for recovery of outstanding tax debt.

The Court stressed that it was not enough for the existence of final demand. However, that final demand should have actually been delivered in accordance with the Rules for Electronic Communication prescribed in terms of the Tax Administration Act, and if an acknowledgement is not received the communication is not regarded as having been delivered except for via eFiling.

As SARS had not furnished proof of the letter being sent via eFiling, and the there was no other proof of delivery, the Court held that SARS had not delivered a final demand to SIP before appointing Standard Bank as the third-party agent.

The notice issued is therefore unlawful and declared null and void by the Court, and SARS was required to repay the full amount, with costs, to SIP.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

The Supreme Court’s interpretation of tax statutes

In Commissioner for SARS v United Manganese of Kalahari (UMK) (25 March 2020) the interpretation of tax statues in conjunction with other statutes was considered. UMK conducts mining operations and specifically that of manganese. UMK was caught in the crosshairs based on its interpretation of section 6(3)(b) of the Royalty Act, which regulates how mining ventures should calculate their so-called “gross sales”. This figure is vital for the fiscus, as it determines the value of royalties payable by mining companies.

Central to the matter was deductions for transport, insurance, and handling costs (hereinafter referred to as TIH costs) from sales prices, in arriving at a “gross sales” number. SARS contended that these TIH costs should not be taken into account when determining “gross sales”. In other words, there should be no deduction from sales figures, which then results in a higher dutiable amount.

The Supreme Court of Appeal (SCA) was tasked with determining what the correct interpretation of the phrase “without regard to any amount received or accrued for the transport, insurance and handling of an unrefined mineral” and whether TIH costs could be deducted in the calculation of UMK’s gross sales.

The SCA found that the Royalty Act did not stipulate that UMK should account for the expenses separately when determining prices to be paid by clients. The court turned to the purpose of the section, considered its origin, and took international practices and Explanatory Memorandum on legislative amendments into account. Based on this, the court found that the extractor of minerals should not be burdened by paying royalties on amounts expended on transport, insurance and handling, and recovered these as part of the sale price paid by the customers – since these costs are necessarily incurred bringing the manganese into a state as required by the incoterms (such as free onboard or cost freight insurance).

This judgement on the interpretation of statutes is in line with the (now accepted) approach in South African interpretation, being a contextual, purposive, and literal approach. Taxpayers should, therefore, always apply this three-tiered approach when they interpret statutes.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Withholding of employees’ tax during liquidation proceedings

In CSARS v Pieters and others, the Supreme Court of Appeal (SCA) was tasked with deciding whether liquidators were required to withhold employees’ tax from payments made to employees under section 98A of the Insolvency Act. The company in question was an insolvent transport company which had employed approximately 700 people. Forty-five days after the appointment of the liquidators, the employment contracts for these employees were terminated under section 38(9) of the Insolvency Act.

During the liquidation process, the employees accrued salary entitlements, leave pay and severance pay. The liquidators determined the quantum hereof and paid amounts owing to them in terms of the provisions of the Insolvency Act.

SARS objected to the liquidation and distribution (L&D) account lodged by the liquidators, on the basis that no provision had been made for the payment of employees’ tax (PAYE) in respect of the payments made by the liquidators. The Master of the High Court accepted SARS’ objection and ordered the liquidators to amend the L&D Account to reflect the employees’ tax as administration costs and deduct the actual employees’ tax payable from their liquidators’ fee.

As stated above, the key issue that the SCA had to decide was whether the liquidators were obliged to withhold employees’ tax on payments made in terms of section 98A of the Insolvency Act.

SARS argued that the liquidators fell within the definition of “employer” where they made these payments. The Master of the High Court agreed and ordered the liquidator to amend the liquidation and distribution account.

The SCA held that the provisions in the Insolvency Act were clearly social justice provisions aimed at alleviating the plight of being unpaid as an employee as a result of the financial woes of an employer. The court held that the provisions in the Fourth Schedule to the Income Tax Act do therefore not apply to payments made under section 98A of the Insolvency Act. To categorise PAYE as costs of administration would have the effect that income tax, attributable to the company’s trade before liquidation and which thus becomes payable before the liquidation, would also be a cost of administration. That is plainly untenable. On this basis, SARS’ appeal was dismissed.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

A single supply of services: Which VAT rate applies?

On 3 April 2020, the Supreme Court of Appeal delivered a judgement against Diageo South Africa (Pty) Ltd (“Diageo SA”) in a value-added tax (“VAT”) matter relating to the supply of advertising and promotion (“A&P”) services to various non-South African brand owners in the group.

Diageo SA entered into an agreement with the foreign brand owners for the A&P of their products in South Africa. The brand owners invested in A&P to build and maintain brand recognition and generate sales by way of enhanced brand equity. The brand owners relied on Diageo SA to build their brands locally through A&P services in return for a fee. The A&P activities consisted of a range of activities, such as advertising across various channels, brand building promotions, events, sponsorships, and market research. Services that were rendered by Diageo SA included advertising media, website design, website building, social networking, and sponsorship of, amongst others, sports events.

To render the A&P services, Diageo SA made use of promotional merchandise and packaging, sample products, and branded giveaway items. These were given away free of charge to third parties for use or consumption within South Africa for the purpose of promoting the products. Two categories of goods were used. Firstly, the products of the brand owners (stock that has been taken out of the trading stock and used for product sampling or tasting); secondly, point-of-sale items were given to third parties and employees, for no consideration.

The fee charged by Diageo SA to the brand owners represented the cost incurred by Diageo SA in rendering the A&P services, which comprised the supply of both goods and services, to the brand owners. However, the tax invoices rendered by Diageo SA to the brand owners reflected a single total fee for services rendered. It did not differentiate between goods and services.

Why is this an issue? While the services to the brand owners are an exported service that can be zero-rated, the goods were consumed locally in South Africa and should have been standard rated (the principle of VAT being a tax imposed where the product is consumed). Part of the single fee charged to the brand owners should, therefore, carry VAT at the standard rate of 15%, and only a part thereof can be zero-rated.

Diageo SA took the view that the fee was charged on the basis that it constituted a zero-rated supply of the A&P services, since “exported services” in South Africa constitute zero-rated supplies. According to Diageo SA, there was only a single supply of A&P, not a separate supply of services and a separate supply of goods.

The court found that the single supply provided by Diageo SA to the brand owners consisted of both goods and services that were distinct and clearly identifiable from each other. There is no artificial and insensible result or commercially unreal outcome if that view is followed. The fee should, therefore, have been split between a zero-rated service, and goods at the standard rate.

The purpose of Section 8(15) of the VAT Act (in terms of which the decision was made) is to ensure that, in a case like this, Diageo and “other similarly positioned VAT vendors fulfil their obligation to pay VAT at the standard rate on the goods that they have supplied.”

Diageo’s appeal was dismissed and the assessments issued were maintained.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Benefits of a cloud accounting approach

In recent years, cloud technology has revolutionised our day-to-day lives. We post our family photos to Facebook and Instagram, we pay our monthly bills through online banking, we order and pay for our groceries online and we use our smartphones to check our email on the move.

So, if we are utilising the cloud in our everyday lives, why are we not doing the same in our business lives?

Cloud-based accounting software now offers all the functionality and reliability of your tried and trusted desktop accounting system, but with a number of additional benefits that only online technology can deliver.

If your business is looking for a more effective way to manage its financial affairs, here are six reasons for seriously considering a move to cloud accounting.

  1. Mobile access at any time
  • With cloud accounting, you can access your accounts and financial figures at any time, from anywhere. When you use an old-fashioned, desktop-based system, you are effectively tied to the office. Your software, your data and your accounts are all located on a local drive. That limits the access you can have to your financial information. Cloud-based accounting frees you up from this restriction. Your data and records are all safely encrypted and stored on a cloud server, and there is no software application for you to download – you log in and work from your web browser, wherever you have Wi-Fi and an Internet connection. So, wherever you are, you can always check on the status of your business.
  1. A cost and time-effective solution
  • Working online reduces your IT costs and saves you time by keeping you constantly connected to the business.
  • Desktop-based systems require an investment in IT hardware, plus the maintenance of that hardware. You require a server to house the application software and the related data. In addition to that, you will need to pay an IT expert to maintain both the server and the office network – that can be an expensive overhead.
  • Online accounting is carried out entirely from the cloud. There is no costly IT infrastructure for you to maintain, and you can access the software whether you are in the office, working from your dining room table or out at a meeting. Rather than waiting until you are back at the office, you can immediately approve payments, or send out invoices to customers, saving you time and making your financial processes far more effective.
  1. Watertight security and no time-consuming back-ups
  • When you are cloud-based, your accounts and records are all saved and backed up with military levels of encryption. If you have used desktop accounting, you will be aware of the need to back-up your work at the end of each day, and you will also know about the need for updates each time your provider brings out a new version of the software.
  • On a cloud platform, back-ups and software updates become a thing of the past. You’re always logged in to the most up-to-date version of the software, with all the latest functions, tax rates and necessary returns. In addition to that, your work is saved automatically as you go, so you save both time and money on tedious back-up procedures.
  • Security is another area where cloud accounting outperforms a desktop system. Your data is no longer located on a physical server in the office, or on the hard drive of your laptop. All your accounting information is encrypted at source and saved to the cloud. The only person who can access your confidential information is you, plus selected members of your team and advisers.
  1. Share and collaborate with ease
  • Working with colleagues, and sharing data with your advisers, is an extremely straightforward process when you’re based in the cloud.
  • Using the old, desktop approach, you had limited access to your accounts – and that made collaboration with colleagues and advisers difficult. If your accountant needed specific numbers, they would need to be emailed back and forth, or saved to USB memory stick and couriered directly to their office.
  • With an online accounting system, you, your colleagues, your management team and your advisers can all access the same numbers – instantly, from any geographical location. So, collaboration is as easy as picking up the phone and logging in to your online accounting package of choice, with the key numbers in front of you.
  1. Reduces paperwork and is more sustainable
  • Using cloud accounting can deliver the dream of having a paperless office. With traditional accounting, dealing with paperwork, data-entry and financial admin can start to eat into your business time. Everything must be printed out and dealt with in hard copy, and this is slow, ineffective and bad for the environment.
  • With an online accounting system, you can significantly reduce your reliance on paperwork. Invoices can be emailed out directly to clients, removing the costs of printing and postage – and speeding up the payment process. Incoming bills and receipts can be scanned and saved directly with the associated transactions in your accounting software.
  • Because your documents are all digitised and stored in the cloud, there is no need to keep the paper originals – saving on filing space and storage costs.
  1. Better control of your financial processes
  • The efficiencies of online accounting software give you greatly improved control of your core financial processes.
  • Online invoicing function streamlines the whole invoice process, giving you a better view of expected income, an overview of outstanding debts and a clear breakdown of what each customer owes your business.

Are you beginning to see the benefits of a cloud accounting approach for your financial management?

If you are currently using a desktop-based accounting system, and want to see first-hand how cloud accounting can benefit your business, please do get in touch with us for a demo of an online accounting package that best suits the needs of both your business and your financial team.

Give us a shout and let us assist you in moving to cloud accounting.

http://www.nwandaonline.co.za/

Transferring assets from persons to companies

Many business transactions are concluded in terms of section 42 of the Income Tax Act. This section essentially allows a transfer of an asset by a person to a company, in exchange for equity shares in that company, allowing for a tax neutral transaction.The South African Revenue Service has recently issued Binding Private Ruling 339, relating to a transaction in which listed shares are transferred to a collective investment scheme (CIS) in exchange for participatory interests in a collective investment scheme. The parties to the transaction are a resident discretionary investment family trust (herein referred to as the Applicant) and a resident CIS as defined in the Collective Investment Schemes Control Act (herein referred to as the Fund).

The facts

The Applicant holds assets which comprise fixed properties and listed shares (amongst other things) that are held as long term investments. In this instance, the current market value of the shares exceeds the base cost. Some shares have been held by the Applicant for more than three years, and some for less than three years. The settlor (also a trustee of the Applicant) of the trust has been managing the investments of the trust, while the administration and stockbroking have been attended to by a separate wealth management company. It has been decided by the trustees to transfer the share portfolio to a CIS to be professionally managed and administered. For this to happen, the Applicant will enter into an agreement to transfer shares to the CIS fund in exchange for a participatory interest in this fund.

Ruling

SARS has confirmed that the transaction in this instance would qualify as an asset-for-share transaction as per the definition in Section 42(1) of the Income Tax Act. It was further confirmed that:

  • Shares held for longer than three years would be regarded as capital assets, and that upon transfer, the participatory interests received in exchange for the shares would be deemed to have been acquired on the dates that the listed shares were acquired;
  • There would be no capital gains tax consequences from the disposal of the listed shares as the Applicant would be deemed to have disposed of the shares for proceeds equal to the base cost, and similarly, to have acquired the participatory interests in the CIS on the dates that the initial shares were acquired, for the same expenditure incurred that is allowable;
  • There would be an exemption on Share Transfer Tax for the proposed transaction.

Observation

If one ignores the potential application of the general anti-avoidance rules which apply to all arrangements, it is unclear why the participants to this arrangement approached SARS for a ruling, since the technical analysis is rather straightforward.

There has recently been an increase in such straightforward rulings issued by SARS. In general (and not suggesting that the parties in this ruling did so) one gets the sense that parties approach SARS for a ruling to avoid any attack on a transaction. SARS is however well within its rights to attack a transaction on anti-avoidance, despite a ruling having been obtained. Parties should, therefore, guard against applying for ruling on seemingly straightforward technical grounds, to avoid any attack on anti-avoidance. Such a strategy may end up being unsuccessful.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

What you should consider when investing in a business

Investing in a business is a daunting decision. Whether you are investing in a new or established enterprise, there will always be risk involved. The best way to mitigate these risks is to gather as much information as possible on the enterprise you wish to invest in.

But how do you go about gathering this valuable information?

  1. Basic knowledge of the entity will be gathered at the beginning, through a general description of the entity and industry it operates in.

During the basic evaluation, you should determine if the entity is trading in an industry that you wish to align yourself with, whether you have experience with the product or service provided and the current economic environment.

  1. An informal sit-down should be organised, a meet-and-greet if you will. It is generally expected to enter into a non-disclosure agreement with the entity before any sensitive information is shared.

At this point, it is good practice to appoint an independent advisor that can assist with the negotiations and even act as a mediator to ensure that all parties are heard. This way the parties become familiar with one another and you gain insight into the basic operations and management of the entity.

  1. Should you proceed, a due diligence of the entity should be considered.

During the due diligence, a detailed evaluation of the company’s records will have to be performed.

Since there is a vast amount of documentation to consider, some of the core information that should be requested and considered is:

  • Financial statements for the previous 3 to 5 years;
  • Management accounts to date;
  • Dividend history;
  • Forecast of profits, investments and planned asset purchases; and
  • A tax clearance certificate.

Through the above information, you will be able to determine the profitability and growth opportunity of the entity.

  1. Should you like what you see after a due diligence has been performed, a formal sit-down should be arranged between parties to negotiate the terms of the investment.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Distributions to beneficiaries of an employee trust

Binding Private Ruling 330 (“BPR330”) was issued on 3 October 2019 and relates to the tax implications arising from distributions of dividends and other amounts from an employee trust to beneficiaries on the termination of their employment.

The taxpayer (a resident trust) was established for the benefit of the black permanent employees of Company A. The object of the trust was to invest funds from time to time and to use the return on these investments for the economic, health, educational and emergency benefits of its beneficiaries.

The trust funds to be administered in this regard will include donations made to the trust, any assets the trustees may acquire (not limited to shares), any net revenue capitalised by the trustees in their discretion and any other interest, dividends or accruals in favour of the trust.

The trustees of the trust are entitled to, in their discretion, select one or more of all the employees to allocate or distribute all or part of the trust’s net revenue. These employees will only have a claim against the trust from the date of vesting of the benefit and are not entitled to deal in any way with the respective trust funds or interest in the trust before such date.

It is envisaged that the trustees will, from time to time, vest dividends in the employees that the trust receives from Company A. These dividends will be distributed immediately after it is received by the trust.

The trust deed furthermore provides for the allocation of beneficial units. Employees that hold these units may only dispose of them to the trust. Also, the trust must repurchase the units when the employee ceases to be an employee at a repurchase price determined by the trustees in their discretion.

The proposed transaction that was considered in terms of the BPR was the repurchase of a beneficial unit from a beneficial unitholder on the date the unitholder ceased to be an employee. The repurchase was funded by existing funds and not a specific dividend that was received.

In terms of the BPR, the unitholder received an amount as a beneficiary of the trust by reason of the termination of its employment and confirmed that this amount would be included in the employee’s gross income, in terms of paragraph (d) of the definition of “gross income”, and be subject to employees’ tax as provided for by the Fourth Schedule to the Income Tax Act.

Also, all amounts to be distributed to the beneficiaries will constitute remuneration as defined in the Fourth Schedule and will be subject to employees’ tax.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

Intra-group transactions: how it works

The South African Revenue Service (“SARS”) issued a private binding ruling (BPR329) on 27 September 2019 on the tax implications of intra-group transactions and the subsequent sale of the relevant assets to a third party outside the group of companies.

The taxpayer in this regard wants to implement a Broad-Based Black Economic Empowerment transaction in terms of which immovable properties owned by the taxpayer and its subsidiaries (all effectively managed in South Africa) will be transferred to a newly established black-owned third party. The latter will not form part of the taxpayer’s group of companies.

In order for the proposed transaction to achieve its objectives as an asset-based transaction1 the taxpayer’s group is required to undertake an internal restructuring as all the properties owned by the subsidiaries have to be transferred from the taxpayer to the third party.

In this regard, the following steps will be implemented. Firstly, the subsidiaries will sell all their properties to the taxpayer in terms of an intra-group transaction as contemplated in section 45 of the Income Tax Act with the purchase price left outstanding on loan account. The taxpayer will furthermore enter into lease agreements with two of the subsidiaries who in turn will sub-lease it to the relevant group company that occupies the property. This will ensure that the third party acquire existing income streams in addition to ownership of the properties. In the final step, the taxpayer will enter into a sale of property and rental enterprise agreement with the third party for a cash consideration and use the cash so acquired to pay off the loans with the subsidiaries in the transaction’s first step.

The question that arises in this regard is whether the subsequent sale of the assets to the third party will result in a capital gain for the taxpayer or in the alternative, whether the proceeds will constitute “gross income” as defined in section 1(1) of the Income Tax Act.

In terms of BPR329, SARS confirmed that the taxpayer will acquire the properties as capital assets from the subsidiaries who in turn held the properties as capital assets (pursuant to paragraph (a)(i)(aa) of the definition of an intra-group transaction in section 45(1)). Secondly, the sale of the properties by the taxpayer will result in a capital gain for the taxpayer, a portion of which will be ring-fenced in terms of section 45(5). The proceeds from the sale will therefore not constitute gross income as defined in section 1(1).

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)

How technology is influencing the financial world

Accounting has moved from pen and paper to the cloud, monthly payments can be done through online banking apps, and big purchases like houses and other property can be completed using cryptocurrency. For a business to be successful, it is important that is keeps up with the tech and digital world, which has shown financial and time efficiency. The added advantage is that bulky computers, heavy stacks of coffee-stained documents and long queues are a thing of the past.

  • Clouds now manage your information

Personal information, including security, is no longer stored on the ground where everyone else would have been able to access it. As businesses have transferred everything to the cloud, IT systems have evolved accordingly to manage information and keep abreast of current trends.

There is always opportunity to make the cloud system faster, to become more innovative and to add features that enable efficiency in a competitive marketplace. Information is readily available and up-to-date, and this improves financial decision-making speed.

  • You can be everywhere by being right where you are

Tech efficiency has evolved so much just by providing a solution to what people don’t have time to do. Business owners no longer have the time to rush out of the office to make it to the bank on time, and as such, tech has provided apps for services that were time-sensitive.

With this comes safety. Deposits of large sums can now be cashless, through streamlined payments. Other advantages of conducting online payments are integrated billing and mobile payments, right from where you are.

  • Coffee won’t mess on your files

The need to print documents has decreased significantly due to the ease of storing them on internal drives and other tech software. Tax submissions are also catered for electronically because they can be calculated and completed by cloud accounting systems and submitted online. You can also make quicker payments through faster online invoicing.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)