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)

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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)

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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)

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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)

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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)

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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)

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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)

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Cryptocurrencies: Everything You Need to Know

1.1 Background to Bitcoin

Bitcoin, Ether and Litecoin. These are some of the most prominent cryptocurrencies on the market today. Bitcoin is by far the best-known cryptocurrency due to the substantial increase in the price that was experienced in the past couple of years.

Bitcoin is a cryptocurrency – a digital asset designed to work as a medium of exchange that uses cryptography to control its creation and management, rather than relying on central authorities. Bitcoin was developed by an anonymous creator – Satoshi Nakamoto – to enable society to operate with a digital cash system, without the need for third-party intermediaries which are traditionally required for digital monetary transfers.

Should you wish to read the original paper used to introduce bitcoin to the word, please follow this link:  https://bitcoin.org/bitcoin.pdf.

1.2 Tax consequences of cryptocurrencies

For the most part, South Africans have only been able to enter the crypto market locally for a short while, which has drawn the attention of the South African Revenue Service (SARS) to cryptocurrencies.

SARS released a statement on the 6th of April 2018, declaring its stance regarding the taxation of cryptocurrencies. The following is an extract from the statement:

The South African Revenue Service (SARS) will continue to 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 statement further indicates that for purposes of the Income Tax Act, SARS does not deem cryptocurrencies to be a currency (due to the fact that wide adoption has not been reached in South Africa and crypto can’t be used on a daily basis to transact), but rather defines cryptocurrencies as assets of an intangible nature.

The definition has the effect that cryptocurrencies will be treated as any other investment for tax purposes. The onus lies on the taxpayer to declare all cryptocurrency-related taxable income in the tax year which the taxpayer received or accrued.

Should a taxpayer thus trade in bitcoin, the trades will be deemed to be income in nature and the profit and loss on the trades should be included in the taxpayer’s taxable income. However, if the taxpayer holds the bitcoin as a long-term investment (the same way some investors hold a share portfolio for long-term investing), the income derived from the disposal of the bitcoin will be deemed to be capital in nature, resulting in capital gains tax needing to be declared on the disposal.

1.3 Conclusion

Whether you are for or against cryptocurrencies, it is evident that cryptocurrencies have formed a part of the modern era and will likely remain relevant. This new form of currency/investment has caused quite a stir at SARS and taxpayers are advised to familiarise themselves with the tax treatment of these currencies to prevent any unexpected tax consequences.

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The Importance of Saving for Retirement

Saving for retirement can prove to be a very complex task, however, this does not have to be the case. Many people are not making the necessary provisions for retirement. When you start a new job or enter the workforce for the first time, the last thing you think about is saving for retirement, however, you should start saving for retirement as soon as possible, to ensure that you live comfortably in your old age.

It does not matter how far away you are from retirement, you should start saving and not spend this money on other things. As a rule of thumb, it is recommended to save 15% of your gross income, over a period of 40 years, between the ages of 25 to 65. Remember, you will also need to develop a financial plan for major life events – expected and unexpected. This could include anything from medical needs to changing family dynamics.

When thinking about your financial future, it’s important that you make retirement planning a top priority. Today, it’s even more important to start planning for retirement early, as fewer employers are offering pensions and retirement savings. This means that retirement is now more challenging than ever, as traditional pension plans are becoming few and far between. Recently, the responsibility of saving for retirement has shifted from the employer to the employee.

Another reason why it is important to start saving for retirement as early as possible is that longer lifespans have led to people outliving their savings. For example, if you live up to 78 years old, you will be in retirement for a long time. Longer life expectancies also lead to more money spent on healthcare.

If you have not started saving for retirement yet, it’s not too late. Make sure to work with your financial advisor or a trusted financial professional to help you to set out new savings goals so that you can get back on track. With the proper preparation and planning, you can have a comfortable retirement.

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)

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Farming operations in South Africa and the tax implications thereof

Farming in South Africa is like second nature to most South Africans, but the tax implications on farming operations seem to raise some questions when determining a taxpayer’s taxable income. The taxation of farming operations is subject to a unique set of taxation rules. SARS requires that all income and expenses relating to farming operations be separately disclosed so that they can easily assess whether the specific tax rules have been adhered to.

The expression “farming operations”, is not defined in the Income Tax Act and should be interpreted according to its ordinary meaning, which according to Merriam-Webster dictionary is the science, art, or practice of cultivating the soil, producing crops, raising livestock and in varying degrees the preparation and marketing of the resulting products.

Section 26(1) of the Income Tax Act stipulates that the taxable income of any person carrying on pastoral, agricultural or other farming operations shall, in so far as the income is derived from such operations, be determined in accordance with the Act but subject to the First Schedule.

The First Schedule deals with the computation of taxable income derived from pastoral, agricultural or other farming operations. This schedule applies regardless of whether the taxpayer derives an assessed loss or a taxable income from the farming operations.

Furthermore, The First Schedule applies to any person who derives a taxable income from above-mentioned farming operations. The person could be an individual, a deceased estate, an insolvent estate, a company, a close corporation or a trust.

On the other hand, not all activities in farming constitute farming operations. Thus, in order to fall within the First Schedule, a farming operation needs to be the trade of the taxpayer and there must be an overall profit-making intention. If the activities carried out are only for the benefit of the individual, without the prospect of making a profit, the individual will not be carrying on farming operations.

The taxable income that is derived from farming operations is combined with the taxable income from any other sources to arrive at the relevant taxpayer’s taxable income for the applicable year of assessment.  If a loss is created, during the year of assessment, in the production of farming income, this specific loss should be carried over to the next financial year. The loss can only be utilised by income-generating activities that are in the production of farming income.

In conclusion, it is essential to determine the nature of farming activities and whether these activities are farming operations. If so, the First Schedule deals with the calculation of the taxable income.

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)

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