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)