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)

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)

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)

Personal benefit or occupational requirement?

In a recent Supreme Court of Appeal decision, the court had to determine whether the payment by an employer to tax consultants for providing assistance to the employer’s expatriate employees constituted a taxable benefit, as contemplated in the definition of “gross income” in section 1 of the Income Tax Act[1] read with section 2(e) or (h) of the Seventh Schedule.[2]

The taxpayer (in South Africa) belongs to a group of companies that conducts worldwide operations and, as a result, requires their employees to work for short to medium term periods in locations other than in their home countries. The group furthermore operates on a ‘tax equalisation’ basis which is standard practice within the group. This means that the group ensures that the net income of their employees, in whichever countries they are placed, is not less than in their home countries. As part of this arrangement, the taxpayer agreed to take responsibility for the payment of the tax due by expatriate employees of South Africa.

Due to the complex nature of tax legislation relating to expatriates, the taxpayer engaged the services of consulting firms to assist the expatriate employees. This included assistance with registering and deregistering them as taxpayers, the completion of tax returns and dealing with queries and objections to assessments. The taxpayer paid for these services.

The South African Revenue Service (“SARS”) issued additional assessments for the 2004 to 2009 tax years on the basis that the payments to the consulting firms were a taxable benefit in the hands of these employees.

The taxpayer objected to these findings and contended that no advantage had been gained by the expatriate employees by virtue of the use of the consultancy services and the payment by the taxpayer of their fees. The services were procured by the taxpayer in pursuit of the taxpayer’s own tax equalisation policy to ensure that it paid the correct amount of tax.

SARS disallowed the objection and both the Tax Court and High Court agreed with SARS. Upon further appeal, the Supreme Court of Appeal considered the engagement letter entered into between the taxpayer and one of the consulting firms. Although it appeared from the introductory paragraph that the services were rendered to the taxpayer, the description of services clearly indicated the assistance to be provided to the expatriate employees. These were services that the expatriate employees would otherwise have had to pay for personally. The court, therefore, agreed with the court below that these payments constituted a taxable benefit in the hands of these employees.

There are several other relevant considerations that were not dealt with as part of the judgment. It is unclear whether these matters were not in dispute between the parties:

  • Whether output VAT was paid in respect of the fringe benefit (the assumption is that it was not since BMW did not regard the payment as a fringe benefit from the outset) or whether BMW was denied the input tax deduction on the expenses; and
  • Whether the costs incurred were allowed as a deduction in the production of BMW’s income.

The takeaway from the judgement is that when employers incur costs that relate in any way to employees, careful consideration should be made of whether the cost potentially results in a benefit or advantage for the employee that was used for their private or domestic purposes. If this is indeed the case, there are a multitude of potential tax consequences which should be considered.

[1] No 58 of 1962

[2] BMW South Africa (Pty) Ltd v The Commissioner for the South African Revenue Service (1156/18) [2019] ZASCA 107 (6 September 2019)

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)

Distinction between expenses of a capital and revenue nature

On 15 November 2019, the Cape Town Tax Court handed down judgement in ITC24614. It is yet another judgement concerned with the distinction between expenses of a capital nature or revenue nature – arguably the issue over which there has been the most litigation in South African tax history. The importance of the distinction lies in the deductibility of the amount for income tax purposes – while expenses which are revenue in nature are generally deductible, those of a capital nature, are not.

The expense (or loss, in this instance) which gave rise to the dispute, is a fellow subsidiary receivable amount (treated in the taxpayer’s books as a “loan”), which was written off by the taxpayer since it was clear that the fellow subsidiary was unable to repay the amount. SARS argued that the loss was of a capital (as opposed to revenue) nature, and along with denying the deduction, imposed a 50% understatement penalty on the taxpayer.

The origin of the loan was not from funds advanced by the taxpayer to the fellow subsidiary, but rather from trading activities between the parties (i.e. amounts which were included in the taxpayer’s income and the amount deducted therefrom).

The tax court argued as follows:

  • A loss suffered by a taxpayer as a result of writing off indebtedness of another party can be categorised as either capital or revenue in nature and there is no single definitive yardstick for distinguishing between capital and revenue expenditure;
  • Whether an amount lost or written off was advanced or treated as a loan is not in itself determinative of the capital or revenue nature of the loss or expenditure, since the accounting treatment applied by a party is not to be regarded as determinative of either the legal position or the correct tax position. The question is always one of substance rather than form, and is to be decided on all the facts of the case;
  • It is not the treatment of an amount as a “loan” which is determinative, but whether the loss was incurred in the conduct of the taxpayers’ own revenue-earning trade or not; and
  • This was not an investment concerned with supporting an extraneous business of the fellow subsidiary and the loss incurred did not amount to the deployment of the taxpayer’s fixed capital to equip its “income-earning machine”. It was rather an indebtedness that arose from its trading activities with the fellow subsidiary and as such is a clear example of the deployment of floating capital, insofar as it was not intended to remain outstanding but intended to be converted back into cash in the ordinary conduct of the taxpayer’s trade.

In the result, the tax court found in favour of the taxpayer and ordered that the additional assessment be set aside.

Respectfully, the tax court’s findings in this regard are sound, and it is unclear why the matter proceeded to litigation. Where the line between revenue and capital in nature is often blurred, this appeared on face value to be rather straightforward. The take-away from the judgement is that taxpayers should, especially where material amounts are involved, not merely accept additional assessments from SARS and should consult with experts where there are uncertainties.

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) 

Taxation of foreign employment income

South Africa has a residence-based tax system, which means residents are taxed on their worldwide income, regardless of where that income was earned.

South African tax residents living overseas and earning remuneration in respect of services rendered outside of South Africa are exempt from tax in South Africa, provided that the individual is outside of South Africa for a period or periods exceeding 183 full days (60 of which have to be continuous days of absence), during any 12 month period.

There is currently no limitation on the foreign employment income exemption.

From 1 March 2020, the first R1 million earned from foreign service income will be exempt from tax in South Africa, provided more than 183 days are spent outside SA in any 12-month period and, during the 183-day period, 60 days are continuously spent outside SA.

This means that any foreign service income above the first R1 million will be taxed in South Africa at the relevant tax resident’s marginal tax rate.

To prove to SARS that you comply with the section 10(1)(o)(ii) exemption, you need to keep a record of your employment contracts and proof of payment of taxes abroad.

When considering your approach to tax planning you should appoint a Tax Practitioner to ensure that you don’t step onto any landmines.

In order to ensure that the tax system promotes the principles of fairness, it was legislated that foreign employment income earned by a resident should no longer be fully exempt.

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) 

SARS changes to employer statement of account

The South African Revenue Service (“SARS”) has recently made changes with regards to the management of payroll taxes in order for employers to more effectively manage their own accounts by way of a number of functions and tools.

SARS states that the aim of these changes is to allow employers to ensure that all their necessary payroll filings are correctly reflected, payments have been correctly allocated and that all charges to their accounts such as adjustments, interest and penalties have been correctly calculated and recorded.

The most recent changes include changes to the statement of account (“SOA”) which were introduced on 26 April 2019. These changes followed complaints by employers of errors on these accounts.

The purpose of the SOA is to reflect the balance and detailed transactions for a tax year with regards to Pay-As-You-Earn (“PAYE”), the Skills Development Levy, the Unemployment Insurance Fund and the Employer Tax Incentive (“ETI”) in order to allow for employers to complete their Employer Reconciliation Declaration bi-annually.

In order to make the SOA more clear and comprehensible, SARS made changes to the manner in which financial information is being displayed. In this regard, enhanced descriptions were included for liability and non-liability transactions. Also, all liability transactions are now grouped together and sorted in transaction date order. The exemption to this is any non-financial transactions with a date earlier than the first day of the period under consideration.

In order to identify payments and to better reconcile them with the employer’s bank statements, the SOA now also makes provision for receipt numbers for payments and journals.

Furthermore, ETI transactions (which have no impact on the PAYE account) are now grouped together and reflected at the bottom of the SOA.

In addition to the above, employers previously had to request SARS to make payment reallocations and corrections on their behalf. The monthly employer declaration (“EMP201”) and payment reference number (“PRN”) system was introduced to allow employers to amend their declarations and payments themselves. This tool also allows employers to identify and follow-up on incorrect or missing transactions using the consolidated employer SOA and query function as well as to correct unallocated payments.

Employers also have access to their financial accounts online to view and query transactions processed against their accounts in real-time. SARS also allows for a case management system where employers will be able to log queries, they are unable to resolve themselves and to monitor and track SARS’ progress with regards to the query logged.

With the annual employer reconciliations submission deadline now at 31 May 2019, employers are encouraged to use all these amended functions and tools to submit accurate information and to manage their payroll taxes more effectively in the future.

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)

2018: A year in tax

As 2018 has come to an end, we reflect on some of the significant highlights (and lowlights) of the 2018 tax year.

Davis Tax Committee concludes its work

The Davis Tax Committee (DTC) was appointed by the Minister of Finance in 2013, to inquire into the role of the tax system in the promotion of inclusive economic growth, employment creation, development and fiscal sustainability. The committee published several in-depth reports, including VAT, corporate income tax, capital gains and wealth taxes. Many of their recommendations will undoubtedly be considered in the years to come. On 27 March 2018, after five years, the DTC held its final meeting. All reports are available at http://www.taxcom.org.za/library.html.

Significant judgements

Two important, precedent-setting judgements were delivered by our courts during 2018:

  • Sasol Oil: In November, the Supreme Court of Appeal (SCA) found in Sasol’s favour when SARS challenged several transactions that they concluded, on the grounds that the transactions were simulated. The court re-affirmed the tests to be applied to determine if transactions are simulated and entering the realm of tax evasion. This was an R1.3 billion win for the taxpayer.
  • Volkswagen: Regarding the valuation of trading stock, the SCA indicated that valuing stock at net realisable value was contrary to two fundamental principles. Firstly, taxable income is determined from year to year by looking at events that have taken place during that year so that tax is backward-looking, while the net realisable value is forward-looking. Secondly, the effect of using net realisable value is that expenses that will only be incurred in a future year in the production of taxable income in that future year would become deductible in an earlier tax year. On this basis, the court found in SARS’s favour.

Changes to the Act

The yearly legislative cycle ended when the Taxation Laws Amendment Bill was published on 24 October 2018, ending a process that started with the Budget Speech in February. 94 organisations and individuals provided valuable inputs and comments on the draft bill, on issues ranging from venture capital companies to debt reduction. As always, the input from the public and organisations significantly shaped the amendments to the law.

Nugent Commission

In May, a commission into tax administration and governance at SARS was appointed under the leadership of Retired Justice Robert Nugent. Several concerning revelations have been made, which has led to the dismissal of Tom Moyane as Commissioner. A final report from the Commission is due shortly – which will hopefully set the scene for positive changes at SARS.

VAT increase and review

On the back of an increase in the VAT rate to 15% on 1 April 2018, a review was undertaken by a panel of experts on the zero-rating of several goods. It was finally decided that white bread flour, cake flour and sanitary pads will be zero-rated from 1 April 2019, at a revenue loss of R1.2 billion to the fiscus. 

Tribute

Sadly, two respected personalities in the tax fraternity passed away in 2018. Professors Matthew Lester and Lynette Olivier will be remembered for their valuable contributions to the field of tax over many years, both in academics and in commerce. Their works will continue to serve as authoritative sources for many years to come.

Undoubtedly, 2019 will bring as many, if not more exciting changes to the world of tax. It will be particularly interesting to see the political impact on our tax system, given that we are heading into an election year.

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)

Changes to income tax returns for companies

The South African Revenue Service (“SARS”) implemented several changes to the annual income tax returns for companies (the ITR14) on 26 February 2018 as part of SARS’ ongoing efforts to promote efficiency and compliance.

Two new schedules were added to the ITR14. Firstly, companies that wish to claim the learnership allowance in terms of section 12H of the Income Tax Act[1] will now need to disclose details of its registered learnerships in a separate schedule. In terms of this schedule, separate disclosure is required for learners with a disability and learners without a disability for both NQF levels 1 to 6 and NQF levels 7 to 10. Also, the number of learners and the allowance amount for each of these fields must be completed.

The second schedule relates to controlled foreign companies (“CFCs”). In terms of section 72A of the Income Tax Act, resident companies that hold at least 10 percent of the participation rights in any CFC (otherwise than indirectly through a company which is a resident), must submit a return to SARS. The “old” IT10B Adobe PDF schedule has been replaced with a simplified MS Excel IT10B schedule, which enables companies to declare all CFC information in one consolidated schedule that can be uploaded to eFiling as a supporting document, regardless of the number of interests held in CFCs. The new IT10B schedule must be used and uploaded on eFiling for all ITR14s submitted from 1 June 2018 onwards. This is to accommodate taxpayers that already completed CFC information based on the old format.

Additional disclosure requirements were also introduced for groups of companies that prepare consolidated financial statements. In future, companies with subsidiaries are required to submit a complete group structure together with the ITR14. New questions with regards to the country-by-country reporting regulations have also been added.  Companies that are subject to these regulations will have to specify the tax jurisdiction of the reporting entity for the multinational entity group as well as the name of the reporting entity. A number of additional line items have furthermore been added to the tax computation portion of the ITR14 to take other legislative amendments into account.

An example of this new ITR14 is available on SARS’ website for further consideration. Tax compliance officers of companies should carefully consider these new requirements in order to ensure that the relevant ITR14 is completed correctly and that all the required supporting documentation is submitted together with the ITR14. Companies that have already created new tax returns on eFiling but which have not yet been submitted should furthermore consider to what extent these changes will affect such returns.

[1] No. 58 of 1962

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)

Dividends tax returns

With effect from 1 April 2012, dividends tax was introduced to replace the then “secondary tax on companies” (or “STC”). The tax is currently levied at 20%. The dividends tax regime brought with it a requirement for dividends tax returns to be submitted periodically (if even no liability for dividends tax arose) and we wish to bring to our clients’ attention when this would be required.

From 1 April 2012, dividends tax returns were required for all taxpayers who paid a dividend.[1] Although not initially required, but the Income Tax Act was subsequently amended retrospectively to provide therefor. Returns were, from that date, not required for dividends received though. However, through various amendments being introduced, the scope of the dividends tax compliance regime was broadened significantly. With effect from 21 January 2015, dividends tax returns were also made compulsory for all dividends tax exempt (or partially exempt) dividends received.[2] The most significant implication flowing out of this amendment is that from this date, all South African companies receiving dividends from either South African companies, or from dual-listed foreign companies (to the extent that the dividend from the foreign company did not comprise a dividend in specie). The requirement for dividends received from dual-listed foreign companies to also carry with it the requirement for a return to be submitted was however removed a year later, with effect from 18 January 2016.

Where dividends are paid by a company, or dividends tax exempt dividends are received by any person from South African companies, the relevant returns (the DTR01 and/or DTR02 forms) must be submitted to SARS by the last day of the month following the month during which the dividends in question were received or paid. In those instances, where a dividends tax payment is also required, payment of the relevant amount of tax is to be effected by the same date too.[3]

Although the non-submission of dividends tax returns at present to not carry any administrative non-compliance penalties, we always encourage our clients to ensure that they are fully compliant with relevant requirements prescribed by tax statutes. We would therefore encourage our clients to revisit their dividends history and ensure that their records and returns are up to date and as required by the Income Tax Act.

[1] Section 64K(1)(d) of the Income Tax Act, 58 of 1962 (“the Income Tax Act”), as it read at the time.

[2] Section 64K(1A) of the Income Tax Act. Dividends received from regulated “tax free investment” accounts do not require a return to be submitted.

[3] Section 64K(1)(a) to (c)

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)