Monday, 13 March 2017

Interest-free Loans made available to trusts

In the 2016 National Budget, the Minister of Finance indicated that legislation would be introduced to deal with interest-free loans made available by natural persons to trusts. Legislation was subsequently drafted and was promulgated on 19 January 2017 as section 7C of the Income Tax Act, No. 58 of 1962, as amended (‘the Act”) by way of section 12 of the Taxation Laws of Amendment Act No. 15 of 2016.

It must be noted that the new section will apply in respect of any loan or advance made by a natural person or at the behest of such person by a company in relation to which a natural person is a connected person under the definition of connected person contained in section 1 of the Act to a trust. 

It must be noted that the new section applies in respect of all loans made on, after, or before 1 March 2017 and therefore applies in respect of pre-existing loans on which no interest is charged.

The legislation provides that where a natural person makes an interest-free loan to a trust, the non-charging of interest will be regarded as a donation subject to donations tax at the rate of 20%.

The benchmark to be used for purposes of ascertaining whether the section applies is the so-called official rate of interest as defined in paragraph 1 of the Seventh Schedule to the Act which currently amounts to 8% per annum. Thus, where a natural person makes an advance or loan available to a trust to acquire assets and no interest is charged, that person will be liable to donations tax on an amount of 8 % of the loan advanced to the trust for each year during which the loan is in existence.

Should interest be charged at a rate lower than the official rate, the difference will attract donations tax in the hands of the natural person.

Thus, where a natural person advanced funds to a trust in an amount of R10 000 000.00 and chooses not to charge interest thereon from 1 March 2017, that will constitute a donation of R 800 000.00 for the 2018 tax year which will result in a liability of donations tax amounting to R 160 000.00 per annum, ignoring for the moment the fact that the first R100 000.00 of donations are exempt from donations tax. Where a loan advanced to a trust does not exceed an amount of R1 250 000.00, 8% thereof amounts to R 100 000.00 and the taxpayer would be entitled to rely on the exemption of donations tax,  which exempts the first R100 000.00 from donations tax.

The donation will be regarded as having been made to the trust by the natural person on the last day of the year of assessment of the trust and donations tax will be payable by the end of the month following the month during which the donation takes effect. Thus the donations tax will be payable by 31 March 2018. The new rules also apply where, for example, a natural person makes a loan to a company to which the natural person is connected and that company in turn, directly or indirectly provides those funds to a trust.

Section 7C(5) provides that no donations tax will arise in respect of loans or advances where:

the trust is a public benefit organisation approved by the Commissioner under section 30(3) of the Act or a small business funding entity approved by the Commissioner under section 30C;
the trust is a special trust as defined in paragraph (a) of the definition of special trust;
the trust used the loan wholly or partly for purposes of funding the acquisition of an asset and the natural person or their spouse used that asset as a primary residence as envisaged in the definition of primary residence in the Eighth Schedule to the Act and the amount owed relates to the part of that loan that funded the acquisition of that residence;
that loan or advance was provided to that trust in terms of an arrangement that would have been regarded as asharia compliant financing arrangement as referred to in section 24JA of the Act.
that loan or advance is subject to the provisions of section 64 E(4) relating to deemed dividends under the dividends tax rules;
that loan or advance comprises an affected transaction as referred to in section 31(1) which is subject to the provisions of that section;
that loan or advance was provided to that trust by a person as a result of the vested interest held by that person in the receipts and accruals of the assets of that trust and the conditions specified in section 7C (5)(b) of the Act are complied with.

Where the natural person makes a loan to a foreign trust and does not charge interest thereon, that loan is subject to the provisions of section 31 and on that basis section 7C should not apply. It is important that where a loan is made available by a South African tax resident to a foreign trust that interest is charged at a rate that would have been charged by person’s dealing at arms’ length thereby complying with the provisions of section 31 of the Act.
Should interest be charged at a rate lower than the official rate,
the difference will attract donations tax in the hands of the natural person.
Unfortunately, the legislature decided not to provide any relief to taxpayers wishing to unwind their trust structures in order to do away with loans advanced by natural persons a trust as was the case when a concession was introduced allowing natural persons to remove primary residences from trust structures when capital gains tax was introduced. Taxpayers were allowed to transfer their homes from a trust for a limited period without paying capital gains tax and transfer duty.

Thus, where a natural person has advanced funds to a trust, it is necessary to review the annual financial statements of the trust to decide what to do and where the trust owns an asset producing income, it may make financial sense to charge interest on the loan which would then ensure that the trust receives a deduction for interest payable to the natural person but remembering that the interest paid will be taxable in the hands of the natural person. It is not possible to generalise and state what course of action a person should follow where they have made an advance available to a trust as it does depend on the totality of the circumstances and it will be necessary to review the taxpayer’s personal situation as well as that of the trust to determine what should be done to alleviate the donations tax that would otherwise become payable if no interest is charged on the loan due by the trust to the natural person.

The question often that arises is whether an amount payable to a beneficiary as a result of an award or distribution made by a trust but not actually paid in cash to the beneficiary will also be subjected to the rules  contained in section 7C. 

The Explanatory Memorandum on the Taxation Laws Amendment Bill published by Natural Treasury on 15 December 2016 indicates that an amount which is vested irrevocably by a trustee in a trust beneficiary, which is used or administered for their benefit will not qualify as a loan or credit provided by that beneficiary to the trust where the vested amount may, in accordance with the trust deed, not be distributed to that beneficiary for example before the beneficiary reaches a specific age, or that the trustee has the sole discretion in terms of the trust deed regarding the timing of and extent of any distributions to that beneficiary of such vested amount.

The Explanatory Memorandum points out that where an amount vested by a trust in a trust beneficiary, which is actually distributed to the beneficiary will qualify as a loan under section 7C where the non-distribution results from an election made by that beneficiary or request by the beneficiary that the amount not be distributed or paid over. It will therefore be necessary to review the trust deed to establish whether awards made, other than cash, to a beneficiary fall within the rules of section 7C or not.

It must be noted that section 7C will apply so long as the loan remains in place between the trust and the natural person which can become expensive when one considers that donations tax at the rate of, currently, 20% will be paid on the interest foregone on the loan made by the natural person to the trust for so long as the loan is in existence. Persons who have interest-free loans in place with a trust should review their position as a result of section 7C.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, March 2017. Image purchased ©"Retirement Savings" by michellegibson 

Friday, 17 February 2017

SARS rules on the PAYE and VAT implications of non-executive directors’ remuneration

National Treasury indicated in the 2016 Budget Review that there are differing views as to whether the remuneration paid to a non-executive director (NED) is subject to employees’ tax, that is, pay-as-you-earn (PAYE) and whether a NED should register for value added tax (VAT).  

It was suggested that these issues be investigated to provide clarity.  In its final response document on the Taxation Laws Amendment Bill, 2016, National Treasury and the South African Revenue Service (SARS) proposed that SARS address the uncertainties relating to VAT and PAYE in relation to NED remuneration in an Interpretation Note.

On 10 February 2017 SARS issued Binding General Ruling (Income Tax) 40 (BGR 40) and Binding General Ruling (VAT) 41 (BGR 41) in which it sets out its interpretation of the Income Tax Act (the Act) and the Value Added Tax Act (the VAT Act) in relation to NED remuneration.  Unlike what has become common practice by SARS to publish binding general rulings in draft format for public comment first, BGR 40 and BGR 41 were issued as final documents without inviting public comment.

Binding General Ruling 40

This BGR sets out SARS‘s interpretation of the employees’ tax consequences of fees derived by non-executive directors as well as the impact of section 23(m) of the Act on non-executive directors claiming deductions against fees derived by them.

SARS points out that since the introduction of the so-called statutory test contained in paragraph (ii) of the exclusions to the definition of remuneration contained in the Fourth Schedule to the Act, there has been uncertainty over the nature of amounts paid to non-executive directors and whether they should be subject to employees’ tax.

The Act does not define the term non-executive director. The King III Report on Governance for South Africa 2009, commissioned by the Institute of Directors of Southern Africa stated that the crucial elements of a non-executive director’s role in a company are that a non-executive director:
·         must provide objective judgement independent of management of a company;
·         must not be involved in the management of the company; and
·         is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.

SARS points out that for the purposes of the BGR it is considered that a non-executive director is to be a director who is not involved in the daily management or operations of a company but attends and provides objective judgment on the company’s affairs and voted board meetings.

The BGR makes it clear that SARS accepts that the nature of the duties performed by a non-executive director mean that they are not regarded as common-law employees. Thus, the only basis on which a non-executive director could be subject to employees’ tax is if the so-called statutory tests apply. Those tests provide that, notwithstanding an amount is paid for services rendered to a person carrying on an independent trade, the recipient is regarded as an employee if two requirements are satisfied, namely, the ‘premises’ test and the ‘control or supervision’ test.

These tests comprise the following:

·         the ‘premises’ test requires that the services must be performed mainly at the premises of the client. Mainly is regarded as meaning a quantitative measure in excess of 50% based on the judgment of Sekretaris van Binnelandse Inkomste vs Lourens Erasmus (Eindoms) Bpk 1966(4) South African 434 (A).

·         the ‘control or supervision’ test envisages either control or supervision which must be exercised over one of the following:

1.1.         the manner in which the duties are required to be performed, or
1.2.         the hours of work

It is required that both of the above tests must be met, that is both the ‘premises test’ and the ‘control or supervision’ test must be fulfilled before the recipient will be regarded as not carrying on an independent trade and therefore receiving remuneration subject to employees’ tax. However, if only one of the above mentioned tests is fulfilled, or neither, the deeming rules cannot apply.

Where the non-executive director is not deemed to be an employee and also is not a common law employee the amounts payable to the non-executive directors will not constitute remuneration.

The BGR makes reference to the fact that it has been suggested that payment made by a company to a non-executive director for time spent preparing for board meetings, for example, which result in payment of an hourly rate for a specified number of hours before each meeting creates some form of control or supervision of the hours of work performed by the non-executive director. SARS indicates that this is not the correct manner in which to apply the ‘control or supervision’ test. 

The fact that there may be a contractual relationship regulating the number of hours for which preparation time may be billed does not result in ‘control or supervision’ being exercised over the hours during which a non-executive director’s duties are performed. Thus, such payments will not satisfy the test in question. It must be noted though that this rule does not apply to non-resident independent contractors.

Section 23(m) prohibits employees and office holders from claiming the deduction of certain expenses. The section requires that expenditure must relate to an office held by the taxpayer and, furthermore, that the taxpayer must derive remuneration from that office.

SARS accepts that directors are holders of an office and thus if they do receive remuneration, section 23(m) will result in the prohibition from claiming deductions applying to that director. Where, however, the non-executive director does not receive remuneration, SARS accepts that section 23(m) cannot apply and the ordinary rules for deductibility of expenditure set out in the Act will apply.

For purposes of the ruling published by SARS, SARS accepts that the non-executive director does not constitute a common law employee. SARS further accepts that no control or supervision is exercised over the manner in which a non-executive director performs his or her duties or their hours of work.

As a result, the director’s fees received by a non-executive director for services rendered in that capacity on a company’s board do not  constitute remuneration  and are not subject to the deduction of employees’ tax. The non-executive director must reflect the income received for services rendered as a non-executive director for tax purposes and pay tax thereon via the provisional tax system.

In addition, SARS accepts that because the amounts received by a non-executive director do not constitute remuneration, the prohibition of claiming expenses under section 23(m) will not apply in relation to the fees received by such persons. The ruling does not apply in respect of fees received by non-resident non-executive directors, in which case the company paying the fees will be required to withhold and deduct employees’ tax. The ruling is published as a BGR in accordance with section 89 of the Tax Administration Act which means that taxpayers are entitled to rely thereon. It must be noted that the ruling has been published such that it will apply from 1 June 2017 until it is withdrawn, amended or the relevant legislation is amended. The terms of the ruling further provide that any ruling and decision issued by the Commissioner which is contrary to BGR 40 is withdrawn with effect from 1 June 2017.

When reference is made to the BGR referred to, the question arises as to what companies should do from the date of publication of the ruling until the date of application thereof, that is, 1 June 2017.

Where, based on an analysis of the law the company is satisfied that it does not exercise supervision or control over the non-executive director and the director is resident, there is a basis in law for the company not to deduct employees’ tax from the fees paid to that director from 10 February 2017 until 31 May 2017. 

Clearly, this does not mean that the amount is not taxable. The ruling and the law merely regulates the manner in which the tax is to be paid by the non-executive director. Where employees’ tax is not withheld by the company, the director has an obligation to include that income for provisional tax purposes and comply with the provisions of the Fourth Schedule, failing which penalties will be imposed for either the late payment or under- payment of provisional tax. Where employees’ tax has been deducted historically in the past, non-executive directors should ensure, if not yet registered for provisional tax purposes that are so registered with effect from 1 June 2017 so that they can adhere to the BGR published by SARS

Binding General Ruling 41

In BGR 41 SARS refers to its conclusion in BGR 40 that an NED is not considered to be a common law employee and that the remuneration paid to an NED is therefore not subject to PAYE.  SARS ruled that for VAT purposes an NED is treated as an independent contractor as contemplated in proviso (iii)(bb) to the definition of “enterprise” in section 1(1) of the VAT Act, in respect of the NED’s activities.

BGR 41 further stipulates that an NED that carries on an enterprise in South Africa is required to register and charge VAT where the value of the remuneration exceeds R1 million in any consecutive 12-month period, and that this applies to ordinary residents of South Africa and to non-resident NED’s.

BGR 41 is made effective from 1 June 2017.  SARS indicated in a media statement issued on 14 February 2017 that where the remuneration paid by the NED was subject to PAYE, the NED would not be required to register for VAT prior to 1 June 2017.  This would allow NED’s who are affected by BGR 41 then approximately three months to register for VAT with effect from 1 June 2017.

In terms of section 66(8) of the Companies Act, 2008, a company may pay remuneration to its directors for their services as directors.  However, such remuneration may be paid only in accordance with a special resolution approved by the shareholders within the previous two years.  In terms of section 64 of the VAT Act any price charged by any vendor for the taxable supply of goods or services is deemed to include VAT.  Therefore, where the NED’s remuneration is not increased by the VAT rate by a special resolution of the shareholders before 1 June 2017, the NED’s remuneration will be deemed to be inclusive of VAT.

The question arises as to whether SARS is correct in its interpretation of the VAT Act as set out in BGR 41.  SARS considers an NED to be an independent contractor “as contemplated in proviso (iii)(bb) to the definition of “enterprise” in section 1(1) of the VAT Act”.  However, proviso (iii)(bb) only applies to services rendered by employees or office holders as contemplated by proviso (iii)(aa) where the remuneration payable constitutes ‘remuneration” as defined in the Fourth Schedule to the Act.  SARS has ruled in BGR 40 that the remuneration paid to an NED does not comprise “remuneration” as defined in the Fourth Schedule, and therefore proviso (iii)(bb) is not applicable as contended by SARS.

The question that remains is whether an NED is carrying on an “enterprise” as contemplated by that definition.  BGR 40 stipulates that SARS considers an NED to be a director who is not involved in the daily management or operations of the company, but simply attends, provides objective judgment and votes at board meetings.  The question is whether such activities of attending and voting at board meetings comprise the supply of “services” as contemplated by the definition of that term as defined in the VAT Act, or whether they are merely the fulfilment of the statutory duties of the NED.  In addition, an NED is elected to that position in his or her personal capacity as contemplated by section 68 of the Companies Act to serve for a specified term, unlike an independent contractor who is appointed under a contract to provide specific services, and who is entitled to delegate the performance of the services. 

The independency of an NED from the management of a company should further not be confused with independency from the company itself.  The company, being a legal entity, cannot on its own make any decision or take any actions.  A company’s mind and soul has been considered by our courts to be that of its board of directors, which includes the NED’s.  It therefore seems that it could be argued that the activities of an NED do not fall within the ambit of the definition of “enterprise” as defined in the VAT Act as contended by SARS in BGR 41.  However, in the absence of a court ruling to the contrary, an NED may be held liable for the VAT, penalties and interest if he or she does not comply with BGR 41.

Gerhard Badenhorst                                                  Beric Croome 
Tax Executive                                                               Tax Executive

Monday, 13 February 2017

Penalties on Underpayment of Provisional Tax

Under paragraph 20(1) of the Fourth Schedule to the Income Tax Act 58 of 1962, amended (“the Act”), if the actual taxable income of a provisional taxpayer, as finally determined under the Act, exceeds R1 000 000 and the estimate made in the return for the payment of provisional tax, that is the so-called second provisional tax payment, is less than 80% of the amount of the actual taxable income, the Commissioner is obliged to levy a penalty, which is regarded as a percentage based penalty imposed under chapter 15 of the Tax Administration Act 28 of 2011 (“TAA”).

The penalty, in the case of a company, amounts to 20% of the difference between the amount of normal tax calculated using the corporate tax rate of 28% in respect of the taxable income amounting to 80% of the actual taxable income and the amount of provisional tax in respect of that year of assessment  paid by the end of the year of assessment.

Paragraph 20(2) of the Fourth Schedule to the Act confers a discretion on the Commissioner to remit the penalty or a part thereof where he is satisfied that the estimate of taxable income was seriously calculated with due regard to the factors as having a bearing thereon and was not deliberately or negligently understated.

The Port Elizabeth Tax Court was recently required to adjudicate a matter relating to the imposition of a penalty on the underpayment of provisional tax in Case No. IT14027, as yet unreported, where judgment was delivered on 7 December 2016.

The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal © "Alert Judge" by junial
ABC (Pty) Ltd was a provisional taxpayer which delivered its return for payment of provisional tax for the 2010 year of assessment on 30 June 2011. In its return of provisional tax it estimated the taxable income for the year of assessment and made payment in accordance with its estimate. Sometime later it appeared that the actual income received exceeded the estimate made by the company substantially. As a result the South African Revenue Service (“SARS”) imposed an underestimation penalty in terms of paragraph 20 of the Fourth Schedule to the Act.

The company lodged an objection which was rejected by SARS and resulted in an appeal which was decided in its favour by the Tax Board. SARS subsequently appealed the decision of the Tax Board to the Tax Court for a hearing de novo and subsequently filed a statement of grounds of assessment and opposing the appeal.

In reply, ABC (Pty) Ltd filed its statement of grounds of appeal according to the Tax Court rules. In its grounds of appeal the company abandoned all of the grounds raised in its original objection and in its notice of appeal and sought to rely only on the procedural ground raised for the first time by the chairperson of the Tax Board upon which he had found in favour of the company.

SARS subsequently filed a notice of exception arguing that the company could not rely on a new ground of objection not previously contained in its grounds of objection.

The company originally estimated its income for the 2011 year of assessment in an amount of R431 638,00 and made payment of provisional tax amounting to R64 905,54. Later, on 30 September 2011 the company made a further payment of R1 377 466,22. Subsequently, the company filed its income tax return reflecting a taxable income for the year of assessment amounting to R5 050 076,00.

By virtue of the large difference between the tax actually due per the final taxable income and the provisional tax paid, SARS imposed the underestimation penalty under the provisions of the Act. SARS considered the objection lodged by the company on the basis that the company did not seriously calculate its tax income as required.

The TAA had not yet come into force by the time that the company’s objection had been disallowed and its notice of appeal lodged. The Tax Board decided that the Commissioner was correct in rejecting the company’s objection and that the appeal should be dismissed on its merits. 

However, the chairperson of the Tax Board mero motu raised a procedural issue under the TAA which had since come into force and decided in favour of the company. The chairperson of the Tax Board reached the view that the manner in which SARS had dealt with the imposition of the penalty was in conflict with chapter 15 of the TAA, especially sections 214 and 215 thereof. 

The Tax Court had to consider whether the company could lawfully amend its grounds of objection even though the matter was already on appeal. Tax Court Rules do not provide for an amendment to the taxpayers’ grounds of objection and the Court therefor referred to the rules of the High Court.

The Tax Court considered the various provisions of the TAA and made the decision that SARS’s exception to the company’s application should be upheld and that the application for the amendment of the company’s grounds of objection should be dismissed. The Court therefore dismissed the company’s appeal and confirmed the penalty imposed on the understatement of provisional tax.

Based on the judgment it is concluded that taxpayers need to exercise extreme caution in calculating taxable income for purposes of provisional tax, failing which they will become liable to the 20% underpayment penalty. 

Furthermore, when a taxpayer disputes the imposition of a penalty, or in fact any assessment, it is important that the grounds of objection are properly formulated as it is not possible to subsequently amend the grounds of objection.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2017. Image purchased ©"Alert Judge" by junial 

Tuesday, 15 November 2016

Final Changes to the Special Voluntary Disclosure Programme

These changes must be read together with my primary article on the Special VDP  (Updated 1/2/2017)

On 26 October 2016 the Minister of Finance tabled the Rates and Monetary Amounts and Amendment of Revenue Laws Bill, Bill 19 of 2016 in Parliament when he introduced the so-called Mini Budget. This Bill contains the legislation regulating the Special Voluntary Disclosure Programme (“SVDP”) which commenced on 1 October 2016 and was to end on 30 June 2017. The Bill, as tabled confirms that the SVDP will run for nine months as opposed to the originally announced period of six months. Subsequently, on 24 November 2016, the Finance Standing Committee extended the deadline to 31 August 2017.

Under the SVDP, qualifying applicants must include in their 2015 tax income an amount equal to 40 per cent of the highest amount of the Rand value of the unauthorised foreign assets at the end of each year of assessment ending on or after 1 March 2010 but not ending on or after 1 March 2015. Thus, the Bill gives effect to the Treasury’s announcement in September that the inclusion rate has been reduced from 50 per cent to 40 per cent.

In addition, the Bill contains a provision whereby the base cost of the unauthorised foreign assets for which an application is lodged under the SVDP will be deemed to have been acquired on 28 February 2015 a cost equal to the highest market value, in foreign currency, of that asset as determined under clause 16 of the Bill. Clause 16 refers to the manner in which the amount to be included in the applicant’s taxable income in 2015 is to be determined. 

This is based on the market value of the unauthorised foreign assets in the relevant foreign currency and translated into South African Rands at the spot rate on the last business day in South Africa at the end of each year of assessment in question, namely, 28 February 2011, 29 February 2012, 28 February 2013, 28 February 2014 and 28 February 2015. 

This is a concession to taxpayers in that the base cost of the foreign assets is effectively increased when determining the capital gain that will be liable to tax when the foreign assets are ultimately disposed of. Instead of relying on the historic cost of the foreign assets taxpayers will be entitled to rely on the market value used to determine the tax payable on those foreign assets under clause 16 of the Bill.

It must be noted that if the proceeds received on the sale of the foreign assets is less than the adjusted base cost, the cost will be limited to the proceeds received. Thus no capital loss will be allowed to be carried forward to a future year in such cases.

Furthermore, the SVDP legislation makes it clear that where any amounts exempt from tax under the SVDP legislation were received or accrued by way of an inheritance or donation, that inheritance or donation must be exempt from estate duty under the Estate Duty Act or donations tax under the Income Tax Act in the hands of the estate or the donor. 

Where, for example an applicant seeks relief under the SVDP in respect of unauthorised foreign assets held by a deceased relative on which estate duty was not paid the estate duty that should have been paid by the deceased effectively falls away. 

Similarly, where an applicant donated assets to a foreign trust on which donations tax should have been paid that donations tax is effectively waived where the donor makes the election available under the SVDP legislation to treat the assets owned by the foreign trust as belonging to them for income tax and estate duty purposes.

The SVDP legislation also deals with controlled foreign companies subject to the provisions of section 9D of the Income Tax Act. Where, for example, an applicant transferred funds from South Africa and invested that in a controlled foreign company and that company is located in a low tax jurisdiction, the income derived by the controlled foreign company should have been declared as part of the income of the applicant. 

In such a case the income that should have been attributed in favour of the applicant will not be liable to tax but the applicant can apply for SVDP relief on the basis that 40 per cent of the highest market value of the controlled foreign company at the end of 2011 – 2015 tax years must be included in the applicant’s income in the 2015 year of assessment.

The SVDP legislation was promulgated in the Government Gazette on 19 January 2017. Prospective applicants must collate the information required to apply for SVDP relief and start submitting applications to the South African Revenue Service (“SARS”) and the South African Reserve Bank (“SARB”) on the basis that applications for SVDP relief must be submitted via the SARS e-filing system, both for tax and exchange control purposes.

It is important that applicants start obtaining the required information as the timeframe to submit application is short, namely  from 1 October 2016 to 31 August 2017.

Dr Beric Croome 
Tax Executive

Monday, 14 November 2016

Reviewing the Tax Ombud’s Annual Report 2015/16

The Tax Administration Act (“TAA”) no 28 of 2011 created the office of the Tax Ombud as an office to deal with complaints by taxpayers which SARS has failed to resolve. 

The Tax Ombud, namely, Judge B. Ngoepe took office in October 2013 and recently released his annual report for 2015/16. From a review of that report it is clear that the number of complaints made by taxpayers to the office is increasing which indicates that taxpayers are becoming aware of the existence of the office and its purpose.

The Tax Ombud identified the delay on the part of SARS in finalising complaints as a cause for concern. From a review the summary of complaints outstanding, which the Tax Ombud is unable to finalise as a result of delays on the part of SARS, too many complaints remain outstanding for an extended period of time.

Furthermore, the Tax Ombud has identified challenges facing its office regarding the fact that the office cannot employ its own staff directly and can only do so in consultation with SARS. The Tax Ombud made representations that the TAA should be amended to allow for his office to employ staff directly without having to consult SARS. 

The Tax Ombud recently launched his Annual Tax Ombud Report 2015/16
© "Executive Research" by sdominick
In addition, currently the office of the Tax Ombud’s expenditure is paid out of the funds of SARS which means that the office of the Tax Ombud does not have financial independence from SARS. It has been proposed that in future the funding of the office of the Tax Ombud will be by way of a budget allocated by the National Treasury and not out of the funds of SARS which should enhance the financial independence of the office.

The proposals to enhance the independence of the office of the Tax Ombud are contained in the tax bills to be tabled in parliament on 26 October.

A further difficulty facing the office of the Tax Ombud is that SARS has failed to update the SARS Service Charter which was last done in 2009. The Tax Ombud’s annual report indicates that the office provided SARS with a draft Taxpayer Bill of Rights for consideration. The Commissioner for SARS indicated recently that an updated taxpayer’s service charter would be released before the end of 2016 and that taxpayers would be able to submit comments before the documents is finalised and adopted.

Taxpayers must remember that the mission of the office of the Tax Ombud is to be an efficient, independent, impartial and fair redress channel for taxpayers who have had complaints against SARS which have not been satisfactorily resolved. 

It must be noted that the office of the Tax Ombud is unable to intervene in legal disputes but is there to assist those taxpayers who have encountered poor service from SARS or other administrative problems in their dealings with SARS. In the 2015/16 period the office of the Tax Ombud received 5904 contacts from taxpayers, not all of those constituted complaints, but also included enquiries received from taxpayers as to the purpose and function of the office of the Tax Ombud. 

A summary of the contacts received by the office of the Tax Ombud is set out below.
Contacts received
No. of Contacts
Queries received
3 771
Complaints not falling within OTO mandate – rejected
Complaints falling within OTO mandate – accepted
Terminated complaints
5 904

From the table set out above, it would appear that out of the 5904 contacts received from taxpayers just under 1000 of complaints received fell within the mandate of the office. During the presentation of the Tax Ombud’s annual report for 2015/16 it was indicated that 87% of all complaints where resolved in favour of taxpayers. Complaints received by taxpayers related predominantly in respect of assessments, dispute resolution, refunds and account maintenance and a host of other issues.

Complaints were received from taxpayers both in South Africa and those outside of the country.

It is disturbing that out of the 961 complaints regarded as falling within the mandate of the office of the Tax Ombud, 460 thereof were unresolved by SARS and 86% of those complaints were already outside the turnaround time available to SARS. It is clear therefore that the level of service which taxpayers can receive from the office of the Tax Ombud is to a large extent dependent upon the turnaround time provided by SARS in dealing with complaints received by the office of the Tax Ombud.

64% of all complaints accepted by the office were service related, with 21% being procedural in nature and 15% administrative in nature. In 2014/15 the office only accepted 409 complaints and this increased to 961 in 2015/16. The annual report contains a summary of the types of complaints received by the office from taxpayers and the time period for which those complaints have been outstanding with SARS. 

It is unacceptable that so many complaints remain outstanding for an extended period of time which would indicate that SARS does not appear to take the resolution of taxpayers’s complaints seriously.

This does not enhance tax compliance as international research has shown that where taxpayers believe they have been treated fairly compliance levels are enhanced.

There were many complaints from taxpayers regarding the delays in payment of refunds which unfortunately continues to be a problem nationally and this has received ongoing coverage in the media. It remains to be seen if the office of the Tax Ombud will regard the delay in finalising refunds as a systemic issue which he will investigate of his own accord to understand the reasons therefore. 

Other complaints identified related to:
·         Delays in issuing tax clearance certificates;
·         Incorrect allocation of payments made by SARS;
·         Victims of identity theft;
·         Non-adherence by SARS to dispute resolution timeframes;
·         Failure by SARS to respond to requests for reasons for assessments;
·         SARS taking collection steps when legally barred from doing so;
·         Hijacking of e-filing profiles.

It would appear that taxpayers are becoming aware of the existence of the office of the Tax Ombud and where they have exhausted SARS’s internal complaints procedures they are resorting to the office of the Tax Ombud in an attempt to seek resolution of their complaints.

It is hoped that the Taxpayer’s Service Charter will be released by the end of the year so the taxpayers know and understand what levels of service they can expect in their dealings of SARS. 

Furthermore, it is important that SARS attends to taxpayers complaints timeously and that in subsequent Ombud’s annual reports, the turnaround time for complaints resolution by SARS will improve.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, November 2016. Image purchased © "Executive Research" by sdominick

Friday, 11 November 2016

Bloomberg's European Tax Services Volume 18, Issue 10 : Publication

My article on the special Voluntary Disclosure Programme.
This article first appeared in European Tax Service, published by Bloomberg BNA,
October 2016, volume 18, issue 10. #VDP
You can subscribe to Bloombergs on-line magazine at
Here is the article:

Monday, 10 October 2016

Davis Tax Committee: Final Report on Estate Duty

On 24 August 2016, with the consent of the Minister of Finance, the Davis Tax Committee (“DTC”) published its final report on macro analysis of the tax system, small and medium enterprises and estate duty.

The committee advised that it would conduct a further investigation into wealth taxes and that this would be dealt with in a separate report.

The estate duty report dealt with estate duty and trusts, and contains a number of recommendations which need to be evaluated by the National Treasury with a view to amending the tax laws.

The DTC recommends that the estate duty regime should be reviewed in order to establish an effective and equitable package of major abatements and rates of duty.

The retirement fund abatement currently available should be retained,  while the maximum threshold for tax deductible retirement fund contributions should be increased from the current cap of R350 000.00 per year to take account of inflation.

The DTC recommends that the inter-spousal estate duty deduction under section 4(q) of the Estate Duty Act should be withdrawn and replaced with a substantial increased primary abatement thus ensuring consistent and equitable treatment for all taxpayers regardless of marital status.

The report recommended that the primary abatement for estate duty should be increased to R15 000 000 for all taxpayers. Furthermore, it has been proposed that the rate of estate duty be increased from 20% - 25% of the dutiable value of an estate exceeding R30 000 000.

Final Davis Tax Committee report tackles marital status discrimination and
primary abatements in estate duty tax law

Image purchased from ©"Senior couple checking their accounts at home" by  

Troels Graugaard 

There has been some discussion regarding the imposition of estate duty and capital gains tax on death and whether that amounts to double taxation. The DTC indicated that Capital Gains Tax (“CGT ”) is regarded as an income tax on capital and not a wealth tax and that estate duty and donations tax are wealth taxes and therefore the DTC does not agree with the contention that estate duty and CGT amounts to double taxation and does therefore not support the call for estate duty to be removed.

It has also been recommended that the current roll-over provisions available relating to inter-spousal bequests under the CGT rules should be repealed and replaced with a generous exemption available on death of R 1 000 000.

Whilst proposing the removal of  the inter-spousal exemption for estate duty and CGT the DTC recommends that the inter-spousal exemption within the donations tax system should also be removed. It proposes  an exemption from donations tax that should be provided for the reasonable maintenance of the taxpayer and their family.

It has been suggested that the transfer of assets in accordance with a divorce order should be subject to exemption similar to the death benefit for estate duty and CGT such that the taxpayer’s death benefit reductions would be reduced by the quantum of any allowances available or utilised during the taxpayer’s lifetime.

National Treasury has been urged to consider the possibility of extending the deeming provisions of section 3(3)(d) of the Estate duty Act to contain deeming provisions such that where an interest-free loan is made available by a person to a trust, the assets attributable to that loan should be included in the deceased’s estate for estate duty purposes. This is in addition to the recent proposal that where a funder makes an interest-free loan available to a trust, the funder be subject to donations tax thereon using the official rate of interest, currently 8% per year.

SARS has been urged to examine all trusts on registration and to investigate the transfer of assets into trusts to ensure the reduction of aggressive tax planning and to provide a level of assurance to taxpayers that their affairs are in order. The DTC proposed that donors and beneficiaries of all vested trusts should be subject to strict disclosure requirements and enforcement measures.

The DTC also recommended that SARS should concentrate on the examination of any trusts in which a deceased person may have enjoyed a vested interest thereby ensuring that all income and capital has been brought to account for both income tax estate and estate duty purposes.

Insofar as the taxation of discretionary trusts is concerned the DTC has recommended that the revenue income must be taxed in the trust in accordance with the definition of the gross income definition contained in section 1 of the Income Tax Act and  that capital gains realised by the discretionary trust should be taxed in the hands of the trust itself prior to those assets or gains vesting in the beneficiary. The DTC agreed that the current flat rate of tax applicable to trusts should be retained and subject to adjustment in line with any changes made in the maximum personal income tax rate.

The DTC recommended that SARS should establish a separate investigations unit to thoroughly comprehensively examine foreign trust arrangements.

The DTC recommended that the estates with a net value of less that R15 000 000 should be exempt from estate duty and that the estates with a value exceeding R15 000 000 should be subject to estate duty at a progressive rate. The report proposes that SARS should establish comprehensive records of all bare dominium and trust arrangements utilised for estate duty purposes and that all holders of a part interests in property should be required to submit tax returns regardless of their income derived.

As indicated above the DTC proposes that where an interest- free loan is made available to a trust the deeming provisions of section 3(3)(d) of the Estate Duty Act should be amended to include deeming provisions such that the asset acquired by the trust as a result of an interest-free loan should be added to the estate when the funder passes away. This would ensure that the interest-free loan no longer confers an estate duty advantage on the funder as a result of the deeming provisions set out in section 3(3)(d) of the Estate Duty Act.

The DTC 

  • considers that the inclusion of a general anti-avoidance rule in the Estate Duty Act has little prospect of success and therefore does not propose such a measure
  • has advised that it will conduct a further investigation into the implementation of wealth taxes in South Africa and that this will be dealt with in a separate report to be compiled by the DTC.
  • did not agree with proposals that trusts should be regarded as corporates for tax purposes as that would mean that trusts would be liable to tax 28% without being subject to dividends tax as is the case with a company. 
  • therefore recommended that the flat rate of tax applicable to trusts be retained at the current level but subject to adjustment from time to time in accordance with any changes made in the personal income tax rate.
  • identified various issues relating to the treatment of foreign trusts and particularly the consequences of paragraph 80 of the Eighth Schedule and section 25B of the Income Tax Act. 
  • recommended that SARS and National Treasury review the legislation applicable to foreign trusts to address the deficiencies noted in the DTC’ s report.

Furthermore, the DTC points out that many  foreign trust arrangements may in fact be managed from South Africa and as a consequence constitute South African resident taxpayers. Thus, taxpayers with foreign trust arrangements need to ensure that those are properly managed abroad and cannot be said to be tax resident in South Africa.

The DTC recommended that offshore retirement funds be further investigated by SARS to establish the nature of those funds and whether the South African resident contributing to such funds has made a donation to that fund. 

The concerns raised by the DTC in this regard relate to the non-payment of donations tax and investments made into the offshore retirement fund and that upon the taxpayer’s death the accumulated investment would not appear to be required to be included in the South African taxpayer’s estate on the basis that no vested right exists in respect of the trust’s accumulated capital income of the foreign trust.

In conclusion, it must be noted that the DTC makes recommendations to the Minister of Finance who will take into account the DTC’s report and will make any appropriate announcements in the course of the normal budget and legislative process. 

Thus, as is the case with all tax policy proposals they will be subject to the normal consultative processes and parliamentary oversight once announced by the Minister but that does not mean that the DTC is entitled to make firm policy proposals which must be accepted by government.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, October 2016. Image purchased ©"Senior couple checking their accounts at home" by Troels Graugaard