Monday, 9 March 2015

Tax Clearance Certificates issued by the South African Revenue Service

The Tax Administration Act 28 of 2011 (“the TAA”) which took effect on 1 October 2012 contained provisions regulating the issue of tax clearance certificates by the South African Revenue Service (‘SARS’). 

Section 256 of the TAA was substituted in its entirety as a result of section 64 of the Tax Administration Laws Amendment Act 44 of 2014 (“TALAA”). The new provisions governing the issue of tax clearance certificates took effect on date of promulgation of the TALAA, namely, 20 January 2015. 

The ‘Memorandum on the Objects of the Tax Administration Laws Amendment Bill of 2014’ indicated that a new tax clearance system has been introduced by SARS to enhance the functionality by SARS in issuing tax clearance certificates for purposes of applying for government tenders for both taxpayers and those entities that are awarding tenders. 

Under section 256 of the TAA, taxpayers are entitled to request confirmation of tax compliance status regarding tenders, good standing, utilisation of the foreign investment allowance or those persons wishing to emigrate.

A taxpayer seeking a tax clearance certificate is required to apply in the prescribed form and manner to SARS and SARS is then required to issue confirmation of that taxpayer’s compliance status within 21 business days from the date the application is submitted, or such longer period as may reasonably be required if a senior SARS official is satisfied that the issue of the tax clearance certificate may prejudice the efficient and effective collection of taxes.

SARS may only provide confirmation of the taxpayer’s tax compliance status as compliant where that taxpayer is registered for tax and does not have any outstanding tax debt due to SARS, excluding an amount which is in dispute and which has been suspended under section 164, or where the taxpayer has concluded an instalment payment agreement with SARS under section 167 of the TAA or the taxpayer has compromised the tax debt with SARS under section 204.

Furthermore, SARS may not issue confirmation that the taxpayer is compliant where the taxpayer has any return outstanding to SARS, unless the taxpayer has made an arrangement with SARS regarding the submission of that return.

Previously, section 256 required that there were no outstanding requests for information and that has been removed as a requirement for confirmation of the taxpayer’s tax compliance status, but that amendment will be reviewed during the 2015 legislative cycle.

Once SARS is satisfied that the taxpayer is compliant, it must issue confirmation of the taxpayer’s compliance status in the prescribed format, and include the original date of issue of the tax compliance status confirmation, as well as the taxpayer’s tax reference number and other identifying details.

Generally, SARS is not entitled to disclose information regarding a taxpayer to any other person, in light of the confidentiality provisions contained in Chapter 6 of the TAA. However, section 256 provides that SARS may confirm the taxpayer’s tax compliance status upon request by an organ of state or any other person to whom the taxpayer has presented the tax compliance status confirmation.

Where SARS discovers that it has issued the confirmation of the taxpayer’s compliance status in error, or that the confirmation was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts, SARS may alter the taxpayer’s tax compliance status from compliant to non-compliant, so long as it has given the taxpayer an opportunity to respond to the allegations of at least 14 days prior to the withdrawal of the confirmation of the taxpayer’s compliant status.

The taxpayer will be regarded as non-compliant from the period commencing on the date that the taxpayer no longer complies with the requirements specified in section 156(3) of the TAA, and ending on the date that the taxpayer regularises their non-compliance.

SARS has indicated that it is intended that where a taxpayer’s request for confirmation of tax compliance status is successful, it will issue the taxpayer with a personal identification number (‘PIN’) for their specific request. When the PIN is utilised by any other person, that person will be able to ascertain the compliance status of the taxpayer on a real time basis on the date on which that PIN is utilised. It is intended that the tax compliance status process will allow taxpayers to print a tax clearance certificate in the previous format from the new system during the phasing in period of the new real time tax clearance status system, by utilising the PIN provided by SARS.

Unfortunately, cases have been encountered where taxpayers have applied for tax clearance certificates, only to be declined on the basis that they have an outstanding tax debt, which relates to an amount in dispute for which the taxpayer has applied for postponement under section 164 and to which SARS has not responded. This flows from the fact that applications for suspension of payment are not tracked on the SARS system and too often SARS delays making a decision on whether the taxpayer’s request for suspension is granted or not, and hopefully this deficiency will be rectified in the future.

Dr Beric Croome Tax Executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review, March 2015. Image by Judy Croome

Monday, 9 February 2015

Effect of Taking Professional Advice on Imposition of Understatement Penalties and Interest

On 18 November 2014 Wepener J delivered judgment in the case of Mr Z v The Commissioner for South African Revenue Service, case number 13472 in the Tax Court Johannesburg (as yet unreported), which dealt with how amounts paid by the taxpayer to an erstwhile shareholder of a company in which the taxpayer had invested should be dealt with for capital gains tax purposes, as well as the imposition of the understatement penalty and interest imposed on the underpayment of provisional tax.

The judgment indicated that during November 2003, A Investments Ltd (“A”) disposed of its shareholding in B (Pty) Ltd. During August 2007 Mr Z, together with another shareholder, Mr X, disposed of 600 000 ordinary shares in B (Pty) Ltd to F. The shares represented 30% of the total issued share capital of B (Pty) Ltd with the taxpayer holding 27,005% and Mr X holding the balance.

Mr Z disposed of his shares for R841,655,833. A Investments Ltd informed the taxpayer that it had discovered that Mr Z had withheld material information from it when he represented A during its transaction with F. As a result, A instituted action against Mr Z on the basis of the 2003 transaction and in particular Appellant’s failure, as A’s agent to inform A that F would be prepared to extend minority protections to A. 

The dissatisfied shareholder claimed an amount of R925,000,000 from Mr Z on the basis that that was the value of the shares and claims it would have held and which it lost by virtue of having disposed of its shares and claims in B (Pty) Ltd. Mr Z concluded a settlement agreement with A to pay it an amount of R694,888,271 in full and final settlement of its claim. Mr Z reflected the net amount derived by him as proceeds for capital gains tax purposes and SARS subsequently increased the proceeds of R216,218,233 originally disclosed by the taxpayer by an amount of R625,437,601 to an amount of R841,655,833. 

The Tax Court reached the conclusion that SARS was correct in disregarding the amount paid by the taxpayer to A of R625,437,601 and thus effectively taxed the taxpayer on an amount he never retained. The court reached the view that the Eighth Schedule to the Income Tax Act No. 58 of 1962, as amended (“the Act”) afforded no relief to the taxpayer in the particular circumstances. This aspect is not discussed further in this article.

SARS imposed an understatement penalty of R46,907,820 on the amount paid by Mr Z to A. In addition, SARS imposed interest on the alleged underpayment of provisional tax in terms of section 89quat of the Act.

The Commissioner adjusted the taxpayer’s taxable income for the 2008 year of assessment and applied the provisions regulating the understatement penalty in terms of section 221 of the Tax Administration Act No. 28 of 2011 (“TAA”).

The Commissioner reached the conclusion that the taxpayer had not taken reasonable care in submitting the tax return to SARS or alternatively that there were no reasonable grounds for the tax position taken. The Commissioner applied the understatement penalty table with the result that the penalty was imposed at a level of 75%, which was the rate of penalty applicable at that time.

Mr Y gave evidence on behalf of SARS and indicated that the 75% penalty was determined by taking account of the fact that there were no reasonable grounds for the tax position taken by the taxpayer.

Most of the provisions of the TAA took effect on 1 October 2012 and at the time of its commencement, the level of penalty imposed on the basis of no reasonable grounds for tax position taken amounted to 75%. That was subsequently reduced to an amount of 50% by way of the Tax Administration Laws Amendment Act No. 39 of 2013 with effect from 16 January 2014. However, the court indicated that should the court decide that Mr Z had no reasonable grounds for the tax position taken the penalty provided for is 50%.

The court indicated that Mr Z’s unchallenged evidence was that the tax position he took was based on his belief that his calculation of capital gains tax was correct and that there was no intention to evade or delay the payment of tax. The taxpayer sought professional advice regarding the completion of his tax returns and denied being negligent in the returns submitted to SARS. Wepener J accepted that the taxpayer obtained professional advice regarding the submission of his tax returns to SARS and the deduction which was the subject of dispute in the case.

The court concluded that the provisions of section 270(6D) of the TAA applied and that the taxpayer had reasonable grounds for the tax position taken by him. The court reached the conclusion that there was a substantial understatement with the result that that triggered the payment of a 10% understatement penalty. The court decided that there were no extenuating circumstances as envisaged in section 270(6D) of the TAA. 

In the result the court decided that the understatement penalty should be reduced to an amount of 10%, taking account of the fact that the taxpayer had relied on advice received from his accountant and others.

The court then considered the imposition of interest under section 89quat of the Act and by virtue of the fact that the dispute related to the 2008 year of assessment, the basis on which the court had to decide whether to remit the interest, was whether the taxpayer had acted on reasonable grounds.

The Court made the point that when the court is required to establish the correctness of the exercise of a discretionary decision, which is subject to objection and appeal, the matter must be reheard by the Tax Court. The court referred to Juta’s Income Tax where the following is stated:

“The test as to whether the grounds are reasonable, is objective, in relation to actions of the taxpayer. A mere subjective belief by the taxpayer that a deduction should be allowed, without taking advice on the matter, is unlikely to be reasonable. On the other hand, the reliance by the taxpayer on expert advice, even if this is wrong, will in most cases constitute reasonable grounds for the action taken.”

The court came to the conclusion that the taxpayer’s reliance on the advice received was reasonable and therefore directed that the Commissioner should waive the section 89quat interest in full.

Unfortunately, the discretion conferred on SARS to waive interest on the underpayment of provisional tax has been significantly narrowed, such that SARS may only take account of circumstances beyond the control of the taxpayer in respect of years of assessment ending on or after 1 November 2010. For individual taxpayers, the restricted discretion applies with effect from years of assessment ending on or after 28 February 2011.

SARS relied on an internal template setting out the basis on which it determined the understatement penalty applicable to the taxpayer in this case. SARS led evidence relating to the template and the reasons contained thereon, which sets out the process SARS adopted in reaching the conclusion that the taxpayer in this particular case had no reasonable grounds for the tax position taken by him. Taxpayers who are subjected to understatement penalties should therefore request reasons from SARS regarding the imposition of the understatement penalty and must remember that where the understatement penalty is challenged, the onus to satisfy the court as to the penalty imposed lies upon SARS in terms of section 102(2) of the TAA.

It is essential that taxpayers exercise caution in submitting their tax returns to SARS and seek professional advice from a registered tax practitioner which may assist in reducing the exposure to the imposition of the understatement penalty where SARS takes a different view regarding the tax treatment of an amount received or a deduction claimed. 

Remember, too, that where a taxpayer has obtained an opinion from a registered tax practitioner in the manner prescribed under section 223 of the TAA, SARS is compelled to waive the penalty which would otherwise have been imposed. This was not the issue before the court, as the taxpayer did not hold a written opinion for the 2008 year of assessment, as that return was filed long before the TAA took effect. 

The fact that the taxpayer took advice at the time of completing his returns was sufficient for the court to show that the taxpayer had acted reasonably and therefore the level of penalty to be imposed was 10%, which under the penalty table is the lowest possible level of penalty which can be imposed.

Dr Beric Croome, Tax Executive: ENSafrica Inc. This article frist appeared in Business Day, Business Law and Tax Review, February 2015. Image purchased from  iStock.

Thursday, 29 January 2015

Amendments to the definition of relevant material for purposes of the Tax Administration Act

Introduction

The Minister of Finance tabled the Tax Administration Laws Amendment Bill No. 14 of 2014 in Parliament on 22 October 2014 at the same time that he introduced the 2014 Medium Term Budget Policy statement. The Bill as introduced by the Minister of Finance, also contained the memorandum on the objects of the Tax Administration Laws Amendment Bill of 2014. 

This article will consider certain of the amendments proposed to the Tax Administration Act No. 28 of 2011 which will take effect once the Bill is enacted.

Amendment of section 45 of the Value-Added Tax Act No. 89 of 1991

Clause 32 of the Tax Administration Laws Amendment Bill (‘TALAB’) proposes amending section 45 of the Value-Added Tax Act (‘VAT Act’), which regulates the payment of interest to a vendor, where SARS delays a refund payable to the vendor.

It is important to note that it was previously proposed by way of section 271, read with paragraph 134 of schedule 1 to the Tax Administration Act No. 28 of 2011 (‘TAA’) that with effect from a date to be determined by the President by proclamation in the Gazette that a delayed refund would not be payable if a person fails to, without just cause, submit relevant material requested by SARS for purposes of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. 

In addition, the provision applied where a taxpayer failed to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account. The date on which the proposed amendment was to take effect was not determined as it related to interest which was dealt with in Government Gazette 35687 published on 14 September 2012.

Clause 32 of the TALAB now removes the reference to where a taxpayer fails to submit relevant material requested by SARS for purpose of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. Thus, the fact that a taxpayer fails to submit the necessary material to SARS will not prevent the payment of interest to the taxpayer once the refund is finalised and paid to the taxpayer. 

The requirement to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account remains in place. Thus, where a taxpayer fails to comply with that requirement, no interest will accrue on the amount refundable from the date that the refund is authorised until the date that the person submits the bank account particulars. 

The proposed amendments will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum on this particular provision contained in the TALAB indicates that in practice it has proven factually difficult and impractical for SARS to apply the rules set out in the proposed amendment.

Clause 37 of the Tax Administration Laws Amendment Bill

Clause 37(b) of the TALAB proposes that the definition of “relevant material” in section 1 of the TAA will in future provide as follows:
“means any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3”

Previously, the definition of “relevant material” did not refer to “in the opinion of SARS”. The rationale for the above amendment as set out in the Explanatory Memorandum on the Objects of the TALAB is to prevent protracted disputes about the information which SARS believes it is entitled to under the information gathering powers contained in the TAA.

The Explanatory Memorandum points out that the proposed amendment seeks to clarify that the statutory duty to determine the relevance of any information, document or thing for the purposes of, for example, a verification or audit is that of SARS and the term “foreseeable relevance” does not imply that taxpayers may unilaterally decide relevance and refuse to provide access thereto. SARS indicates that in practice taxpayers are deciding what information should be submitted to SARS and what information should not be so provided.

In addition, the Explanatory Memorandum indicates that according to the literature, which is not cited in the Explanatory Memorandum, the test of what is foreseeably relevant for domestic tax application would have a low threshold and the application of what is “foreseeably relevant” follows the following broad principles:

·         Whether at the time of the request there is a reasonable possibility that the material is relevant to the purpose sought;

·         Whether the required material, once provided, actually proves to be relevant is immaterial;

·         An information request may not be declined in cases where a definite determination of relevance of the material to an ongoing audit or investigation can only be made following receipt of the material;

·        There need not be a clear and certain connection between the material and the purpose, but a rational possibility that the material will be relevant to the purpose; and

·         The approach is to order production first and to allow a definite determination to occur later.

The Explanatory Memorandum points out that the protection of taxpayer information received by SARS is confidential and protected under chapter 6 of the TAA and may only be disclosed to another party in certain specific circumstances referred to in chapter 6 of the TAA.

The Explanatory Memorandum indicates that SARS received comments that SARS should provide reasons for each request for information, explaining why the material requested is considered relevant. SARS indicates that this is impractical when auditing taxpayers and referred to the case of Australia and New Zealand Banking Group Limited v Konza, [2012] FCA 196, which SARS relies on as a basis not to justify why material requested is in fact relevant. It is unfortunate that SARS does not draw attention to the fact that Australia does not have a Bill of Rights enshrined in a constitution as is the case in South Africa where the right to administrative justice set out in section 33 of the Constitution of the Republic of South Africa is paramount.

SARS indicates that where a taxpayer is dissatisfied in the manner in which SARS requests information, taxpayers have the following remedies:

·         Request SARS to withdraw or amend the decision to request material in terms of section 9 of the TAA;

·         Pursue the internal administrative complaints resolution process of SARS;
·         Approach the Tax Ombud;
·         Approach the Public Protector.

SARS refers to the internal administrative complaints resolution process of SARS and it is unfortunate that these have not been clarified and publicised on SARS’ website. It is questionable whether the particular issue falls within the mandate of the Tax Ombud as set out in the TAA.

Section 17 of the TAA sets out the limitations placed on the Tax Ombud’s authority and the Tax Ombud may not review SARS’ policy or practice generally prevailing other than to the extent that it relates to a service matter or procedure or administrative matter arising from the application of the provisions of a tax Act by SARS. It may therefore be possible for a taxpayer to argue that where SARS exceeds its powers enshrined in the TAA in requesting information which is clearly irrelevant, that a taxpayer may be entitled to file a complaint with the office of the Tax Ombud.

Where SARS chooses to undertake a field audit at the taxpayer’s premises in terms of section 48 of the TAA, it is important that the material requested falls within the scope of the audit as required under section 48 of the TAA. Section 48(2) requires that SARS issues a notice to a taxpayer indicating the initial basis and scope of the audit or investigation and this should, restrict the scope of information requested and should not entitle SARS to call for all documents and records pertaining to the taxpayer which bears no relationship to the scope of the audit underway.

Taxpayers must remember that under the provisions of the common law, SARS is not entitled to request information which is protected by legal professional privilege. Generally, where a taxpayer has sought advice from an attorney or an advocate, such advice is protected by the so-called advice privilege and furthermore, where a taxpayer is engaged in litigation the documents relating to that litigation will, depending on the circumstances, also be privileged. Based on the decision of the court in Heiman Maasdorp and Barker v Secretary for Inland Revenue and Another 1968 (4) SA 160 (W), 30 SATC 145 the court upheld the principle that SARS is not entitled to request information which is protected by privilege. 

It is unfortunate that the information gathering powers conferred on SARS in sections 46 to 48 do not deal with the question of documents which may be subject to legal professional privilege, as is the case where SARS conducts a search and seizure operation where specific rules are in place to regulate the treatment of documents which may be subject to legal professional privilege. Section 64 of the TAA regulates the process relating to search and seizure operations but does not unfortunately apply specifically to requests for information or field audits conducted by SARS. 

On many occasions SARS will also request copies of advice and opinions obtained by a taxpayer from a person other than an attorney or an advocate and it is questionable whether such information would constitute relevant material as envisaged in section 1 of the TAA. An opinion is generally an analysis of the law and an interpretation thereof which would in a legal dispute be regarded as inadmissible in court as the court is required to adjudicate on matters of legal interpretation. Taxpayers need to consider SARS request for opinions and make a decision whether SARS is lawfully entitled to call for such opinions.

Amendment to the definition of “return”

Clause 37(c) of the TALAB proposes amending the definition of “return” to provide as follows:
“means a form, declaration, document or other manner of submitting information to SARS that incorporates a self-assessment, is a basis on which an assessment is to be made by SARS or incorporates relevant material required under section 25, 26 or 27 or a provision under a tax Act requiring the submission of a return;”

It is therefore clear that the definition of “return” will be expanded and the Explanatory Memorandum indicates that the amendment seeks to clarify that a return is also an information gathering mechanism to obtain third party information which may not on its own constitute a basis of an assessment but is relied on by SARS to verify the correctness of returns submitted by taxpayers. In addition, the purpose of the amendment is to ensure that SARS obtains information required for purposes of SARS meeting its obligations to exchange information under international tax agreements.

The intended amendment seeks to ensure that the definition of a return is more closely linked to the provisions in the TAA and other tax Acts dealing with returns.

Amendment to section 46 of the TAA

Clause 46 of the TALAB contains a requirement that where SARS requests relevant material under section 46, the taxpayer must submit that relevant material to SARS in the format, which must be reasonably accessible to the taxpayer.

Where, for example, taxpayers possess relevant material in electronic format, they would be obliged to make that version of the material available to SARS once the amendment takes effect. SARS indicates in the Explanatory Memorandum that historically taxpayers would only supply SARS with printouts of the electronic version of the material. Thus, this amendment seeks to ensure that where a taxpayer receives a request for relevant material from SARS in terms of section 46 of the TAA, it must be supplied in the format required by SARS if reasonably accessible to the taxpayer. Where, for example, a taxpayer does not maintain electronic records, it would not be acceptable for SARS to insist that the taxpayer captures manual records electronically to suit SARS purposes. Furthermore, a taxpayer should not be obliged to manipulate date and supply it in the particular format which SARS requires if that is not readily available and accessible to the taxpayer.

Tax compliance status

Clause 64 of the TALAB amends section 256 of the TAA which regulates the process regarding the issue of tax clearance certificates to taxpayers.

SARS is compelled to issue or decline to issue the confirmation of the taxpayer’s compliance status within 21 business days from the date on which the taxpayer’s application is submitted or such longer period as may reasonably be required where a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.

Furthermore, a  senior SARS official may provide a taxpayer with confirmation of the taxpayer’s compliance status as compliant only where they are satisfied that the taxpayer is registered for tax and does not have any outstanding tax debt, other than a tax debt contemplated in sections 167 or 204, or where a tax debt has been suspended under section 164 or does not exceed the amount referred to in section 169(4). Furthermore, the tax clearance certificate may be denied where a taxpayer has an outstanding return, unless an arrangement acceptable to the SARS official has been made for the submission of the return in question.

Section 256(4) of the TAA will provide that a confirmation of tax compliance status must be issued in the prescribed format and refer to the original date of issue of the tax compliance confirmation to the taxpayer, the name, taxpayer reference number and identity number or company registration number of the taxpayer, the date of the confirmation of the tax compliance status of the taxpayer to an organ of state or a person referred to in section 256(5) of the Act and the confirmation of the tax compliance status of taxpayer as at the date referred to above.

SARS will be entitled, in terms of section 256(5) of the TAA, to confirm a taxpayer’s compliance status as at the date of the request by an organ of state or a person to whom the taxpayer presented the tax compliance status confirmation, despite the provisions protecting confidentiality of taxpayer information in chapter 6 of the TAA.

Section 256(6) of the TAA will provide that SARS will be entitled to alter a taxpayer’s compliance status to non-compliant if the confirmation was issued in error or was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts and SARS has given the taxpayer prior notice thereof and an opportunity to respond to the allegations made of at least 14 days prior to the alteration of their status.

Section 256(7) of the TAA provides that a taxpayer’s tax compliance status will be indicated as non-compliant by SARS for the period commencing on the date that the taxpayer no longer complies with the requirements under section 256(3) of the Act and ending on the date that the taxpayer remedies the non-compliance. The new provisions regulating tax clearance certificates will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum indicates that the requirements of no outstanding requests for information is removed as a requirement for a tax clearance certificate, but that that will be reviewed during the 2015 legislative cycle. SARS has introduced a new tax clearance system which will cater for sending a letter to taxpayers advising them as to the change in their status from compliant to non-compliant, thereby enabling taxpayers to remedy their non-compliant status.

Conclusion

The amendments proposed to the TAA are significant and taxpayers need to be aware thereof. SARS is clearly concerned that taxpayers may resist its request for relevant material when requesting information under section 46 and indeed when undertaking a field audit at the premises of the taxpayer under section 48 of the Act. Clearly, in the case of a field audit, the law requires that SARS specifies the scope of the audit and it would be untenable for SARS to request information which falls outside of the scope of the audit as prescribed in section 48 of the TAA. It is hoped that certain of the provisions contained in the TAA regulating the request for information and particularly what is envisaged by the term “relevant information” will ultimately be adjudicated by the courts to provide clarity for taxpayers and SARS.

Dr Beric Croome,  Tax Executive, ENSAfrica. This article first appeared in TAX TALK ProfessionalJanuary/February 2015 edition from The South African Institute of Tax Professionals.



Monday, 1 December 2014

UCT Celebrates 100 Years of Income Tax in South Africa

During 1914, General Jan Smuts, in his capacity as Minister of Finance, tabled legislation in the Parliament of the Union of South Africa introducing income tax in the country with the Income Tax Act of 1914. Taxpayers in the Union of South Africa became liable to income tax with effect from 20 July 1914. [Source: Wikipedia]

In 2014, twenty years since South Africa became a constitutional democracy , the University of Cape Town marked this milestone since with the "INCOME TAX IN SOUTH AFRICA: THE FIRST 100 YEARS 1914 – 2014" conference.   

Dr Beric Croome addresses attendees at the
 "Income Tax in South Africa: The First 100 Years" conference,
with Prof Jennifer Roeleveld, a conference organiser, looking on
 

[Photograph Michael Hammond].
I was privileged to be part of this special occasion and presented a paper called "The shift to a constitutional democracy in 1994 and the impact thereof on tax law in SA." This paper, together with all the other conference papers, will be published in 2015 by Juta's Law, who also hosted the gala dinner.
The Deputy Tax Ombud of South Africa, Advocate Hanyana Eric Mkhawane, speaking at the Gala Dinner held in Smuts Hall at the University of Cape Town
[Photograph Michael Hammond].
You can read a media report on this conference here . You can view the UCT Finance and Tax  conference photo album HERE and the Juta Law's Gala Dinner photo album HERE. Below are some photos from the conference:
Prof Jennifer Roeleveld, Head: Taxation, Department of Finance and Tax,
 University of Cape Town and a co
nference organiser chats to Mr Kent Karro, Chairman of Horwath Zeller Karro and Chairman of SAICA's monthly tax journal Integritax's editorial panel.
[Photograph Michael Hammond].


[Photograph Michael Hammond].
Thanks to the University of Cape Town's Professors Jennifer Roeleveld, Craig West and Johann Hattingh for an excellent conference and to Jutas Law Mr Wayne Staples and Ms Melanie Wagner for an entertaining Gala Dinner. 
Prof Peter Surtees addresses the attendees
[Photograph Michael Hammond].
Here are some of the items from the "goody bag" the attendees received: 






























Monday, 10 November 2014

Western Cape High Court Rules on Purpose of Preservation Orders

Section 163 of the Tax Administration Act 28 of 2011 (“TAA”) provides that a senior SARS official may authorise an ex parte application to the High Court for an order for the preservation of any assets of a taxpayer, or other person prohibiting any person, subject to the conditions and exceptions as specified in the preservation order, from dealing in any manner with the assets to which the order relates.

The TAA provides that a preservation order may be granted if required to secure the collection of tax. The preservation order will apply in respect of realisable assets seized by SARS in terms of section 163(2), which allows SARS to attach assets in anticipation of being granted a preservation order by the court. 

Furthermore, the preservation order would typically be granted in respect of realisable assets as may be specified in the order, and which may be held by the person against whom the preservation order is being made. In terms of section 163(4) of the TAA, the court to which an application is made may grant a provisional preservation order having immediate effect. In addition, the court may grant a rule nisi calling on the taxpayer or any other person, on a business day mentioned in the rule, to appear and satisfy the court as to why the preservation order should not be made final.

The TAA requires that the preservation order must provide for notice to be given to the affected taxpayer and the person from whom the assets are seized.
Where a preservation order is granted in terms of section 163 of the TAA, the court may make any ancillary orders regarding how the assets must be dealt with, including:
·         authorising the seizure of all movable assets
·         appointing a curator bonis in whom the assets of that taxpayer or another person liable for tax vests
·         realising the assets in satisfaction of the tax debt
·         making provision as the court may think fit for reasonable living expenses of a person against whom the preservation order is made, or
·         any other order which the court considers appropriate for the proper, fair and effective execution of the order.

The court which grants the preservation order may vary or rescind that order if the circumstances set out in section 163(9) of the TAA are complied with.
Once a preservation order has been granted, it remains in force pending the setting aside thereof on appeal, or until the assets subject to the preservation order are no longer required for purposes of the satisfaction of the tax debt.

The TAA provides that assets seized under section 163 of the TAA must be dealt with in accordance with the directions issued by the High Court which granted the relevant preservation order.

Rogers J in Commissioner for the South African Revenue Service v Tradex (Pty) Ltd (case number 12949/2013) as yet unreported, was required to decide whether to confirm the provisional preservation order granted in terms of section 163(4) of the TAA. In the Tradex case the affected taxpayers had been delinquent in that tax returns had not been submitted timeously to SARS, and it was accepted that amounts were due to SARS for various tax debts payable to SARS.
Using such an order as a tactic by Sars comes in for criticism by judge
In the case before the court, the taxpayers repeated an offer of security made in negotiations with SARS by way of continued operation of caveats in respect of various immovable property which the taxpayer contended had a value of approximately R7.5 million. In addition, Tradex offered SARS a cession in securitatem debiti of the company’s book debts to the value of R10.5 million.

SARS, in its papers filed with the court, continued to be dismissive of the value of the book debts offered as security by the taxpayer.

SARS approached the court for confirmation of the preservation order and that the taxpayers be prohibited from disposing, dissipating of any assets and that SARS be authorised to cause caveats to be registered over the taxpayer’s immovable properties. In addition, SARS sought that a Mr Nel be appointed as the taxpayer’s curator bonis with all of the taxpayer’s assets vesting in him. Rogers J expressed the view that he did not think that the legislature intended that a preservation order would routinely be available to SARS in every case of an actual or anticipated tax liability. The court was of the view that there must be a material risk that assets will be dissipated in order to justify the granting of a final preservation order.

In the case at hand, SARS did not satisfy the court that there was an appreciable risk of the assets owned by the taxpayer being diminished. SARS did not in its replying and supplementary replying papers allege that the taxpayer was causing the company to dissipate its assets by distributing dividends or paying unreasonable salaries or engaging in other suspicious transactions.

At paragraph 54 Rogers J stated as follows:

“One gains the distinct impression that SARS launched the application not so much because a preservation of the respondents’ assets was required but in order to bring the matters to a head by placing legal pressure on the respondents.”

The court expressed the view that the granting of a final preservation order would have the effect of forcing the company to shut down and the granting of a preservation order in such circumstances would not be just. The court made the point that the taxpayers had offered SARS caveats over the immovable property and had those been accepted by SARS, the litigation would have been resolved far earlier than what was the case.

In the result the court ordered that the caveats registered against the immovable properties remain in place unless the taxpayer and SARS agree thereto in writing or the court otherwise directs.

The court was critical of the appointment of the curator bonis by way of the provisional preservation order on the basis that that appointment increases the costs of the taxpayer and was not strictly necessary to preserve the assets in question. The court also made the point that section 163 of the TAA is a procedure for preserving assets and is not a means of execution on the basis that once tax has been assessed or is otherwise due and payable, the “pay now, argue later” rule applies. In terms of the provisions of the TAA, SARS has various provisions in terms of which it can institute proceedings to recover assessed tax from a delinquent taxpayer.

The court ordered SARS to pay a large portion of the taxpayer’s costs and dismissed SARS’ application to confirm the provisional preservation order.

The grant of a preservation order is an intrusion into the life of a taxpayer and confirmation of an interim preservation order will not be granted lightly by the courts, based on the Tradex decision.

Dr Beric Croome is a Tax executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review (November 2014). Please contact me if there are copyright issues relating to use of image.


Monday, 13 October 2014

The Pistorious Case: Taxability of Amounts Received for Information Supplied

The Washington Post reported on 5 March 2014 that NBC News had agreed to pay the family of the late Reeva Steenkamp, the woman killed by Oscar Pistorius, for its co-operation in a series of interviews.

The question that arises in this regard is the nature of such payments for tax purposes, that is, whether such amounts received by a person supplying information constitutes gross income and therefore liable to income tax under the provisions of the Income Tax Act, No. 58 of 1962 (‘the Act’), as amended or falls outside of the taxing statute.

Should Reeva Steenkamp's family pay tax on the fee paid to them by NBC news?
(Steenkamp's mother, June Steenkamp, above, in court for Oscar Pistorious' trial)
It is appropriate to refer to the case of the Commissioner for South African Revenue Service v Kotze, [2002] 64 SATC 447 where Mr Kotze received a reward from the police for information leading to the arrest and conviction of persons involved in illicit diamond buying. 

In that case, the taxpayer indicated that the reason for supplying the information to the police was to protect himself against any appearance of involvement in criminal activity and to protect his good name, his business and standing in the community of Springbok. Mr Kotze received an amount of R200,000 from the South African Police for the information supplied by him, which contributed to the criminals being charged and ultimately convicted.

The Tax Court, in ITC 1683 [2000] 62 SATC 406, accepted that there was no relationship of employer and employee between the police and Mr Kotze and it held that the amount did not constitute gross income and therefore was not liable to tax. The Commissioner was dissatisfied with the decision of the Tax Court and the matter proceeded on appeal to Cape High Court.

The High Court considered the definition of “gross income” in the Act and particularly paragraph (c) of the definition thereof which provides as follows:

“any amount, including any voluntary award, received or accrued in respect of services rendered or any amount…received or accrued in respect of or by virtue of any employment or the holding of any office.”

The court accepted that Mr Kotze was not employed by the South African Police Service and it was therefore necessary to determine whether the amount was received by him in respect of “services rendered”. In Kotze, the taxpayer’s counsel contended that the amount was fortuitously received and that it was unreasonable to tax the recipient on such an amount because he was performing, what he had perceived as a civic duty.

The court indicated that where a person rescues a drowning child and is rewarded by a grateful parent, such amount would be regarded as an accolade and would not  be regarded as a receipt received by the taxpayer in respect of services rendered.

Foxcroft J came to the conclusion that Mr Kotze was rewarded for having provided information to the police which lead to the arrest and conviction of the persons who had approached him. The court therefore decided that had Mr Kotze not provided the information in question, he would not have received the reward from the police.

The court unanimously concluded that the payment received by Mr Kotze, which amount he kept and did not give back to the police, was received for information which had been provided.

The court accepted that the police exercised a discretion in making payment to Mr Kotze but once that discretion had been exercised, the amount paid to him was in respect of services rendered and not as a reward for good conduct in the exercise of a civic duty.

The High Court therefore came to the conclusion that there was an adequate link between the service rendered and the payment of the reward. In the result, the High Court confirmed the assessment issued by the Commissioner to subject Mr Kotze to tax on the amount received from the police for the information supplied regarding the illicit diamond transactions, which resulted in the arrest and conviction of the perpetrators thereof.

Thus, where a person receives payment from a journalist for information supplied, it is submitted that such amount will constitute income fully liable to tax based on the decision of the court in Kotze’s case. The gross income definition is extensive and applies even though there may not be an employer/employee relationship between the parties concerned.

Thus, payment for information  supplied by one party to another will generally constitute gross income liable to income tax at the rate applicable to the recipient concerned.

In addition, where payments are received for the use of materials such that the press or advertising agencies pay an amount for the privilege of filming in a person’s home, those amounts will also constitute income on the basis that the amounts are paid for the use of the taxpayer’s assets. Clearly, where a taxpayer disposes of an asset and is not a dealer in such asset, the amount received will constitute proceeds for the purposes of capital gains tax which will result in the gain realised on that disposal being subjected to tax at a favourable rate, currently a maximum of 13.3% for natural persons.

However, where a person receives consideration for information supplied or for the use of their assets, such amounts will constitute gross income fully liable to income tax at the rate applicable to the person concerned, such that the rate could amount to 40%. 

Where the recipient of the consideration can show that expenses were incurred relating to the income generated for the information received or other similar payments, such expenditure should be deductible under the general deduction formula contained in the Act.

Taxpayers must remember that when they complete their tax returns, that they make full disclosure of all amounts received by them, failing which they would be subjected to the imposition of penalties under the Tax Administration Act, which can range from 0 to 200% of the tax that would otherwise have been payable, depending on the precise circumstances and when the amount that should have been subjected to tax is identified by SARS.

Dr Beric Croome: Tax executive Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, October 2014. Image from The Guardian.co.uk

Monday, 8 September 2014

New Tax Disputes Resolution Rules Promulgated

The new rules governing objections and appeals were promulgated under section 103 of the Tax Administration Act No. 28 of 2011 (‘TAA’) in Government Gazette 37819 on 11 July 2014. 

These rules replace the rules which were promulgated under section 107A of the Income Tax Act and for all practical purposes the new rules took effect on 11 July 2014 and will therefore regulate the resolution of tax disputes going forward.

The new rules comprise some 68 rules whereas the old rules comprised some 29 rules. The new rules are very similar to the High Court rules regulating litigation and it is important that taxpayers are aware of the provisions of the rules should they entered into a dispute with the Commissioner: South African Revenue Service (‘SARS’).

The rules contain a number of definitions but one that must not be overlooked is that the term “day” means a business day as defined in section 1 of the TAA which excludes Saturdays, Sundays and public holidays and those days between 16 December of each year and 15 January of the following year. 

The rules define the term “deliver” as meaning to issue, give, send or serve a document to the address specified for such purpose under the rules and includes via eFiling. It is intended therefore that most of the documents required under the rules can be lodged via eFiling.

SARS must come to the party in terms of adhering to the time frames set out in new rules
The rules authorise SARS and the taxpayer to agree to extend the time period set out in the rules when necessary.

Under rule 6 a taxpayer can request reasons prior to lodging an objection and should consider doing so where proper reasons have not been made available at the time that the assessment is issued.  A request for reasons must be made in the prescribed form and manner and specify the address at which the taxpayer will accept delivery of the reasons.

The taxpayer must request reasons within 30 days of the date of assessment and SARS is in turn required to provide those reasons within 45 days.

The period of 45 days may be extended by a maximum of 45 days where exceptional circumstances, complexity of the case, principle or the amount involved justify an extension.

If the SARS official is satisfied that reasons have been supplied previously, the taxpayer is required to be informed thereof within 30 days and SARS must refer specifically to the documents which contain those reasons.

Under Rule 7, a taxpayer is required to deliver their notice of objection within 30 days after receiving reasons or the date of the assessment in question. 

The taxpayer is required to complete the prescribed form and must specify the grounds of objection in detail, that is, that part or specific amount of the disputed assessment to which the taxpayer objects, as well as the grounds of assessment which are disputed. 

At the time of filing the objection the taxpayer is required to submit those documents which have not previously been delivered to SARS in substantiation of the grounds of objection.

SARS may regard the objection as invalid where the requirements contained in rule 7 are not met and is obliged to inform the taxpayer within 30 days thereof.

The taxpayer will then be permitted to submit a new compliant objection within 20 days, this was previously 10 days, following the delivery of the notice of invalidity. 

Unfortunately we are seeing too many cases where SARS regards an objection as invalid on various grounds instead of actually dealing with the merits of the objection and taxpayers need to be aware of this problem.

Once the taxpayer has filed their objection, SARS may call for the submission of substantiating documents which are required to be lodged within 30 days of the request being made.

SARS is required to inform the taxpayer of their decision on the objection within 60 days under Rule 9, this period was previously 90 days. 

The period may be extended by a period of 45 days where SARS requests further information and the period may be extended by a period of 45 days where exceptional circumstances or the complexity of the matter, principle or amount involved justify that extension.

Where the taxpayer receives a notice of disallowance of objection, they are entitled to appeal against that decision under Rule 10 and must deliver the notice of appeal in the prescribed form and manner within 30 days after delivery of the notice of disallowance of the objection.

The taxpayer is required to specify in detail the grounds on which they are appealing, as well as the grounds for disputing the basis of the decision to disallow the objection and to specify a new ground on which the taxpayer is appealing. It is at this stage that the taxpayer is entitled to request that the matter be referred to Alternative Dispute Resolution (‘ADR’). 

It must be noted that the taxpayer may not appeal on a ground that constitutes a new objection against a part or amount of the disputed assessment not objected to under Rule 7.

It is therefore critical that when the taxpayer drafts their objection that they deal with all items in dispute, as the failure to do so at the right time will mean that the taxpayer cannot raise disputes later.

The taxpayer would then have the right to have the matter heard by the Tax Board, where the tax in dispute does not exceed R500,000 and SARS and taxpayer agree that the matter should proceed to the Tax Board, which is less costly and less formal than proceeding to the Tax Court.

The new rules contain a new process whereby a case may be designated as a test case under Rule 12, whereby one case will proceed to the Tax Court and similar cases are stayed until the test case is decided.

Instead of proceeding to the Tax Court, the taxpayer may decide to ask that the matter be referred to ADR and this often does result in the tax dispute being resolved. The processes regarding ADR are governed by Rules 17 to 25 and are largely similar to the rules which were previously in place.

Where the case proceeds to the Tax Court, SARS is required to file a statement containing their grounds of assessment and opposing appeal (Rule 31) within 45 days of the taxpayer filing their notice of appeal or the failure of ADR. 

The statement is required to set out the statement of consolidated grounds of disputed assessment, as well as which facts or legal grounds in the taxpayer’s notice of appeal SARS admits and which are opposed. SARS is not entitled to include a ground which constitutes a novation of the whole or factual legal basis of the disputed assessment, or which requires the issue of a revised assessment.

The taxpayer is then required to deliver their statement of grounds of appeal (Rule 32) within 45 days after delivery of SARS’ statement or after discovery of documents by SARS.

The taxpayer must set out their grounds of appeal and which facts or legal grounds are admitted and those which are opposed. The taxpayer is precluded from including a ground of appeal that constitutes a new ground of objection against a part or amount of the disputed assessment not objected to under Rule 7.

Under Rule 33 SARS may then deliver a reply to the taxpayer’s statement of grounds of appeal. The issues in the appeal are those contained in the Rule 31 and 32 statements. The rules allow for the parties to agree that the statements made under Rule 31, 32 or 33 be amended.

As is the case with civil litigation, the parties are required to make discovery of documents in accordance with Rule 36. Rule 37 regulates the notice of expert witnesses. A pre-trial conference is required to be arranged not later than 60 days before the hearing of the appeal.

Under Rule 39 the taxpayer is required to apply to the Registrar of the Tax Court for a date of hearing of the appeal by the Tax Court within 30 days of delivery of the statement of grounds of appeal or SARS’ reply thereto.

SARS in turn is required to compile a dossier for the Tax Court and submit that at least 30 days before the case is heard by the Tax Court.

Part F of the new rules regulate applications on notice either in terms of the TAA itself or under the rules governing objections and appeals, which would include applications for orders to compel the taxpayer or SARS to comply with the provisions of the rules and related matters. Part G of the new rules contains the transitional arrangements, which in principle provide that the new rules will apply to disputes currently in progress.

The frustration that taxpayers experienced in the past was that SARS often failed to adhere to the time frames contained in the old rules. It must be noted that the new rules seek to shorten the time frame for resolution of tax disputes and it is hoped that SARS will adhere to those periods.

Dr Beric Croome Tax Executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, 8 September 2014. Image purchased from www.iStock.com