Tuesday, 6 February 2018

Employer and employees’ tax obligations

Any employer paying remuneration to an employee is required, under the provisions of the Fourth Schedule to the Income Tax Act, 58 of 1962, (‘the Act’), to deduct and withhold Pay As You Earn (‘PAYE’) or employees’ tax from the remuneration paid. 

The employer must pay the  tax collected over to the Commissioner: South African Revenue Service (‘SARS”). It does not matter whether the remuneration is paid in cash or in kind. Certain payments may be exempt from tax, but those fall outside of the scope of this article.

The employer must deduct the tax from the remuneration and pay that over to SARS by the 7th of the month following the month in which the tax was deducted. If the 7th falls on a weekend or public holiday, the PAYE must, together with the other employment related taxes, be paid on the preceding business day.

The tax year for natural persons commences on 1 March of each year and ends on the last day of February of the following year. The employer is required by law to provide their employees with a tax certificate, the IRP5 certificate, reflecting the amount of remuneration paid to the employee and the PAYE deducted from that remuneration. The IRP5 must cover the full tax year or, if the employee only worked for a part of the tax year, only that part.

The employee will receive the tax certificate around July and then has the personal obligation to complete and submit an income tax return to SARS, subject to certain exceptions.

If the employee fails to file their tax return within the prescribed period SARS will impose administrative penalties on the employee for the late filing of the return. 

The penalty is determined by taking account of the level of taxable income reflected by the taxpayer and can range from R 250  to R 16 000 per month until the tax return is filed. Where SARS is aware of the taxpayer’s latest address the penalty can be imposed for up to 36 months and where SARS does not have the taxpayer’s latest details the penalty can be levied for up to 48 months. 

In addition, SARS can institute criminal proceedings against a taxpayer for the failure to submit a tax return in time and has indicated that in future it intends to use the Tax Court to expedite the prosecution of defaulting taxpayers. In such cases, the taxpayer will remain liable to pay the administrative penalty to SARS as well as whatever fine the court may impose.

Thus, where a taxpayer is required to submit a tax return and fails to do so the penalty will be imposed and can add up to a substantial amount due to SARS. It is critical therefore that taxpayers file their tax returns timeously.

The first time a taxpayer may become aware of a debt due to SARS is when they receive a letter of demand from SARS or if SARS instructs the taxpayer’s employer to withhold amounts of the taxpayer’s salary to settle the debt due to SARS by way of a garnishee.
Employees with tax problems are distracted and unhappy employees. 
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Employers do not have a legal obligation under the Act to assist or inform their employees that they must complete and submit an annual income tax return to SARS. However, in practice it appears that employees are not always aware of the obligation to file an income tax return.  This is especially true of school leavers or graduates who may be employed for the first time and are not aware of the tax rules in the country.

Those schools that do not teach basic financial skills, including basic tax rules, to their pupils should do so, thereby enabling pupils to be properly equipped to become compliant tax paying citizens when they embark on a business venture for their own account or enter into employment and receive remuneration.

Whilst employers may not have a statutory duty to advise their employees to register and submit an annual income tax return, many employers do assist their employees in this regard. When a new employee commences employment with an employer the employer should remind the employee of the obligation to register and submit annual tax returns to SARS.

Ideally, the employer should arrange for tax information sessions whereby employees are reminded of the obligation to file a tax return and are taught how to do so. 

Most people fear SARS and are loathe to deal with their tax affairs.  This is often as a result of ignorance of how the tax system in the country works and how a tax return should be completed.

Employers should empower their employees by educating them on the need to submit tax returns and furthermore assist employees by providing information as to how tax returns should be completed. This will alleviate employees receiving a nasty shock at the end of the month when they receive their pay slip and, for the first time, become aware of an amount deducted on behalf of SARS for the failure to pay an income tax debt on time and/or as a result of  an administrative penalty imposed for late or non-submission of a tax return.

Employees who have debts due to SARS will be distracted and may not be as efficient as they could be if their tax affairs are in order and up to date. 

It is contended that if an employer assists its staff in attending to their personal tax obligations that will contribute to a content work force and encourage tax compliance in the country.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2018.

Saturday, 16 September 2017

Street Smart Taxpayers: A Practical Guide to Your Rights in South Africa

I have always felt that my PhD thesis and legal text Taxpayers' Rights in South Africa (Juta Law, 2010) should be made available as a less technical guide to educate the ordinary South African taxpayers of their rights.  For years I tried to find the right person to translate my legal text into a fun and easily understandable text that would make the complex tax laws of South Africa more accessible to the ordinary South Africa taxpayer. In 2013 my wife, author and poet, Judy Croome approached Juta Law with the proposal that we work together on this book.  The journey to publication was at times as challenging as it was exhilirating but, finally, after four and a half years "STREET SMART TAXPAYERS: A Practical Guide to Your Rights in South Africa" was revealed for the first time at the Tax Indaba 2017. 
You can order your copy of Street Smart Taxpayers from Juta Law by clicking here
Simplifying complex legal language and tax terminology, the book attempts to reduce the fear factor and frustrations that many taxpayers experience when dealing with tax matters.
Street Smart Taxpayers explains the processes SARS must follow when working with taxpayers throughout the various stages of the tax process, and identifies the remedies available to taxpayers. Together with interesting tax stories and a useful glossary for taxpayers to better understand tax lingo, Street Smart Taxpayers explores the following taxpayers’ rights:

• the right to property
• the right to equality
• the right to privacy
• the right of access to information
• the right to administrative justice
• the right to remain silent
• the right of access to courts

Combining humour, expert knowledge and anecdotes about the troubles taxpayers encounter in their dealings with SARS, the authors also investigate taxpayers’ obligations, how tax and religion intersect and the important question of ethics from the point of view of both SARS and the taxpayer. It is hoped that this book will enable taxpayers to be street smart and competent in handling their tax affairs.

    With Judge Bernard Ngoepe the Tax Ombud before joining him in panel discussion 
    on "The Psychology of Tax Behaviour in Times of Recession" Tax Indaba 2017

Contents Include:
  • A history of South African taxation
  • Taxpayers and the tax process
  • Seeking help as a taxpayer
  • What are your taxpayer rights?
  • Taxpayers’ right to property
  • Taxpayers’ right to equality
  • Taxpayers’ right to privacy
  • Taxpayers’ right to access to information
  • Taxpayers’ right to administrative justice
  • Taxpayers’ right to remain silent
  • Taxpayers’ right of access to courts
  • Taxpayers’ obligations
  • The ethics of paying tax
  • Taxpayers’ rights — an international work in progress
  • Taxpayers’ remedies in South Africa
  • The future of taxpayers’ rights
  • Glossary 
At Tax Indaba 2017 - panel discussion on "The Psychology of Tax Behaviour in Times of Recession" Speakers from left to right: 
Dr Beric John Croome (ENSafrica), Dr Randall Carolissen (SARS), Judge Bernard Ngoepe (Tax Ombud SAand Patricia Williams (Bowmans)
(Photograph courtesy of Thyann Delport of 
 Street Smart Taxpayers is of interest and benefit to:
  • South African taxpayers
  • Law students
  • Tax practitioners 
  • Government officials

Monday, 14 August 2017

SARS must provide grounds for Assessments issued

The Eastern Cape High Court was recently required to adjudicate a dispute between a taxpayer and the Commissioner: South African Revenue Service regarding the manner in which the Commissioner: SARS had dealt with the taxpayer.

In the case of V Z Nondabula v The Commissioner: SARS & Another (case no. 4062/2016  Eastern Cape Local Division: Mthatha, as yet unreported), the taxpayer applied for an interdict preventing SARS from invoking the provisions of section 179 of the Tax Administration Act (“the Act”) pending the final determination of the taxpayer’s objection to his additional income tax assessment. 

SARS had issued a notice to a third party under section 179 of the Act directing that the party had to pay whatever funds it held for the taxpayer to SARS in settlement of the tax allegedly due.

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The taxpayer conducted business as a sole proprietor of a service station and received various assessments for the 2014 tax year. The assessments issued to the taxpayer were paid timeously in respect of the assessments issued in 2015. Subsequently, SARS issued a further assessment to the taxpayer reflecting a debt allegedly due amounting to R1 422 637.83. The first time that the taxpayer became aware of the tax debt was by way of a letter dated 29 September 2016 demanding payment of the tax within ten days, failing which, further action would be taken.

It would appear that SARS provided a statement of account reflecting the amount payable, but did not inform the taxpayer as to how the amount due was arrived at.

The taxpayer called on SARS to provide details regarding the additional assessment issued for the 2014 tax year and how the amount of the tax debt was arrived at.

In the papers before the court, SARS did not explain how the additional assessment issued to the taxpayer was arrived at. The taxpayer objected to the additional assessment through the offices of his accountants and SARS responded to the objection by advising that the objection did not comply with the rules.

The accountant submitted a further objection challenging the assessments issued by SARS but the objection filed by the accountants were not responded to, and even where there was a response the court indicated that it was not a substantive response to the taxpayer’s objection.

The court pointed out that SARS is a creature of statute and is therefore required to operate within the statutory provisions which empower it.

The court reviewed the statement of account provided by SARS to the taxpayer and other documents provided and reached the conclusion that SARS had not provided the taxpayer with a statement of the grounds for assessment as required in terms of section 96(2)(a) of the Act. The court pointed out that SARS is an organ of state and SARS exercises a public power or performs a public function in terms of the Act. 

Under section 195 of the Constitution SARS must be accountable and must comply with the Constitution. At paragraph 25, Acting Judge Jolwana stated:

“There is no doubt the first respondent dealt with the applicant in an arbitrary manner contrary not only to the Act but most importantly the values enshrined in the Constitution were not observed by the first respondent. The applicant is a business man and employs quite a number of people in our country where the unemployment rate is alarmingly high. The first respondent’s actions had the potential to close down applicant’s business with catastrophic results not only for the applicant and his family but also for all of his employees in a situation in which unemployment is rampant and reaching crises proportions.”

The court concluded that SARS must comply with its own empowering legislation and most importantly it must promote the values of the Constitution of the Republic of South Africa when exercising its powers. The court further concluded that SARS has failed to do so and particularly failed to provide the taxpayer with information prescribed in section 96 of the Act. 

The court therefore decided that SARS acted unlawfully and unconstitutionally and thus set the third party notice aside and also directed SARS to pay the taxpayer’s legal costs.

Unfortunately there are too many instances where SARS issues an assessment to a taxpayer without explaining the basis of that assessment and then proceeds to collect the tax on that additional assessment. 

Furthermore, SARS often fails to properly deal with objections lodged to an assessment, rejecting the objection as invalid. Taxpayers must be aware of the right that they have to be informed of the details of the assessment issued to them and failing SARS’s adherence to the Act they can either lodge a complaint with the office of the Tax Ombud, or alternatively, approach the court for relief.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, August 2017.

Monday, 10 July 2017

The Lawfulness of Retrospective Amendments in Tax Law

On 29 May 2017 Judge Fabricius delivered judgment in the Gauteng High Court  in the case of Pienaar Brothers (Pty) Ltd vs Commissioner for the South African Revenue Service and the Minister of Finance, as yet unreported 87760/2014 [2017] ZAGPPHC231 (29 May 2107) in a case dealing with The Taxation Laws Amendment Act No. 8 of 2007 (“the Amending Act”) which inserted section 44(9A) into the Income Tax Act (“the Act”)

The taxpayer sought an order declaring that section 34(2) of the Amending Act is inconsistent with the Constitution and invalid to the extent that it provides that section 44 (9A) of the Act shall be deemed to have come into operation on 21 February 2007 and to be applicable to any reduction or redemption of the share capital or share premium of a resultant in company, including the acquisition by that company of its shares in terms of section 85 of the Companies Act, on or after that date.

Pienaar Brothers approached the Court  seeking a declaration that the amendment to section 44, the so-called amalgamation section in the Act was unconstitutional and invalid on the basis that the amendment was retrospective. 

The company concluded an amalgamation transaction in terms of section 44 of the Act in which it acquired all of the assets of the company then known as Pienaar Brothers (Pty) Ltd on 16 March 2007 with effect from 1 March 2007 in terms of the sale of business agreement. 

Later, on 3 May 2007 the Board of Directors of the Company resolved under the Companies Act to make a distribution to its shareholder’s pro-rata to their shareholding of an amount of R29 500 000.00 out of the taxpayers’ s share premium account. 

On the date of the resolution the tax law excluded from its ambit any amount distributed out of a company’s share premium account. 

The company therefore argued that on 3 May 2007 when the distribution was made it did not constitute a dividend as defined in the Act and thus no secondary tax in companies was due and payable on the distribution on the basis that it was made out of the share premium account. 

The Commissioner, however assessed the amount of R29 500 000.00 to secondary tax on companies on the basis that the amount fell within the amendments introduced to section 44 by way of the Amending Act which was only promulgated on 8 August 2007.

The Court  examined the process whereby section 44 of the Act was amended. It was pointed out that in the 2007 Budget Speech presented  on 20 February 2007 that the then Minister of Finance indicated the intention to pass retrospective legislation to deal with anti-avoidance arrangements relating to STC. 

Subsequently, on 21 February 2007 the Commissioner issued a press-release stating that the STC exemption for amalgamation transactions contained in section 44(9) of the Tax Act was to be withdrawn with immediate effect, that is, from 21 February 2007. On 27 February 2007, SARS and National Treasury released for public comment the Draft Taxation Laws Amendment Bill 2007. 

That Bill proposed the amendment of section 44 addressing the concerns raised by the Minister in his Budget Speech. As pointed out above, the amalgamation transaction, the distribution as well as the introduction of the BEE partner in the company was completed in early May 2007. 

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Thereafter, on 7 June 2007, the 2007 Taxation Laws Amendment Bill was published but instead of proposing the deletion of sections 44(9) and (10) of the Act, it proposed the insertion of a new subsection (9A). 

The Bill also indicated that the amendment would be retrospective to 21 February 2007. 

The company contended that it concluded the amalgamation transaction in May and only later in June 2007 did it become aware that the transaction concluded by it could be covered by the amendment.

On 8 August 2007 The Taxation Laws Amendment Act 2007 was promulgated giving effect to the amendments announced in the February 2007 Budget Speech. 

The company argued that the amendment was invalid under the Constitution because it was retrospective and offended against the principle of legality of the rule of law. 

The company contended that when it completed the transaction in May it was not possible to know that the amount would be subject to secondary tax on companies by virtue of the fact that there was no law in place and that it could not be held liable for interest for this reason and similarly could not be subject to penalties or criminal prosecution for not having submitted an STC return reflecting the reduction of share premium as a dividend liable to STC. 

The judgment deals with both the legal arguments of the company and the Commissioner at length and refers to the position in South African law as well as a number of other countries.

The case is a very useful summary of the legal position regarding retroactive amendments, not only in the tax arena.

The Commissioner’s counsel contended that the taxpayer was given notice of a proposal to amend the law and that it was not correct to argue that there was no prior notification of the proposed amendment to plug the perceived loophole in the STC legislation. 

The Commissioner’s counsel referred to the process whereby the amendment was given effect to and the Court  made it clear that the history of the amendment made it clear that the Minster, SARS and Parliament were determined to close the STC loophole with effect from 21 February 2007. 

The Court  analysed the rule of law in the Constitution and various academic writings dealing with that topic. The Court  referred to the general principle that an amendment to a law should only apply prospectively, that is from a future date unless the amendment makes it clear that it applies from an earlier date. 

The Court  reviewed the position of retroactive amendments in the United States, United Kingdom, Canada and other countries and came to the view that those constitutional democracies do not specifically prohibit retroactive amendments to tax laws. 

The Court  indicated that it is also necessary to weigh up the public interest and the needs of the Treasury when considering retroactive amendments to legislation even though such amendments may adversely effect particular taxpayers. At paragraph 63 the judge stated as follows:

“I am not aware of any authority or legislative provision that provides that a fairly precise warning needs to be given before the legislature can pass retrospective legislation, whether in general, or in the case of a tax statute. In the latter instance, economic demands must be considered in the context of the purpose and effect of an intended statute. If the tax statute is rationally connected to a legitimate purpose, no precise warning is required, if one at all.”

The court pointed out that the Constitution itself does not contain a provision prohibiting retrospective legislation. The court  accepted that Parliament may not legislate with retrospective effect as it pleases but to do so must meet the standard required for the constitutional validity of retrospective amendments. It indicated that reference must be made to the rationality test and the second standard relating to reasonableness or proportionality.

The court referred to various judicial decisions and came to the conclusion that in the particular instance the standards set by the court  had not been violated and therefore decided that the amendment to section 44 was lawful and the taxpayer was liable to the STC as assessed by the Commissioner.

The taxpayer also argued that its right to property had been violated as a result to the manner in which the amendment was enacted and the court  dismissed this contention on the basis that the amendment did not constitute the unlawful deprivation of property.

The court  came to the conclusion that it is not necessary that exceptional circumstances must exist for Parliament to pass retrospective legislation. The court  decided that there was no overriding duty to give notice of intended legislation. It was decided in the present case that there was sufficient notice of general impact and that there is no over-riding duty to give notice that indicates precisely what the intended legislation will encompass.

 In the result the court  dismissed the company’s application to find that the amendment was unlawful under the Constitution. By virtue of the fact that the case related to constitutional issues it made no orders as to costs. It remains to be seen if the case will proceed on appeal to a higher court . 

The judgment is important in that it sets out clearly for the first time the consequences of retrospective amendments to legislation in the tax arena and taxpayers and advisors are well advised to study the comprehensive judgment which is a good summary of the law in South Africa and around the world.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, July 2017.

Monday, 12 June 2017

Tax Ombud To Investigate Alleged Delays In Payment Of Refunds By Sars

On 27 March this year the Tax Ombud, namely, Judge B. M. Ngoepe, confirmed that he had requested and secured the approval of the Minister of Finance to review the alleged delays in the payment of refunds by the South African Revenue Service (“SARS”) to taxpayers.

The Office of the Tax Ombud was created by Part F of chapter 2 of the Tax Administration Act (“TAA”) which took effect on 1 October 2012. The Tax Ombud was created to deal with taxpayers’ complaints of an administrative nature and is an office independent of SARS which reports directly to the Minister of Finance.

The TAA was recently amended conferring greater autonomy on the Office of the Tax Ombud and specifically to enhance the mandate of the Tax Ombud and the power to request that the Minister of Finance approves a request made by the Tax Ombud to investigate any systemic and emerging issue relating to a service matter or the application of the provisions of the TAA or procedural or administrative provisions of the a tax Act. 

The approval granted to investigate the alleged delays in the payment of refunds to taxpayers is the first review to be conducted under section 16(1)(b) of the TAA which came into operation on 18 January 2017.

Image from www.taxombud.gov.za
The Tax Ombud’s review will encompass all categories of tax refunds.

The Tax Ombud approached the Minister for approval to investigate the apparent delay in the payment of refunds to taxpayers because of the volume of complaints received by the office of the Tax Ombud from taxpayers regarding the delay in refunds.

The Office of the Tax Ombud has accordingly advised both SARS and external stakeholders, comprising professional bodies representing tax practitioners and others of the investigation into the delays in refunds. SARS indicated that it will cooperate with the office of the Tax Ombud during the course of the investigation. 

The Office of the Tax Ombud has confirmed that it will engage both SARS and concerned taxpayers regarding the delays in payment of refunds to taxpayers.

The Office of the Tax Ombud will investigate the question of refunds due to taxpayers and make recommendations to the extent necessary.

In my capacity as chairman of the TAA sub-committee of the South African Instituted of Chartered Accountants (“SAICA”), we have received various representations from members of SAICA regarding the delay in refunds being paid to taxpayers.

Many delays are experienced by taxpayers claiming VAT refunds and whilst it is accepted that SARS must ensure that refunds are in order and prevent payment of fraudulent claims, taxpayers have experienced unnecessary delays in the payment of refunds. 

In many cases taxpayers have submitted VAT returns reflecting a refund payable and then suddenly SARS takes a decision reversing all input credits claimed by the taxpayer eliminating the refund without due process being followed which requires that SARS informs the taxpayer of reasons for adjustments made in assessments issued to the taxpayer. 

There have been a number of complaints that VAT vendors have submitted VAT refund claims only to discover that the refund has been eliminated on the basis that SARS requests the documents which it has not apparently received. Unfortunately, taxpayers often submit documents to SARS which are not property receipted and despite having submitted documents on more than one occasion encounter problems in dealing with SARS such that the refunds are eliminated without proper notice being given relating thereto.

In the case of income tax SARS will often summarily disallow all expenses claimed by a taxpayer despite the fact that the taxpayer’s expenses had been allowed in the past and will not properly consider the documents submitted by a taxpayer on multiple occasions. In some cases the documents submitted by taxpayers are voluminous and difficulties are encountered by taxpayers in filing the documents through the e-filling system because of constraints on the SARS system.

Taxpayers have also encountered difficulties in securing refunds from SARS after the successful conclusion of alternative dispute resolution procedures or after successfully prosecuting a tax appeal in the tax court. Once the tax court has delivered a judgment and SARS has decided not to appeal it and the taxpayer has paid the tax in dispute, the taxpayer is entitled to a tax refund together with interest thereon. In some cases taxpayers may secure the payment of their tax previously paid under protest but encounter further difficulties in securing the payment of the interest to which they are entitled under the provisions of the TAA.

Taxpayers who have encountered unreasonable delays in the payment of any tax refund from SARS should inform the Office of the Tax Ombud so that their case can be considered as part of the general review being conducted by the Office of the Tax Ombud into the alleged delay of refunds payable by SARS to taxpayers. 

Professional bodies have also made submissions to the Office of the Tax Ombud to assist it in its investigation into the delays faced by taxpayers in securing refunds from SARS.

It is hoped that the investigation into the delays in refunds will result in substantive proposals being made by the Office of the Tax Ombud to ensure that the undue delay in payment of refunds does not occur in future which adversely affects taxpayers’ business operations in South Africa. 

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, June 2017.

Friday, 19 May 2017

South Africa Provides Guidance on Withholding Tax on Royalties

Below article reproduced with permission from BNAI European Tax Service Monthly Digest, Bloomberg BNA, 05/31/2017. Copyright _ 2017 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

Monday, 10 April 2017

Increase in the rate of Dividends Tax

The Minister of Finance introduced his budget to parliament on 22 February 2017. During the course of the budget it was announced that the dividends tax would be increased from 15% to 20%.

In the case of foreign dividends the rate of tax will increase to 20% with effect from 1 March 2017. 

This is by virtue of the fact that foreign dividends are not subject to withholding tax and it is only possible for taxpayers to report foreign dividends in the tax return to be filed by them which will, in most cases, cover the period 1 March 2017 to 28 February 2018. Thus, the new tax rate will apply in respect of foreign dividends received by affected taxpayers on or after 1 March 2017.

However, in the case of dividends from which dividends tax must be withheld, the adjusted rate will apply in respect of dividends paid on or after 22 February 2017.

The Draft Rates and Monetary Amounts and Amendment of Revenue Laws Bill, 2017 was released on 22 February 2017 and that legislation contains amendments giving effect to the various adjustments in tax rates announced in the National Budget. Clause 11 of the draft Bill makes it clear that the adjustment in the dividend withholding tax is deemed to have come into operation 22 February 2017 and applies in respect of any dividend paid on or after 22 February 2017.

Section 64E of the Income Tax Act 58 of 1962, as amended, provides that in the a case of a dividend, other than an award of an asset in specie, declared by a company that is a listed company, is deemed to be paid on the date on which the dividend is paid. In the case of a company which is not listed it is deemed to be paid on the earlier of the date on which the dividend is paid or becomes due and payable.

It is therefore important to consider what is meant by the date on which a dividend can be said to have been paid in the case of an unlisted company.

In ITC1688 [1999],62 SATC 478 the Tax Court was required to determine whether the dividends declared by a company were liable to the erstwhile secondary tax on companies (STC). In ITC 1688 the company declared a dividend on 2 March 1992 and a further dividend on 5 March 1993, that is prior to 17 March 1993, the date on which STC took effect. In neither case was the payment of the dividend made in cash or by cheque.

Mr A left the money on loan with the company and his loan account in the company’s was simply credited. In the case of both dividends the actual crediting of the loan account was only effected on 31 July 1993 which was after the introduction of STC. The Commissioner: SARS contended that payment took place on the date on which Mr A’ s loan account was in fact credited. That is to say on 31 July 1993, that is after the introduction of STC and thus issued STC’s assessments to the company reflecting tax payable.

Galgut J reached the conclusion that based on the wording of the company’s two resolutions and based on a proper construction of all the facts that it had been intended to record that the dividends concerned would not be paid in cash or by cheque but would be retained by the company as a loan. The court therefore reached the conclusion that the dividend was paid as required even though it was not in cash or by cheque, before the introduction of STC.

Subsequently, in the Supreme Court of Appeal case of Commissioner: SARS v Scribante Construction (Pty) Ltd ([2002], 64 SATC 379) in which judgment was delivered on 14 May 2002  Heher AJA delivering judgment for the unanimous court stated as follows:

“ I have already referred to the uncontested practice of the shareholders in using the company as a banker. In that context the crediting of the loan accounts constituted an actual payment as if the dividends had been deposited into an account held by a shareholder at a banking institution”.

The Supreme Court of Appeal has therefore decided that dividends will be regarded as paid when those amounts are credited to a shareholder’s loan account making it clear that it is not necessary to pay a dividend in cash.

Clearly, with the dividends tax rate being increased from 15% - 20% SARS has a concern that unscrupulous taxpayers may seek to backdate dividends to escape the increased rate of tax. Where taxpayers seek to fabricate resolutions purportedly  giving effect to decisions which were not actually made prior to 22 February 2017, such conduct constitutes tax evasion and will face the full might of the law and the imposition of penalties.
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SARS has indicated that it will audit all dividends paid shortly before the increase in rate to ensure the lawfulness thereof. Where, however, the shareholders of a company passed a proper resolution declaring a dividend, having satisfied themselves as to the solvency and liquidity of the company as required under the Companies Act, the shareholders have a claim against the company for such dividend and will be entitled, based on the case law, to pay the dividends tax at the rate of 15% where such resolution was properly adopted prior to 22 February 2017. 

Based on ITC 1688 it does not appear that the dividend must have been recorded in the books of account prior to 22 February 2017. The courts require that the resolution must have been properly passed giving the shareholder an unconditional right to claim the dividend against the company which would confirm that the dividend has been paid as required under section 64E of the Act.

National Treasury indicated at the Standing Committee on Finance hearings on the National Budget that it may seek to amend section 64E such that it will be required that the dividend must in fact be paid in cash and not only credited to a shareholder’s loan account. Such an amendment would be retrospective and should be resisted on the basis that it violates the rule of law and the certainty required under the Constitution of the Republic of South Africa. 

Taxpayers need to consider their position and seek appropriate advice knowing that SARS will no doubt audit and investigate dividends declared particularly in February and credited to loan accounts before 22 February 2017 in light of the substantial increase in the rate of dividends tax from 15% – 20 %.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, April 2017. Image purchased www.iStock.com ©iStock.com/