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) |
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
No comments:
Post a Comment
Note: only a member of this blog may post a comment.