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.

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

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

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

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

Binding General Ruling 40

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

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

The Act does not define the term non-executive director. The King III Report on Governance for South Africa 2009, commissioned by the Institute of Directors of Southern Africa stated that the crucial elements of a non-executive director’s role in a company are that a non-executive director:

·         must provide objective judgement independent of management of a company;

·         must not be involved in the management of the company; and

·         is independent of management on issues such as, amongst others, strategy, performance, resources, diversity, etc.

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

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

These tests comprise the following:

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

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

1.1.         the manner in which the duties are required to be performed, or

1.2.         the hours of work

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

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

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

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

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

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

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

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

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

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

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

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

Binding General Ruling 41

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

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

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

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

 

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

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

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

Gerhard Badenhorst                                                  Beric Croome 

Tax Executive                                                               Tax Executive

Income Tax and Vat Consequences of E-Tolls

Introduction

The levying of tolls for the use of certain highways in Gauteng, the so called e-tolls, took effect on 3 December 2013.  

It is therefore appropriate to consider the income tax consequences arising from the payment of e-tolls in those cases where an employee is reimbursed for business travelling or is provided with a vehicle owned by their employer or where an employee receives a travelling allowance to finance the expenditure incurred whilst travelling on the employer’s business.  

In addition, brief reference will be made to the income tax consequences facing fleet owners and cartage contractors.

Reimbursement at prescribed rate

An employer may decide not to provide an allowance for travelling to their employees nor a company owned vehicle and instead reimburse staff for the actual distance travelled on the business of the employer.  

Where an employee travels on the employer’s business and does not exceed 8 000 kilometres during a year of assessment and the employee does not receive any other compensation from the employer in the form of a further allowance or reimbursement, the prescribed rate per kilometre, which may be paid without attracting income tax,  is R3.24.

The rate per kilometre was set before e-tolls became effective and future regulations governing the amount payable by an employer to an employee for travelling on the employers business should be clarified to provide that the employer may reimburse the employee in respect of the cost of e-tolls.  

Currently, the rate per kilometre fixed for purposes of section 8(1)(b)(iii) of the Income Tax Act, No. 58 of 1962 (‘the Act’) provides that the amount of R3.24 may only be paid without any adverse tax consequence arising when no other compensation in the form of a further allowance or reimbursement is payable by the employer to the recipient of the reimbursement at the specified rate.  

The payment of the allowance is also not subject to VAT as a fringe benefit in terms of section 18(3) of the VAT Act.

Company Owned Vehicle

Where the employer owns or leases a motor vehicle and makes that available to an employee the employee will be subject to fringe benefits tax on the value and usage of that vehicle in the manner set out in paragraph 7 of the Seventh Schedule to the Act.

In principle, the employee is subject to fringe benefits tax at a rate of 3.5% of the determined value of the motor vehicle for each month for which the employee is provided with the use of the vehicle by their employer.  

The determined value of the vehicle for fringe benefits tax purposes is normally the cash cost thereof, including VAT.  In the event that the motor vehicle, at the time of acquisition, is the subject of a maintenance plan, the rate of fringe benefits is reduced to 3.25% of the determined value of the motor vehicle on a monthly basis.

In the case of an employer owned vehicle, the vehicle will be owned by the employer and thus the employer will be liable to pay the e-tolls to the extent that the motor vehicle in question travels on tolled highways.

The employer will be entitled to deduct the cost of e-tolls as an expense incurred in the production of income in that it relates directly to the provision of the motor vehicle by an employer to an employee for purposes of its business. 

The employer will, so long as the travelling was for the purpose of making taxable supplies and they receive a valid tax invoice which complies with the provisions of section 20 of the Value-added Tax Act, Act No. 89 of 1991,(‘VAT Act’), be entitled to recover the VAT paid on the e-tolls as an input credit when submitting its VAT returns to SARS. 

Where the employee retains accurate records of business distance travelled it will be possible to reduce the taxability of the fringe benefit by taking account of the ratio of business kilometres to total kilometres travelled by the employee. 

Furthermore, where the employee pays for certain expenses relating to the motor vehicle, the value of the taxable fringe benefit may be reduced by taking account of the business kilometres travelled as a proportion of the total kilometres travelled during the tax year. 

In accordance with the provisions of the Fourth Schedule to the Act the employer is required to deduct PAYE on 80% of the value of the fringe benefit arising from the use of the employer owned vehicle unless the employer is satisfied that at least 80% of the employee’s travel is related to the business of the employer. In these cases the PAYE deduction is based on 20% of the value of fringe benefit in question.

Employee Owned Motor Vehicle

In this case the employee will receive an allowance as part and parcel of their remuneration package with the result that the travelling allowance received will be subject to PAYE such that 80% of the allowance paid per month will attract PAYE.  

Where the employer can be satisfied that 80% or more of the travelling undertaken by the employee is for business purposes only 20% of the allowance paid will attract PAYE.

It is essential for the employee to retain a log book recording distance travelled on the business of the employer and the nature thereof so that they may determine the total business kilometres travelled during the tax year and that portion of travelling with constitutes private travel for which no deduction is available.

When the employee completes their annual tax return they will be entitled to claim expenditure regarding the motor vehicle against the allowance received by taking account of actual business kilometres travelled during the tax year.  

The taxpayer is entitled to use either actual costs incurred in respect of operating the motor vehicle during the tax year or alternatively may rely on the table of costs prescribed by the Minister of Finance.

Where the employee chooses to claim expenditure based on actual expenditure incurred they will be entitled to take account of the cost of insurance, maintenance and other direct costs relating to the operation of the motor vehicle including fuel, depreciation on the motor vehicle and the cost of e-tolls.  

The table of costs prescribed by the Minister takes account of the fixed cost attributable to the motor vehicle which is an attempt to recognise the depreciation in the value of the a motor vehicle depending on the cost thereof as well as the fuel cost and maintenance cost.  

The table of costs currently in existence does not take account of the cost of e-tolls. 

The table of costs is unlikely to be amended because e-tolls are only applicable on certain highways in Gauteng and not in South Africa generally. 

The alternative for the employee is to seek the reimbursement of the actual e-toll costs incurred from the employer in respect of business travelling. 

This will be neutral for tax purposes from the employee’s point of view. 

The employer should be entitled to claim the reimbursement of e-toll costs as a deduction for income tax purposes under section 11(a) of the Act.

Where an employer reimburses an employee who travelled for taxable business purposes for e-toll costs that employer will be entitled to recover the VAT relating thereto even though the tax invoice will be issued in the name of the employee and not in the name of the employer. 

This is based on the provisions of sections 16(2)(a) and 54 of the VAT Act which regulates the position of input tax borne by an agent on behalf of their principal.  

Also, section 20(5) of the VAT Act does not require that the name, address and VAT registration number of the employer be reflected on a tax invoice where the consideration for the supply does not exceed R5 000.

Fleet owners and cartage contractors

Those businesses which own a large number of vehicles, such as the car rental companies will face an increase in their operating costs as a result of the introduction of e-tolls. 

Similarly, the transport contractors will experience an increase in their costs of moving goods around the country as a result of the imposition of e-tolls. 

The cost of e-tolls are directly related to the business conducted by such taxpayers and will be deductible under section 11(a) of the Act.

Where the affected businesses are registered for VAT, they will be entitled to recover the VAT incurred on the e-tolls if the vehicles were used in the course of making taxable supplies and so long as they are in possession of a valid tax invoice which meets the requirements of section 20 of the VAT Act.

The introduction of e-tolls will no doubt result in an increase in the cost of goods transported by road which will ultimately be carried by the consumer in South Africa. 

Conclusion

Where an employee receives a reimbursement of travelling at a rate not exceeding the amount specified by the Minister of Finance it may be possible to seek the reimbursement of e-toll costs without adverse tax consequences. 

However, it would be preferable if the rules regulating such reimbursement are clarified in this regard. 

In the case of a company or employer owned vehicle, the employer will be liable to pay the e-tolls and should be entitled to deduct that cost as a deduction for tax purposes.  

No adverse tax consequences should arise in so far as the employee is concerned who is subject to fringe benefits tax on the usage of the motor vehicle in any event.

In those cases where an employee receives a travelling allowance to finance the cost of travelling on the employer’s business a decision will need to be made whether to claim the actual expenditure incurred regarding the motor vehicle, including the cost of e-tolls or to rely on the table of prescribed costs as set out by the Minister of Finance from time to time.

Those businesses which own a fleet of vehicles for renting out to clients or which own trucks to transport goods around the country will face an increase in costs which will, no doubt, be recovered from their clients. 

The cost of e-tolls will be deductible for tax purposes in terms of section 11(a) and the VAT element should be recoverable where the business is registered for VAT purposes and the vehicle is used for taxable business purposes. 

Dr Beric Croome, Tax Executive, Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, February 2014.