Changes to bad debt allowance

Most South African businesses are at some point in time exposed to credit risk in the form of bad debts. Although taxpayers would undoubtedly prefer to recover the debts, the Income Tax Act[1] provides for some relief in cases where debts have become bad, or doubtful.

Not only does section 11(a) provide for the deduction of losses actually incurred in the production of income, section 11(i) and 11(j) are specifically aimed at a deduction or allowance for bad and doubtful debts respectively. These two provisions are, however, contentious mainly for two reasons. Firstly, there is no guideline in the Act, or clear test that has been established in case law, for when a debt is only considered to be bad, or “doubtful”, or has, in fact, become “bad”. This is an important consideration since it determines whether taxpayers can claim a permanent full deduction of the amount in terms of section 11(i), or merely an allowance in respect of section 11(j), that must be included in taxable income again in the subsequent year.

Secondly, the value of the allowance that taxpayers can claim in respect of “doubtful” debts has been a topic of dissent between taxpayers and SARS. Traditionally, taxpayers have claimed a 25% allowance in respect of such debts but some taxpayers, especially in the retail and unsecured debts market, have been challenged by SARS on the reasonability of the allowance. Recently, however, there has been an effort from the legislature to provide some certainty around the bad debts regime, at least in respect of the second value of allowances for “doubtful” debts.

Since 1 January 2018, banks can claim 25% of an impairment loss calculated in terms of the International Financial Reporting Standards (IFRS). In the Draft Taxation Laws Amendment Bill 2018, the legislature looks to extend this rate of allowance to other taxpayers as well, and specifically as follows:

  • Companies reporting in terms of IFRS: 25% of the loss allowance relating to impairment as calculated in IFRS 9 (excluding lease receivables); and
  • Companies that do not report in terms of IFRS: 25% of the face value of doubtful debts that are 90 days past due date.

Although the proposal to provide certainty is welcomed, some tax practitioners have made representations to National Treasury on the different treatment of taxpayers that report in terms of IFRS, and those who do not.

Whereas IFRS 9 makes provision for either a general or a simplified approach (or a combination thereof) that may be applied across a group of financial assets (debts) and that can also consider historical information, taxpayers that do not report in terms of IFRS 9 will be required to make an individual assessment of each debt to determine if such a debt is 90 days or more in arrears. This could cause practical difficulties where debtors have different terms or when payments are due (e.g. 30 days after invoice date or 30 days after statement date), especially where taxpayers have a significant number of low-value debtors.

It is suggested that there should not be any distinction between taxpayers that report in terms of IFRS 9 and taxpayers that do not, but rather that the guidance of IFRS 9 can be used to determine any impairment, even for taxpayers that do not report in terms of IFRS 9. This will also remove any inconsistent treatment of taxpayers, depending on the financial reporting framework that they are subject to. The suggestion is, therefore, that any taxpayer not reporting in IFRS may elect to apply IFRS 9 in determining its section 11(j) allowance. Submissions are currently being considered by National Treasury.

[1] 58 of 1962 (‘the Act’)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Valuation of preference shares

In income tax, the question of valuation of shares often causes a great deal of uncertainty, especially where shares are not traded on a recognised exchange. Although the Eighth Schedule to the Income Tax Act[1] in paragraph 31 gives some guidance on the market value of certain assets, the ‘catch-all’ method is the price that could have been obtained upon the sale of an asset between a willing buyer and a willing seller dealing at arm’s length in the open market.

The rules of capital gains tax determine that a person is deemed, on the date of their death, to dispose of all their assets (except for a limited number of exclusions) for an amount equal to the market value of those assets. Market value, and how it should be determined, is therefore a very important consideration.

Recently, the Supreme Court of Appeal in CSARS v The Executors of Estate Late Sidney Ellerine 2018 ZASCA 39 recently provided some more guidance on the valuation of preference shares in such a case, by considering the rights attached to those preference shares. The South African Revenue Service (SARS) argued that at the time of the deceased’s death, he was entitled to convert preference shares that he held in a company to ordinary shares and that the shares should be valued on that basis. This was a crucial consideration since it made the difference between the shares being valued at R563 million compared to its nominal value of R112 000.

After the Tax Court initially found that the deceased was not entitled to convert the preference shares to ordinary shares, the Supreme Court of Appeal considered certain amendments made to the company’s Memorandum of Incorporation (as it then was) as well as two special resolutions. Factually, based on these documents, the court found that the deceased was indeed entitled to convert the preference shares to ordinary shares on the date of his death. The shares, therefore, had to be valued at R563 million instead of R112 000.

There are two key lessons from this judgement. Firstly, the precedent that has been set that where a person has the right to convert preferences shares to ordinary shares, the preference shares should be valued on that basis.

Secondly, the true intention of parties should be reflected in the wording and construction of all documents. The legal team for the respondent in the Ellerine-case argued strongly that a purposive and contextual approach should be adopted in considering the Memorandum of Incorporation and special resolutions. The court was, however, not persuaded and indicated that while intention is important, the basic interpretation should be made with reference to what is recorded. Taxpayers are encouraged to seek professional advice prior to executing agreements to ensure that their true intention and the purpose for which they execute documents are clear from the wording used.

As can be seen from the Ellerine-case, failure to do so could be very costly.

[1] No 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

When to make use of the small claims court

This article discusses claims making use of the Small Claims Court. It specifies what the benefits are of approaching the Small Claims Court and who would have locus standi to do so. The article then establishes what Small Claims Court proceedings entail and briefly provides relevant information regarding judgments by this Court.

Article:

Introduction

The Small Claims Court provides a prompt and inexpensive way to resolve minor disputes. It is meant for the ordinary man and woman on the street who cannot afford civil litigation. In particular, the Small Claims Court can benefit the destitute and indigent in South Africa to be able to access justice in a very informal, cost-effective, and user-friendly manner.

The Small Claims Court is governed in terms of the Small Claims Court Act 61 of 1984 (‘the Act’) which is established for a time and cost-effective mechanism for those who have a claim against another party. The Small Claims Court is for anyone who wants to institute a minor civil claim against someone else. You can also institute claims against companies and associations.

However, the claims are limited to amounts that are less than R15 000. This excludes the State, meaning a person cannot, for example, make a claim against a local municipality. Claims brought to the Small Claims Court are dealt with quickly and cheaply without claimants having to appoint an attorney, and anyone, except juristic persons, are allowed to make use of this forum.

What does the process entail?

The procedure of lodging a claim in the Small Claims Court is fairly easy and straightforward. As in the case of most litigious claims in other courts, claims should initially be instituted by way of a letter of demand, which must be sent by registered post or be hand-delivered. In the letter of demand, one should set out all the relevant facts which give rise to one’s claim, and specify the amount being claimed. The party instituting the action should give the opposing party 14 working days in order to settle the claim, which is calculated from the date of receipt of demand by the defendant.

The Act provides that upon proof submitted to the clerk of the court that the requirements regarding the letter of demand have been complied with; and if the clerk of the court is satisfied that the plaintiff is a natural person; and that the summons comply with the prescribed requirements, the clerk of the court shall set a date and time for the hearing of the action and issue the summons. The summons will then be served on the defendant personally or by the sheriff of the court.

The hearing:

The claimant and the defendant must appear in court in person and the hearing will be chaired by the commissioner. Commissioners in the Small Claims Court are usually experienced legal practitioners. Remember that all the documents on which one’s claim is based should be brought to the hearing, as there is no point in showing up empty-handed. The Small Claims Court proceedings are basic and straight-forward. No legal representatives such as attorneys or advocates are involved in the proceedings, which contributes to the cost-effective nature of this mechanism. As the proceedings begin, answer any questions that the commissioner of the court may ask.

The judgment:

After the hearing of the action, the judgment will be given by the commissioner, which becomes final and enforceable. If the commissioner grants judgment in your favour, he or she will usually ask the defendant how the debt will be settled.  The commissioner can make an order for payment by instalments.  If no such order is made and the defendant does not pay or settle the judgment within two weeks, one can enforce this judgment by execution in the Magistrate’s Court. It must be noted that a judgment in the Small Claims Court is not appealable but may be taken on review.

Sources:

Small Claims Court Act 61 of 1984

Small Claims Courts: Guidelines for Commissioners

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SARS’ service charter

On 1 July 2018, the South African Revenue Service (‘SARS’) released a new version of its Service Charter. The release of the Service Charter has been widely welcomed and the timing thereof is optimal, since it coincides with the start of the 2018 tax filing season for individual taxpayers, as well as some senior personnel changes at the Revenue Service.The Service Charter broadly follows the same layout and order as the sections of the Tax Administration Act[1] and dispute resolution rules and contains service level targets for many legislated administrative matters that directly affect taxpayers. The most notable theme throughout the Service Charter is on SARS’s response time, which has traditionally been a frustration for taxpayers, especially regarding refunds. In terms of the Service Charter, SARS will endeavour to pay refunds (above R100), within seven business days if:

  • All obligations have been met and no other debt is due;
  • SARS administrative control procedures are adhered to; and
  • No inspection, verification or audit is required or has been initiated.

Other welcome proposals are SARS’s endeavour to speedily finalise inspections, audits and verifications as well as providing feedback to taxpayers regarding debt suspension and compromise of tax debts within a reasonable time. If adhered to, this will go a long way in removing the uncertainty and anxiety that often goes along with disputes.

It is however, important to note that as much as the Service Charter is an expression by SARS of expected timelines and the quality of service it wishes to offer taxpayers, the content of the Service Charter does not override legislation and SARS specifically includes this disclaimer. There still appears to be a lack of real substantive rights and recourse mechanisms available to taxpayers. Many of the commitments seem vague and non-committal. The primary dispute resolution options and relief available to taxpayers for disputes with SARS therefore remain the provisions of relevant tax acts, as well as the Office of the Tax Ombud. Although it is recommended that taxpayers familiarise themselves with the contents of the Service Charter, they should be weary if simply relying on the content of the Service Charter and should always ensure that they know what their rights are in terms of legislation.

Taxpayers should also remain hopeful that a taxpayer Bill of Rights is developed over time, as recommended by the Davis Tax Committee in its September 2017 report to the Minister of Finance. In terms of this report, taxpayers should have guaranteed rights that are enforceable and have legal effect, since rights are of no value if they cannot be enforced. Although this appears to be one of the shortcomings of the Service Charter, it could be a preamble to what may ultimately develop into a positive set of rules that promote taxpayer confidence.

[1] 28 of 2011

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

When should financial statements be audited, reviewed or compiled?

The Companies Act of South Africa (the Act) requires all companies to prepare financial statements within 6 months after the end of its financial year. A very popular question among business owners with regards to financial statements is whether the statements should be independently audited, reviewed or compiled. In determining the engagement type, the Act prescribes the following criteria to be applied:

Audited financial statements

  1. Any profit or non-profit company that, in the ordinary course of its primary activities, holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million;
  2. Any non-profit company, if it was incorporated:
  1. directly or indirectly by the state, a state-owned company, an international entity or a company; or
  2. primarily to perform a statutory or regulatory function in terms of any legislation, a state-owned company, an international entity, or a foreign state entity, or for a purpose ancillary to any such function;
  1. Any other company whose public interest score in that financial year is:
  1. 350 or more; or
  2. at least 100, but less than 350, if its annual financial statements for that year were internally compiled.

How to calculate your public interest score, to determine if you exceed 350 points or not:

  1. a number of points equal to the average number of employees of the company during the financial year;
  2. one point for every R1 million (or portion thereof) in third-party liabilities of the company, at the financial year end;
  3. one point for every R1 million (or portion thereof) in turnover during the financial year; and
  4. one point for every individual who, at the end of the financial year, is a member of the company, or a member of an association that is a member of the company.

Independent review of financial statements

The Act prescribes that an independent review of a company’s annual financial statements must be performed if the following apply and the company does not select to be voluntarily audited:

If, with respect to a company, every person who is a holder of, or has a beneficial interest in, any securities issued by that company is not a director of the company, that financial statements should be independently reviewed.

A company and its directors may choose to be voluntarily audited or reviewed if they wish to engage in an assurance engagement, although it has not been prescribed by the Act.

Compiled financial statements:

If none of the above-mentioned requirements has been met, the financial statements may be compiled.

With compilations, or compiled financial statements, the outside accountant converts the data provided by the client into financial statements without providing any assurances or auditing services.

If you need any assistance with your engagement in financial statements, do not hesitate to contact our friendly staff.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

SARS verifications, audits – When, why and what to do

Being selected for an audit and being selected for verification are two different processes.

Verification:

Once you have submitted your return, it could be selected for verification.

A verification involves a comparison of the information per your return against the financial records and other supporting documents to ensure that the information completed on the return is correct.

When a taxpayer is selected for a verification, it is very important that your supporting documents are submitted timeously; failing which, SARS will disallow any credits or deductions that you have claimed in your return.

Common examples of supporting documents for individual, salaried taxpayers are: medical aid certificates, travel logbooks and retirement annuity contribution certificates.

We as your tax practitioner have access to your eFiling profile and usually submit the requested documents on your behalf.

Once you have submitted all the requested relevant material, the verification should be finalised within 30 to 60 business days.

Once the verification is finalised, one of the following can be expected:

Notification of the finalisation of the verification Where no further risks were identified and no finding was made
Notice of assessment of the revised assessment Where no further risks were identified but a finding was made
Referral for audit letter Where further risks were identified

If you have a refund due, the refund will not be paid out while the verification is in progress.

Audit:

An audit is an examination of the financial records and supporting documents of the taxpayer to determine whether the taxpayer has correctly declared his/her tax position to SARS. SARS will generally ask questions relating to, for example, your rental property that forms part of your tax return. You will need to explain your circumstances to SARS and back up all your expense claims with invoices.

Any taxpayer can be selected by SARS for an audit on a random or cyclical basis.

It is, therefore, preferable to have all your invoices and supporting documents readily available before filing your return in case SARS selects your return for an audit.

The required relevant material will differ depending on the tax type and scope of the audit. SARS can also obtain relevant material from any third party.

If all supporting documents are valid and you can correctly answer SARS’ questions, there should be nothing to worry about if you are selected for an audit.

Once you have submitted all the requested relevant material, the audit should be finalised within 90 business days.

If you have a refund due, the refund will only be paid out after the audit has been finalised.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Employees’ Tax (part II): Are you a labour broker for Tax purposes?

The deduction of employees’ tax is dependent upon three elements being present. These elements are all defined in the Fourth Schedule to the Income Tax Act[1] and include i) the presence of an employer, ii) an employee and iii) the payment of remuneration. No employees’ tax can be charged if one of these elements is not present. However, due to the misuse of concepts such as “independent contractor” and “service company” to try and circumvent these elements, the Income Tax Act contains specific provisions dealing with “personal service providers” and “labour brokers” in order to combat such possible instances of avoidance of PAYE and to limit the available deductions from income in the determination of taxable income for these entities (very few deductions are available against remuneration).

A labour broker is any natural person[2] who carries on a business whereby he or she provides their clients with other persons (workers) to render a service or perform work for that client. It also includes services rendered in the form of procurement of workers for the client. (The workers are remunerated by the client and not the labour broker.)

Any payments made by a client to a labour broker is subject to employees’ tax at the rates applicable to individuals, unless the labour broker is in possession of a labour broker exemption certificate (IRP30A) for that specific tax year.[3]

In order to qualify for this exemption certificate, the labour broker must carry on an independent trade and must be registered as a provisional taxpayer and as an employer for Pay-As-You-Earn purposes. Furthermore, the labour broker must be up to date with all relevant tax submissions. No certificate will be issued if the labour broker provides the services of another labour broker to any of its clients or if the labour broker is contractually obliged to provide a specified employee of the labour broker to the client. Also, if more than 80% of the gross income of the labour broker for the tax year is received from only one client. However, an exemption to the last-mentioned rule applies in instances where the labour broker employs three or more full-time employees throughout the tax year in the business of the labour broker and these employees are not connected persons in relation to the labour broker.

Labour brokers without an exemption certificate may only deduct the remuneration paid to employees as an expense for income tax purposes.[4]

[1]No. 58 of 1962

[2]A company, close corporation or trust that provides such services is not classified as a labour broker.

[3]Labour brokers must apply for this exemption certificate annually as it is only valid for one tax year.

[4]Section 23(k) of the Income Tax Act. The prohibition does not apply to labour brokers who do have an exemption certificate.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Capital Gains Tax and the annual exclusion

With the 2018 tax-filing season for individuals in full swing, it is worthwhile looking at a common misconception regarding the determination of capital gains tax for individual taxpayers, specifically the role of the ‘annual exclusion’. Ensuring that the annual exclusion is applied accurately as determined in the Eighth Schedule to the Income Tax Act[1], especially where capital losses arise, will assist taxpayers in accurately completing their IT12 income tax returns and equally important, doing proper tax planning for the next tax year.

Apart from certain exceptions, individual taxpayers are required to calculate a gain or loss on the disposal of assets. This includes disposals of investments, property and even interests in private companies or close corporations. These gains or losses, which are calculated by deducting the base cost from the proceeds, should be aggregated to determine the potential tax exposure on the disposal.

Aggregate capital gain or loss

The annual exclusion is applied to determine the aggregate capital gain or loss for a year, which is a two-step process. Firstly, all capital gains for a year are reduced by all capital losses for the tax year, essentially a tally of all gains and losses realised during the year to arrive at a net total. Secondly, the net amount that has been determined, whether a gain or loss, is reduced by the annual exclusion of R40 000. The annual exclusion counts equally to reducing capital gains and losses. Importantly, the annual exclusion is not cumulative, unused portions are not carried forward to future years and it applies only to gains and losses from the current tax year. If the aggregated gain or loss is therefore less than R40 000 in the current tax year, disposal of assets in that year effectively have no impact on a person’s current or future years of assessment (although it is still a requirement to complete the information on the income tax return).

A person’s assessed capital loss from previous years of assessment is not, as commonly believed, reduced by the annual exclusion. Only after the aggregate gain or loss has been established, are capital losses from previous years considered.

Net capital gains or assessed losses

To arrive at a net capital gain or assessed capital loss, any assessed capital losses from previous tax years are deducted from aggregate capital gain, or added to aggregate capital losses, depending on the case. If there is still a net gain after deduction of previous losses, this amount is included in an individual’s taxable income at 40% (known as the taxable capital gain). If the aggregate capital loss of the current year is increased by the losses from previous years, this assessed capital loss is carried forward to be offset against capital gains in future years.

With the introduction of the tax-free savings account regime, it is expected that the value of the annual exclusion (which has increased from R10 000 for year of assessment prior to 2006 to the current R40 000), will not increase in future.

Fortunately, correct application of the annual exclusion is built into the eFiling system for individuals. It is however important that taxpayers understand its proper application in the unlikely event of errors on the eFiling system, and to accurately plan their capital gains exposure for future years.

[1] 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Employees’ tax (part 1): Personal service providers

For there to be an obligation for PAYE to be withheld is typically dependent on three elements being present. These elements are all defined in the Fourth Schedule to the Income Tax Act[1] and include the presence of an employer, an employee and the payment of remuneration. No employees’ tax can be charged if one of these elements is absent.

As a result of certain avoidance structures being implemented to avoid employees’ tax, specific tax provisions were introduced dealing with “personal service providers” (or “PSPs”) to combat such possible instances of tax avoidance and to limit the available deductions from income in the determination of taxable income for these entities.[2] What individual taxpayers would do to limit their effective tax rate (and to ensure that PAYE is not withheld from remuneration paid to them) otherwise would be to earn their salaries in entities controlled by them. In other words, an employee would arrange with his/her employer that a company owned by the employee would rather be rendering the same services as an employee to the employer. This company would then earn remuneration, even though it would be performing exactly the same services as the employee otherwise would have and had that individual not rendered those services through that company.

It was therefore necessary to include a PSP in the definition of “employee” for tax purposes. A PSP can be a company, close corporation or trust, where any service rendered on behalf of the entity to its client (the would-be employer) is rendered personally by any person who stands in a connected person relationship to such entity. One of three additional requirements must be met for an entity to be a PSP:

  • The client would have regarded the person as an employee if the service was not rendered through the entity.
  • Alternatively, the person must render the service mainly at the premise of the client and he/she is subject to control and supervision of that client as to the manner in which the duties are performed.
  • More than 80% of the income derived from services rendered by the company is received from one client.[3]

A PSP is deemed to be an “employee”[4] and any remuneration[5] received by the PSP is subject to the withholding of employees’ tax in the form of PAYE too. Income tax deductions for PSPs are themselves also severely limited, typically akin to what would have been the case for individual employees themselves. It is recommended that clients of potential PSPs should have policies and systems in place to correctly identify and withhold tax from these entities.

[1] No. 58 of 1962.

[2] Also see SARS Interpretation Note 35 (Issue 4) dated 28 March 2018.

[3] Also includes any associated person in relation to the client.

[4] See the definition of “employee” in paragraph 1 of the Fourth Schedule to the Income Tax Act.

[5] See the definition in paragraph 1 of the Fourth Schedule to the Income Tax Act.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The tax court reviews the deductibility of general business expenses

The recent Cape Town Tax Court judgment of S G Taxpayer v The Commissioner for the South African Revenue Service,[1] delivered on 9 May 2018, re-affirmed a number of key concepts regarding the deductibility of expenses for tax purposes generally in terms of the general deductions formula contained in section 11(a) of the Income Tax Act.[2] Significantly, the judgment also illustrates the importance of considering all of the relevant arguments and case law that may be applicable to transactions during dispute resolution or litigation.

The case concerned the deductibility of a contribution to an employee share-incentive scheme by the taxpayer. Based on the complex structure of the scheme and flow of transactions, SARS contended that the beneficiaries of the taxpayer’s contribution to the scheme were not the employees of the taxpayer themselves, but the special purpose vehicle used by the taxpayer to implement the scheme. As a result, SARS disallowed the contribution as a deduction on the basis that there is no sufficiently direct, causal link between the contribution and the production of income.

The court found that the test is that there must be a sufficiently close connection between the expense and the production of income in order to qualify as a deduction. A direct link, as contended by SARS, is not required. Regard must be given to what the expenditure actually affects and the purpose of the expenditure for the taxpayer. A causal connection is not established only with reference to the initial use of the expense and it is not necessary to show that a particular item of expenditure produced any specifically identifiable part of income for a particular year of assessment.

Based on these principles the court found that the purpose of the employee share-incentive scheme and the contribution thereto was to incentivise key staff members to be efficient and productive and remain in the employment of the taxpayer primarily. Accordingly, the contribution should be allowed as a deduction.

Apart from confirming settled principles regarding the deductibility of expenses, what is perhaps more interesting from the judgment is the number of possible arguments that SARS did not rely on, as highlighted by the court. Firstly, they advanced no arguments regarding the ‘negative test’ contained in section 23(g) of the ITA (often read in conjunction with section 11(a)), that does not allow any deduction to the extent that the expense in question was not expended for the purposes of trade. The court found that this omission, by implication, means that SARS accepted that the contribution by the taxpayer was in fact for the purposes of trade. SARS furthermore relied on case law where it was found that money spent by a taxpayer to advance the interests of the group of companies to which it belongs is not regarded as expenditure in the production of income. Despite referencing the case law, SARS never applied the precedent to the particular set of facts.

It is unclear to what extent the outcome may have been different if SARS did use any of these arguments, especially since the court confirmed that a case such as this is very fact-specific. This illustrates the importance of considering all relevant tax provisions, pertinent arguments and related case law when determining the tax consequences of transactions, specifically during dispute resolution or litigation, as it may significantly affect the ultimate outcome.

[1] ITC 14264, as yet unreported.

[2] 58 of 1962 as amended (the ITA).

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)