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)

The interpretative value of SARS interpretation notes

In terms of section 4 of the South African Revenue Service (SARS) Act,[1] one of the objectives of SARS is to secure the efficient, effective and widest possible enforcement of tax and related acts. One of the methods employed by SARS in this mandate is through the publication of official documents on the application, or SARS’s interpretation, of the acts which they administer – namely Interpretation Notes, which are generally available to taxpayers.

In a unanimous judgment on 25 April 2018, in the matter of Marshall and Others v Commissioner, South African Revenue Service,[2] the role of Interpretation Notes in the interpretation of statutes was considered. The judgment is of particular importance, since it has been generally accepted that Interpretation Notes provide context to legislation and “constitute persuasive explanations in relation to the interpretation and application of the statutory provision in question”,[3] but the weight that should be attached to Interpretation Notes during statutory interpretation, was unclear.

The case involved the interpretation of two sections of the Value-Added Tax Act,[4] dealing with the VAT treatment of payments received by the South African Red Cross Air Mercy Service Trust for services rendered to provincial health departments. The applicant was of the view that the SCA placed undue reliance on SARS’ Interpretation Note 39 in formulating its interpretation of the relevant sections, since it gives “rise to unequal treatment of the litigating parties and fly in the face of the right to a fair hearing.”

The Constitutional Court found that, in the context of statutory interpretation, an approach whereby reliance is placed on an interpretation which accords with a consistent application by those responsible for the administration of the legislation requires re-examination, especially in a constitutional democracy.

In arriving at a conclusion, Justice Froneman indicated the following:

Why should a unilateral practice of one part of the executive arm of government play a role in the determination of the reasonable meaning to be given to a statutory provision? It might conceivably be justified where the practice is evidence of an impartial application of a custom recognised by all concerned, but not where the practice is unilaterally established by one of the litigating parties. In those circumstances it is difficult to see what advantage evidence of the unilateral practice will have for the objective and independent interpretation by the courts of the meaning of legislation, in accordance with constitutionally compliant precepts. It is best avoided.

This makes it clear that courts should make an objective and independent interpretation of legislation and that Interpretation Notes (and arguably other interpretative materials), should be irrelevant to such an interpretation. Since SARS is often a party to tax litigation, Interpretation Notes containing their interpretation of legislation, cannot be considered independent. Despite the appeal being dismissed based on the finding that the SCA indeed interpreted the legislation independently and objectively, the judgment provides clear indication of the role of Interpretation Notes in fiscal interpretation. In short, it carries no value.

[1] 34 of 1997.

[2] [2018] ZACC 11.

[3] Dambuza JA in Commissioner, South African Revenue Service v Marshall NO [2016] ZASCA 158; 2017 (1) SA 114 (SCA) (SCA judgment).

[4] 89 of 1991 (the VAT 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)

Deductibility of interest for non-trading individuals

SARS Practice Note 31.2 (PN31.2) provides for a person to be able to deduct interest paid, even where that person is not a moneylender or doesn’t carry on any other trade, where that interest expense is incurred in the production of other interest earned to the extent that it does not exceed the interest income. Strictly, in terms of prevailing income tax legislation, this practice (which favours taxpayers) is not supported by the Income Tax Act, 58 of 1962.

Reliance on this practice by a taxpayer was recently considered in the Western Cape High Court.[1] Due to the unique structure of the taxpayer’s employment contract as a partner at a law firm, a portion of his profit share was withheld as an obligatory interest-bearing loan to the employer, to fund ongoing working capital requirements (‘director’s loan’). While periodic distributions of interest that accrued on the director’s loan was paid to him and treated as taxable income, he was not allowed to claim repayment of the capital for as long as he was in employment. At the same time, the taxpayer would incur interest on a bank loan used to purchase an immovable property (‘bank loan’).

The court had to consider whether there is a sufficiently close link between the interest incurred by the taxpayer on the bank loan, and the interest earned by him on the outstanding balance of the director’s loan. In other words, whether the bank interest can be said to have been incurred in the production of the interest income on the director’s loan.

The taxpayer contended that it did since he would have used the proceeds of the director’s loan to repay the bank loan had it not been for the strict repayment terms, and in the process reducing the capital and interest incurred on the bank loan. He considered the portion of the bank loan equal to the director’s loan as a loan payable on which an interest deduction should be allowed. This was supported by evidence of deposits into the bank loan from distributions of profit share which could also be matched.

The court found that even assuming the funds standing in credit of the director’s loan are ‘capital’ or ‘surplus’ funds as required by PN31.2, any distributions he receives thereon are entirely in the discretion of his employer. As a result, he was not solely reliant on the distributions to maintain the bank loan and the fact that he made deposits into the bank loan from profit distributions does not distract from this fact. To have access to the bank loan, he had to maintain it from sources other than distributions on the director’s loan. Accordingly, the purpose of the bank loan was to provide him with a facility, and not to maintain the director’s loan. It cannot be said that interest paid on the bank loan brought about interest earned on the director’s loan. He would have received interest on the director’s loan, irrespective of the existence of the bank loan. Accordingly, the court disallowed the taxpayer’s appeal for deduction of the interest incurred.

An important takeaway from the judgment is the distinction the court made between the two scenarios dealt with in PN31. Firstly, PN31.1 deals with a scenario where an interest expense was incurred in the carrying on of a trade, while PN31.2 deals with a scenario where a taxpayer does not carry on a trade. The requirements of the two paragraphs should be considered separately and not treated as a single principle. It is therefore important for taxpayers that want to claim interest deductions and rely on PN31 to consider both scenarios, especially if they are not in the business of lending money.

[1] L Taxpayer vs The Commissioner for the South African Revenue Service (Case A124/2017, on appeal from the Tax Court).

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)

Under what circumstances can a private company and/or close corporation be deregistered?

During the registration of a company or close corporation that entity acquires a legal personality. This legal personality comes to an end when the directors and/or members decide to deregister the entity. A company or close corporation can be deregistered in one or more of the following ways:

  • by means of a request from the directors and/or members of the company or close corporation or a similar request by a third party in instances where the entity is no longer trading, has no assets or liabilities and there is no reasonable likelihood that it will be liquidated;
  • by means of a request from the Companies and Intellectual Property Commission (CIPC) in instances where a company or close corporation’s prescribed annual returns have been outstanding for two years or longer;
  • by means of a request from the CIPC when it is found that a company or close corporation has for at least seven years been inactive and no person has demonstrated a reasonable interest in the continued existence of the entity; and
  • in instances where the registration of the company and/or close corporation is transferred to a foreign jurisdiction.

In terms of Article 33 of the Companies Act No. 71 of 2008 (the Act) companies and close corporations are required to submit annual returns to the CIPC. The purpose of such CIPC return is to confirm that:

  • a company or close corporation is in business;
  • a company or close corporation is trading; and
  • a company or close corporation will still be in business and trading in the near future.

If a company or close corporation fails to submit the prescribed CIPC returns for two or more years the CIPC will assume that the entity is inactive and will take the necessary steps to deregister it. The effect of such deregistration will be the following:

  • that the company or close corporation will be deprived of its legal personality and will consequently no longer be able to enter into binding business transactions and agreements;
  • that the company or close corporation may no longer trade under its registered name;
  • that the assets of a deregistered company or close corporation are automatically transferred to the state as bona vacantia;
  • that, should there be existing debts to creditors, these debts are not cancelled but become unenforcable against the entity;
  • that CIPC removes the name of the company or close corporation from the register and the name becomes available for future use;
  • that any summons served on a deregistered company or close corporation cannot be enforced but also that a deregistered company or close corporation may not serve a summons on a debtor that fails to pay.

In an instance where CIPC deregisters a company or close corporation as described above, any interested person, including a third party who has a direct or indirect financial interest in the company or close corporation, may apply to have the deregistration reversed. It is also possible to apply to the court to request CIPC to reverse the deregistration.

When the deregistration of a company or close corporation is reversed, the company or close corporation acquires similar legal personality, and any rights or privileges that existed before deregistration again vests in the company or close corporation. The general effect is that the entity is deemed not to have been deregistered in the first place.

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)

Tax deductions against salary earnings

Our clients who earn only a salary will know that very few tax deductions are available against salary income for income tax purposes and whereby they may reduce the taxable income derived ultimately from such remunerations. Section 23(m) of the Income Tax Act[1] provides that none of the deductions ordinarily available to taxpayers in terms of section 11 are allowed against salary income, other than for a limited few. We set out these deductions which are available below:

  1. Contributions made by taxpayers to a pension fund, provident fund or retirement annuity fund may be deducted against salary income in accordance with the provisions of section 11F;
  2. To the extent that an individual incurs legal fees, wear and tear-related costs or bad or doubtful debts as part of his/her employment, such expenditure will be deductible.[2] (Although it is possible that a wear and tear-related allowance may be available against a laptop or textbooks acquired as example, it is in our experience practically highly unlikely for legal fees, bad debts and doubtful debts to arise from an employment trade);
  3. Where amounts received, either as a restraint of trade payment or as ordinary remuneration for employment services rendered, are refunded by the employee, those amounts refunded may be legitimately claimed as an income tax deduction;[3] and
  4. Expenses incurred towards rent of, cost of repairs[4] of or expenses in connection with any dwelling, house or domestic premises, those costs may be claimed as deductions, to the extent that it is incurred as part of the individual’s employment and on condition that it does not offend the provisions of section 23(b) which deal with “home office” expenses.

Other than for the above, very few other deductions are available for individual taxpayers earning only a salary. Outside the ambit of section 11, the only other deductions which we typically encounter are medical aid contributions incurred, amounts claimed against travel allowances received or donations made to qualifying public benefit organisations. Of late, investments in section 12J “venture capital companies” may also be claimed as income tax deductions against salary income.

The above limitations only apply to salaried income received from employment though. Where an individual is also engaged in another trade (such as the renting out of an apartment), the above limitations do not apply to that separate trade. In such case, section 23(m) will not make the deductions in section 11 unavailable, although this is only as relates to the separate (rental) trade.

 

[1] No. 58 of 1962.

[2] Sections 11(a), (c), (i) and (j) respectively.

[3] Sections 11(nA) and (nB) respectively.

[4] In terms of section 11(d).

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)

Korporatiewe Beheer – Naamsveranderinge

Dit staan ʼn maatskappy of beslote korporasie vry om sy naam te verander indien verkies.  Vir maatskappye sal die naamsverandering ʼn spesiale besluit tot gevolg hê wat deur die aandeelhouers van die maatskappy goedgekeur moet word en in die geval van ʼn beslote korporasie moet die lede van die beslote korporasie die naamsverandering goedgekeur.

Voor die naam van die maatskappy of beslote korporasie verander kan word, moet voorgestelde name aan die “Companies and Intellectual Property Commission” (“CIPC”) voorgelê word vir goedkeuring. Daar kan vier opsies van moontlike name verskaf word aan CIPC in volgorde van keuse. Wanneer CIPC tevrede is met ʼn voorgestelde naam, sal hulle dit vir die gebruik van die maatskappy of beslote korporasie reserveer vir ʼn tydperk van 6 maande.  Die reservering kan ná 6 maande vir ʼn verdere tydperk van 1 maand verleng word, maar kan daarna nie verder verleng word nie en sal verval, waarna  ʼn aansoek weer ingedien sal moet word.

Die voorgestelde name van maatskappye en beslote korporasies moet aan verskeie vereistes voldoen soos uiteengesit in Artikel 11 van die Maatskappywet van 2008 (“die Wet”).  Hieronder volg ʼn lys van enkele van hierdie vereistes –

  • die naam mag woorde in enige taal insluit;
  • die naam mag nie dieselfde of verwarrend soortgelyk wees aan –
    • die naam van ʼn ander maatskappy, geregistreerde buitelandse maatskappy, beslote korporasie of koöperasie nie, tensy die maatskappy/beslote korporasie deel uitmaak van ʼn groep wat soortgelyke name gebruik;
    • ʼn naam geregistreer vir die gebruik van ʼn persoon as ʼn besigheidsnaam ingevolge die Wet op Besigheidsname, Wet no. 27 van 1960, nie;
    • ʼn geregistreerde handelsmerk wat aan ʼn ander persoon behoort, of ʼn handelsmerk ten opsigte van ʼn aansoek vir registrasie as ʼn handelsmerk in die Republiek ingedien is nie, of ʼn welbekende handelsmerk soos in Artikel 35 van die Wet op Handelsmerke, Wet no. 194 van 1993, beoog nie;
    • ʼn handelsmerk, woord of uitdrukking waarvan die gebruik ingevolge die Wet op Handelswaremerke, Wet no. 17 van 1941, beperk of beskerm word nie;
  • die naam mag nie valslik impliseer of voorgee, of sodanig wees dat dit ʼn persoon redelikerwys sal mislei om verkeerdelik te glo dat die maatskappy/beslote korporasie –
    • deel is van of geassosieer word met ʼn ander persoon of entiteit nie;
    • ʼn staatsorgaan of ʼn hof is, of deur die staat, ʼn staatsorgaan of ʼn hof bedryf, geborg, gesteun of onderskryf word nie;
    • besit, bestuur of bedryf word deur ʼn persoon of persone wat ʼn bepaalde opvoedkundige benaming het nie;
    • besit, bedryf, geborg, gesteun of onderskryf word deur, of die ondersteuning geniet van enige internasionale organisasie, buitelandse staat, staatshoof, regeringshoof, regering of administrasie van ʼn departement van so ʼn regering of administrasie nie;
  • die naam mag nie ʼn woord, uitdrukking of simbool insluit wat, in isolasie of in samehang met die res van die naam redelikerwys geag kan word as oorlogspropaganda, aanhitsing tot onmiddellike geweld of voorspraak vir haat gebaseer op ras, etnisiteit, geslag of geloof, of aanhitsing om skade te veroorsaak uit te maak nie.

Hierdie artikel is ʼn algemene inligtingsblad en moet nie as professionele advies beskou word nie. Geen verantwoordelikheid word aanvaar vir enige foute, verlies of skade wat ondervind word as gevolg  van die gebruik van enige inligting vervat in hierdie artikel nie. Kontak altyd ʼn finansiële raadgewer vir spesifieke en gedetailleerde advies. (E&OE)

Changing banking details with SARS

In order to prevent fraud, the South African Revenue Service (“SARS”) requires confirmation of new or any changes to existing banking details and will only process any refunds due once these new details have been verified. (This often leads to frustration among taxpayers whose refunds are being withheld without notification of banking details that require verification.)

Taxpayers have various options available on how to proceed with this verification process. It can either be done in person at any SARS branch (if the person is not registered on eFiling) or the details can, in limited instances, be updated when completing the person’s income tax return (for both individuals and companies). The banking details can also be updated when requesting a transfer duty refund or by completing the relevant RAV01 form[1] on eFiling. SARS will not allow updates to the SARS system via other forms of communication (e.g. email, fax, post[2] or telephone).

Registering or changing of banking details for customs and excise clients cannot be done via eFiling. These taxpayers need to visit a SARS branch office and submit a completed DA185 application form[3] together with specific supporting documentation.

SARS will only accept as a valid bank account a cheque, savings or transmission account in the name of the relevant taxpayer. Credit card, bond and foreign bank accounts are not accepted.

Persons that are allowed to change banking details only include the relevant taxpayer, a registered representative of that taxpayer (whose details match those on the SARS system) or a registered tax practitioner acting on behalf of the taxpayer. A tax practitioner may not further delegate an employee to act on behalf of the client, but needs to be present him- or herself to request the necessary changes.[4] SARS lists certain exceptional circumstances where banking details may be changed by someone other than the aforementioned persons (for example, in the case of estates or where the taxpayer is a non-resident unable to go to a branch office).

SARS also provides detailed guidance on the supporting documentation what should be provided when changing banking details. Typically, this includes the original ID document of the taxpayer, a certified copy of that document and proof of the residential or business address of the taxpayer. The same is required of the registered representative or tax practitioner if applicable. SARS also requires the taxpayer to present bank statements of the account holder (not older than 3 months) as proof thereof that the bank details provided are correct.

To avoid having to stand in those long SARS queues (potentially, more than once) ask us to assist with this process.

[1] Registration, Amendment and Verification form

[2] This also includes placing documents in the drop-box at a SARS branch.

[3] Registration / Licensing of Customs and Excise

[4] See form ASPOA – Authority on Special Power of Attorney by Tax Practitioner.

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)