issue37

The official journal of theSouth African Institute of Tax Practitioners

November/December 2012ISSN - 1845-5896

The ATAF Transfer pricing is a high priority

TaxTalk Nov/Dec 3

Welcome to the last issue of TaxTalk for 2012. It seems as if we only just signed off the last issue for 2011, and here we are almost at the end of 2012.

The Tax Administration Bill came into effect on 1 October 2012, and there has already been a misunderstanding regarding the cut-off date for taxpayers wishing to submit their VAT returns via eFiling. SARS responded quickly to clear up this issue. However, eFiling users should note that

interest and penalties are chargeable with effect from the 25th of the month, where a return is filed or payment is made after the last business day of the month.

In this issue we have an update on the African Tax Administration Forum by Logan Wort, acting executive secretary of ATAF. Transfer pricing remains a high priority area for ATAF as does the exchange of information on tax matters. We would urge anyone who is involved with transfer pricing or cross border transactions to learn of any new updates in these areas (visitwww.ataf.org for more information).

Some of our subscribers have asked about the criteria for lifestyle audits by SARS and in this issue we feature a response to a parliamentary question which will give some insight into the subject.

We would like to remind you that TaxTalk is now available in an electronic format via Zinio, the world’s largest newsstand. Should you wish to subscribe to the electronic version or convert from your current subscription to the electronic version, please contact us at info@taxtalk.co.za.

We wish our readers the very best for 2013, and travel safely over the holiday period.

Until next time.

Opinions expressed in this publication are those of the authors and do not necessarily reflect those of this journal, its editor or its publishers, COSA Communications. The mention of specific products in articles or advertisements does not imply that they are endorsed or recommended by this journal or its publishers in preference to others of a similar nature, which are not mentioned or advertised. While every effort is made to ensure accuracy of editorial content, the publishers do not accept responsibility for omissions, errors or any consequences that may arise therefrom. Reliance on any information contained in this publication is at your own risk. The publishers make no representations or warranties, express or implied, as to the correctness or suitability of the informa-tion contained and/or the products advertised in this publication. The publishers shall not be liable for any damages or loss, howsoever arising, incurred by readers of this publication or any other person/s. The publish-ers disclaim all responsibility and liability for any damages, including pure economic loss and any consequential damages, resulting from the use of any service or product advertised in this publication. Readers of this publication indemnify and hold harmless the publishers of this magazine, its officers, employees and servants for any demand, action, application or other proceedings made by any third party and arising out of or in connection with the use of any services and/or pro-ducts or the reliance of any information contained in this publication.

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The official journal of the South African Institute of Tax

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While independent, TaxTalk is the official SAIT journal.

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ediTORiAl

editorLiz Jonesliz@taxtalk.co.za

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Dear reaDer

conTenTs

06 The ATAF

Transfer pricing is a

high priority

10 Negotiating tax in Africa

12 Political tax talk

14 IT14SD requirements

and difficulties

22 SARS overreacts after SCA

decision on exit taxes

28 More regulations for

tax advisers

30 Winning Idols is a taxing affair

Our annual subscription fee for 2012 is R290.

4 TaxTalk Nov/Dec

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READER’s FORUM

CAN A PERSON WHO HAS A CRIMINAL RECORD ACT AS A TRUSTEE ON A TRUST?

It will depend on the

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Section 20(2)(a) of the

Trust Property Control Act

57 of 1988 provides that:

“A trustee may at any time

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(a) if he has been

convicted in the Republic

or elsewhere of any offence

of which dishonesty is an

element or of any other offence for which he has been sentenced to

imprisonment without the option of a fine:” [Emphasis added].

The use of the word ‘may’ as opposed to the word ‘shall’ implies

some sort of discretion on the part of the Master of the High Court

when considering all the facts. In light of the fact that the position

of trustee is a fiduciary one, it is highly unlikely that if someone is

found guilty of an offence of which dishonesty is an element that

they would be permitted to continue acting as a trustee.

The trust deed may, however, in no uncertain terms, state that a

person automatically ceases to be a trustee if the circumstances

presented themselves. This would mean that the trustee is

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authority to bind the trust. If such a person, notwithstanding the

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capacity to bind the trust.

2(A) CAN A PERSON WHOSE ESTATE HAS BEEN SEQUESTRATED ACT AS A TRUSTEE?

Section 20(2)(c) of the Act provides that:

“A trustee may at any time be removed from his office by

the Master-

(c) if his estate is sequestrated or liquidated or placed under

judicial management;”

Again, the use of the word ‘may’, presupposes discretion on

the part of the Master to remove a trustee from office in such

circumstances. The wording of the trust deed may, on the other

hand, state that a trustee who is sequestrated must either resign

from office, or that they will automatically be deemed to have

vacated the office of trustee if such person is sequestrated.

2(B) DOES THE POSITION CHANGE UPON REHABILITATION?

Yes. Once rehabilitated, a person is restored to full contractual

and legal capacity and would not then be disqualified from acting

as a trustee. Sequestration affects your legal status and curtails

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Heather Pretorius

Heather Pretorius Consulting

hp_legal@mweb.co.za

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The ATAF Transfer pricing is a high priority

TaxTalk caught up with the african Tax administration Forum, which is in the process of establishing itself as an international organisation.

6 TaxTalk Nov/Dec

TaxTalk Nov/Dec 7

Originally there were 34 members of ATAF; is this number still the same or has membership increased? how do you anticipate increasing the membership? What is the cost of membership and where do these fees get paid to?

The ATAF membership has grown to 35

member states, geographically positioned within

the African continent. The latest members

include Chad, Seychelles, Mozambique and

Burundi; with the recent addition of the

Comoros Islands. ATAF has increased its

membership by reputation and has not sought

an aggressive recruitment process as we are in

the process of legally establishing ATAF as an

international organisation.

We have extended invitations to the

forthcoming second meeting of the ATAF

general assembly, taking place in September

2012, to several African states that are not

currently members of the organisation. Our

objective is for these countries to attend

some of the sessions of the meeting and

engage with active members to experience

the benefits that membership can offer.

In mentioning one of these benefits, only

members may attend ATAF technical events as

part of ATAF’s capacity-building programme.

The cost of membership is based on the GDP

of a particular country, and ATAF currently has

a three-tier structure in place for the payment

of annual membership fees. The ATAF rules

and procedures contain the exact fees of

each tier. The annual contribution of fees

range from US$5 000 at the lowest tier to

US$32 000 at the top tier.

What are the priority areas for 2011/2012? i would imagine that transfer pricing would be high on the list.

Yes, transfer pricing (TP) will remain a priority

item on our agenda for a long while. Studies

by civil society organisations have shown that

TP is responsible for up to 60% of tax loss

on the continent. The formation of the ATAF

Working Group on Transfer Pricing last year

serves to assess the areas of need for our

members in the technical realm of transfer

pricing. We also conduct capacity-building

training events for our members on transfer

pricing, which are facilitated by highly skilled

international experts. The ATAF Technical

The other priority areas for this year, which

will no doubt be carried forward into next year,

will be exchange of information in tax matters.

The ATAF Working Group on Exchange of

Information and Tax Treaties is doing great

work in developing agreements such as double

taxation agreements (DTA) and tax information

exchange agreements (TIEA) to facilitate

negotiations between members.

In April this year, ATAF held a technical

conference on the exchange of information

and tax treaties, which was well attended

by our members. The conference, supported

by the European Commission, drew guest

speakers from the Global Forum, SADC, the

OECD and the Norwegian Ministry of Finance,

to present a global perspective in this area.

We have now completed a multi-country

negotiation of an ATAF agreement on mutual

assistance in tax matters that has been

presented to members to sign up to in terms

of their domestic legal processes. This

agreement will allow for mutual information

exchange of taxpayer information, joint

assessment and audits as well as inter-

country support on complex tax matters. With

the support of the GIZ, 22 ATAF members met

and agreed on the final text of the agreement.

ATAF is also focused on establishing itself as an

international organisation with full legal status.

In this regard we are finalising the host country

agreement with South Africa and rolling out the

structure of the permanent secretariat.

In line with our 2013 work plan, we aim to

launch our first online training programme

and conduct a further six technical events. In

addition, we will finalise the research on the

reform priorities of African tax administrations

and continue with work on the establishment

of an African tax centre.

how many employees does ATAF employ?

The ATAF secretariat currently has 14

personnel members. The majority have been

seconded to ATAF from the South African

Revenue Services (SARS). At this stage,

the secretariat also employs five short-term

consultants who assist in the research stream.

We have two virtually seconded personnel

members; one from the Botswana Unified

Revenue Service (BURS), and another from

the Federal Inland Revenue Service of Nigeria

(FIRS). Each of these seconded staff members

assists with the co-ordination of the various

ATAF working groups.

Conference on Transfer Pricing will also take

place in March next year, which will allow

members to engage with and participate in

discussions with these seasoned experts.

Another priority area is the establishment of

the ATAF Technical Assistance Unit (TAU).

This facility will form part of the broader

ATAF capacity-building programme and seeks

to deliver technical assistance to African

revenue administrations in areas of scarce

skills, specialised tax functions, and audits

and investigations. ATAF has already received

numerous requests from various members to

assist with the provision of transfer pricing

experts to receive hands-on advice in their

respective revenue administrations.

“We conduct capacity-building

training events for our members on transfer

pricing, which are facilitated by highly skilled international

experts.”

Logan Wort | Acting executive

secretary of ATAF

The final independent secretariat will employ

13 full-time staff members.

What is the progress on the African tax centre? What will its focus be and who are the developmental partners?

A feasibility study on the establishment

and maintenance of the ATC has been

finalised and will be presented at the second

meeting of the ATAF general assembly for

further consideration. The outcome of the

deliberations will indicate whether or not it

is viable to proceed with the implementation

process of the ATC. Based on the options

detailed in the feasibility study, the final

decision regarding the focus and collaboration

of development partners in the process of

establishing and maintaining the ATC rests

with the general assembly. More information

will be made available shortly.

how many of the current members attended the meeting, ‘ATAF Agreement on Mutual Assistance in Tax Matters’ (AMATM) held in Pretoria from 25 to 27 July 2012?

Twenty-two ATAF member states participated

at the recent AMATM meeting: Benin,

Botswana, Burundi, Cameroon, the Comoros,

Ghana, Kenya, Lesotho, Malawi, Mauritius,

Mozambique, Namibia, Niger, Nigeria,

Rwanda, Seychelles, South Africa, Swaziland,

Tanzania, Uganda, Zambia and Zimbabwe.

Securing the attendance of the majority of

the ATAF members at such an important

meeting shows that our members are serious

about taking the necessary steps to promote

exchange of tax information for the prevention

of fiscal evasion and avoidance.

The focus of the meeting was to consider and

agree on the text of the mutual assistance

agreement in order for each member state to

sign up to the agreement, which entails that

they would be required to proceed with their

domestic processes of ratification/accession of

the agreement.

how will ATAF manage the exchange of information in the absence of the to-be-negotiated info ex agreement in Africa, which will take a few years to finalise?

Information exchange can proceed with those

countries that have existing bilateral and

double taxation agreements. In the case of

the ATAF agreement on mutual assistance

in tax matters, it comes into effect once five

countries have signed up. The signatories can

then immediately benefit from the provisions

of the agreement.

What are the focus areas for ATAF in looking into the tax affairs of cross-border taxpayers in Africa?

This is a matter for individual tax

administrations. ATAF will facilitate where

requested and, with the AMATM agreement,

provide support to countries that co-operate

on cross-border assessment, service and

audits. However, transfer pricing and company

financials will be an important focus.

Where do you think the biggest tax leakage is in Africa?

Various research efforts, by mainly tax NGOs,

shows intercompany transactions resulting

in aggressive transfer pricing structures

and especially thin capitalisation, as major

culprits. There are concerns with aggressive

financial structures, corruption and the narrow

tax base on the continent.

how closely do you work with us and european tax authorities?

ATAF’s co-operation with Europe and the US

tax authorities is mainly through the OECD

and its forum on tax administration. ATAF

also co-chairs the OECD task force on tax

and development. We have, however, been

in direct contact with the tax authorities of

the United Kingdom and the Netherlands,

both of whom have supported ATAF technical

events. We have also been contacted by the

US Inland Revenue Service with a view to

co-operate on several projects. We expect

that as ATAF grows and establishes itself as a

continental tax body, more and more of these

engagements will take place.

“ATAF will facilitate where requested and, with

the AMATM agreement, provide support to countries that co-

operate on cross-border assessment, service

and audits.”

8 TaxTalk Nov/Dec

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10 TaxTalk Nov/Dec

Cor Kraamwinkel | Associate

director | PwC’s corporate

international tax division

“Africa offers great potential in terms of investment,

but multinationals need to strategise business deals

carefully in order to reduce their tax burden,” says

Cor Kraamwinkel, an associate director in PwC’s

corporate international tax division. He points

out that African jurisdictions are known for their

inconsistent tax rates. “There is no harmony in

tax rates across the continent. The corporate tax

rates are high. There are also high withholding

tax rates. This places significant challenges on

multinationals wanting to do business and cross-

border transactions.”

Furthermore, the double taxation treaty network in

Africa is scattered, with no single jurisdiction having

treaties with all of Africa. The value-added taxation

(VAT) systems are also inconsistent in that in some

jurisdictions taxpayers are unable to claim an input

VAT. “The tax authorities are renowned for being

suspicious of foreign multinationals wanting to enter

into cross-border activities in the African continent.”

Kraamwinkel says multinational companies should

consider the most effective solution and whether it’s

possible to negotiate with the African tax authorities

about possible tax treatments, the interpretation of

various laws and the resolution of various disputes.

The African Tax Administration Forum (ATAF)

recently stated in media reports that it is aware of

complaints by multinationals that have had dealings

with African tax officials who lack an understanding

of complex and technical legislation. As a result,

ATAF has trained more than 400 tax officials on

the continent in various aspects of tax, including

technical training programmes.

Kraamwinkel adds multinational companies usually

find themselves in a difficult position when making

business decisions as the tax laws regarding complex

cross border business transactions may not be

Multinational companies doing business in Africa need to consider the most efficient way of negotiating their tax affairs with the revenue authorities. “Effective negotiations can mean the difference between success and failure,” says professional services firm PwC.

NegotiatiNg tax iN africa

TaxTalk Nov/Dec 11

“There are wide differences in Africa regarding advance rulings. Furthermore, companies should not assume that they can get a tax ruling in any country, as some countries in Africa do not have advance tax ruling systems in place.”

clear. In certain jurisdictions, taxpayers have

the opportunity to see the tax authority’s

interpretation of the law by way of advance

tax rulings. “There are wide differences in

Africa regarding advance rulings. Furthermore,

companies should not assume that they

can get a tax ruling in any country, as some

countries in Africa do not have advance tax

ruling systems in place.”

Where disputes do arise, certain countries do

allow tax disputes to be resolved by way of an

alternative dispute resolution (ADR) process,

thereby avoiding the need to approach the

courts. South Africa has offered this to

taxpayers for several years. ADR can either be

initiated by the taxpayer or the South African

Revenue Service (SARS).

Kraamwinkel says that some authorities in

Africa may be lenient towards taxpayers who

acknowledge they have made a mistake

and approach revenue to correct past errors.

In such cases, they are prepared to waive

penalties for late payments of taxes. However,

many countries, such as Uganda, are often not

willing to entertain the waiver of tax penalties.

A number of African jurisdictions offer tax

incentives to attract and retain greater levels

of foreign direct investment. However, there is

a move towards codifying tax incentives and

doing away with unregulated tax holidays or

other incentives, particularly in the wake of

the recent economic uncertainty. Kraamwinkel

says that this is in line with international

norms and efforts to regulate the tax laws.

“Multinationals need to be careful when

entering into tax incentive negotiations with

African jurisdictions. If they reach an agreement

with government officials that is not supported

by law, they may find that such arrangements

are later challenged based on the fact that

officials did not have the necessary authority.

The organisation could be held liable for hefty

fines and penalties for failing to comply with

the applicable tax laws. “Businesses must be

aware of the relative laws when negotiating

deals and the legal basis of tax incentives and

tax holidays.”

Lobbying to influence the tax laws on the

African continent does take place in varying

degrees. “It should not be viewed as inherently

bad, but rather as a bridge between policy

makers and the practical business world.

It may be an invaluable tool to taxpayers

and government to ensure the continued

development of tax laws in Africa. Some

countries allow for formal input from taxpayers

on tax policy matters, while others encourage

lobbying on an informal basis.”

Lobbying involves extensive research, planning,

organising and, most importantly, relationships.

“It’s about whom you know and are connected

to.” Kraamwinkel warns that some African

tax authorities tend to remain cautious and

suspicious of taxpayers, particularly foreign

multinationals carrying out large business

transactions. “Multinational companies need

to know who to speak to in government

departments. Having a good track record is vital

and can make a difference between the success

and failure of a deal.”

“It should not be viewed as inherently bad, but rather as a bridge between policy makers and the practical business world. It may be an invaluable tool to taxpayers and government to ensure the continued development of tax laws in Africa.”

NegotiatiNg tax iN africa

12 TaxTalk Nov/Dec

Political tax talk

Dr Dion George | shadow

Minister of Finance

Pravin Ghordan | Minister

of Finance

Dr DT George (DA) put forward a question to the Minister of Finance in the National Assembly as to whether an implementation plan has been drawn up for the proposed sA Revenue service (sARs) audit of individuals whose lifestyles do not match their declared earnings.

The minister replied that the South

African Revenue Service (SARS)

employs a risk-based approach

to identify and investigate non-

compliance with tax and customs

laws. The lifestyle audit has been used over

many years as one of several methods to

establish non-compliance with tax laws

and obligations.

TaxTalk Nov/Dec 13

Political tax talk

“A total number of 72 926 audits – across all tax types and on all categories of taxpayers – with varying degrees of depth were concluded during 2008/09. Of these 1 740 were in-depth investigations of individual taxpayers.”

Risk-profiling is applied to all tax entities

(individuals and businesses) and across all

tax types or tax products: personal income

tax (PIT), corporate income tax (CIT), value-

added tax (VAT) and customs and excise

duties. Over time, SARS has improved its

capability to gather and analyse taxpayer

information. This has significantly improved

SARS’ risk rules that identifies undesirable

tax planning and tax evasion.

SARS obtains taxpayer information from

various sources – verification and analysis

from third party data sources, the SARS

anti-corruption and fraud hotline, income

tax returns a taxpayer submits to SARS

and suspicious activity reports from

members of the public.

A lifestyle questionnaire is one method

of obtaining information from a taxpayer

and, together with other information sources, assists

SARS in matching the lifestyle trends, income streams

and the asset base of a taxpayer, to what has been

declared in an income tax return. The accumulated

wealth has to be explained by the taxpayer for tax

purposes. Any unexplained wealth is taxed.

The Compliance and Risk Unit within SARS conducts

the risk analysis of taxpayer information. If there is a

mismatch between what the taxpayer has declared and

what SARS has found, the case is referred for an audit.

If it is confirmed that the taxpayer has evaded tax,

penalties are levied, interest is charged and additional tax

of up to 200% of the evaded tax is charged. Depending

on the circumstances, the case may then be handed to

SARS criminal investigation who then engages the South

African Police Service (SAPS) and a Specialised Tax Unit

for criminal prosecution within the National Prosecuting

Authority (NPA).

A total number of 72 926 audits – across all tax types and

on all categories of taxpayers – with varying degrees of

depth were concluded during 2008/09. Of these

1 740 were in-depth investigations of individual taxpayers.

The key message to all South Africans is that they must

declare all their income in their income tax returns

and pay their fair share of tax in accordance with the

law. Government’s ability to deliver services to the vast

majority of poor people in South Africa and implement its

economic and other programmes depends upon the taxes

paid by all citizens.

(2) Section 4 (1) of the Income Tax Act requires SARS

to preserve and aid in preserving secrecy with regard to

all matters that may come about in the performance of

its duties and prevents the communication of any such

matter to any person whatsoever other than the taxpayer

concerned or his or her lawful representative. As a result,

SARS is not legally in a position to either confirm or deny

whether an audit is being conducted on any particular

person or legal entity.

“The accumulated wealth has to be explained by the taxpayer for tax purposes. Any unexplained wealth is taxed.”

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respecting any matter of which a return is required”.

A year after its launch, it is clear that the form does

successfully attempt to enhance tax compliance;

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The IT14SD is designed to reconcile the following types of tax returns

with the relevant line items in the IT14 income tax return submitted

to SARS:

• PAYE as per the EMP201 to employment costs expense in the

IT14.

• Profit/loss as disclosed in the financial statements to taxable

income as calculated in the IT14.

• Total output VAT as declared in the VAT201 returns during the year

to total turnover in the IT14.

• Total input VAT as declared in the VAT201 returns during the year

to total cost of sales in the IT14.

In essence, it is meant to reconcile companies’ and CC’s accounting

reporting to their tax reporting.

An in-depth understanding of the taxpayers business and industry

is needed in order to accurately reconcile these amounts and it is

perceived, therefore, that in order to mitigate non-compliance risks,

companies and CCs must ensure they have sufficient expertise at their

disposal (whether external or internal) to perform this task.

Some examples of areas of difficulty in performing the required

reconciliations are:

• Total employment costs may include certain expenses that are

not subject to PAYE; for example, provisions for bonuses and

leave pay, staff welfare and training. These expenses would need

to be accurately excluded from total employment costs for this

reconciliation.

• There are often differences in timing between VAT periods and

financial year end of a company. Companies will therefore need to

ensure they have an accurate reconciliation between these dates.

• The IT14SD attempts to reconcile output VAT declared to the

turnover as per the annual financial statements, however there are

certain additional transactions which would need to be taken into

account, such as bad debts recovered, disposal of fixed assets,

16 TaxTalk Nov/Dec

“A small company with few sales lines, minimal different operating expenses, basic employee cost structures and no separately registered divisions or branches would likely be able to derive the required information from their financial statements or, if needed, their trial balance.”

rental income, insurance proceeds and recoveries. In

certain industries such as construction, the revenue

recognition principles are complex and very much

different from your standard business, which would

make this reconciliation much more cumbersome.

• The IT14SD attempts to reconcile input VAT declared

to cost of sales which therefore has not taken into

account other expenditure on which input VAT may

be claimed, such as purchases of fixed assets and

marketing and administration expenses. In addition,

it is unclear to what amount service organisations

(who are unlikely to have a cost of sales amount)

should reconcile. It is also unclear to practitioners

and business organisations what benefit can possibly

be derived by the SARS in the calculation of input

VAT on cost of sales when no accounting system

separates the input VAT on cost of sales from all

input VAT claimed by companies.

The above examples serve only to scratch the surface of

a variety of complexities that may be discovered when

attempting these reconciliations. A small company

with few sales lines, minimal different operating

expenses, basic employee cost structures and no

separately registered divisions or branches would likely

be able to derive the required information from their

financial statements or, if needed, their trial balance.

A more complex organisation with multiple sales lines

including zero-rated sales, exports and imports, property

investments, multiple separately registered branches and

divisions and various accounting provisions is likely to

have a much tougher time unless their accounting system

is set up in a detailed enough manner to be able to extract

the required information.

Companies should conduct a detailed review of their current chart of accounts,

accounting policies and procedures and set up internal controls that would assist in the

compilation of the required information. The trial balance should be presented in a way

that would not only serve to produce financial statements that are compliant with the

relevant accounting framework, but is also easy to use to compile tax information. This

will result in a more detailed trial balance and more onerous bookkeeping requirements,

but the proactive approach will assist in preventing reconciliation difficulties.

It is recommended that companies

employ the service of an appropriately

qualified accountant in order to assist

with this structure and bookkeeping

staff should be suitably trained on

the different tax effects of certain

transactions. Whether companies opt to

mitigate this additional risk externally

(e.g. contracting a tax consultant or

accountant) or internally (e.g. employing

a tax accountant, training of current

staff), it is likely to give rise to additional

actual costs or opportunity costs of the

additional time spent on administration.

Investing in the most efficient structures

up front could save a lot of time and

stress down the line.

It is expected that SARS will implement

certain revisions to the current form,

which will hopefully allow for more clarity

and details with regard to reconciling

items, certain fields to be pre-populated

and further guidance on the requirements

of the form. The IT14SD is just another

tool SARS uses to ensure that taxpayers

are become more tax compliant and, in

effect, is transferring much of the back-

office administration from SARS to the

taxpayer. The Taxation Administration Act

became effective from 1 October 2012

and lays out requirements which will

enable practitioners to comply across

the different tax acts and also identifies

the consequences of non-compliance

which makes provision for criminal

offences for, among other offences,

wilfully or negligently failing to submit a

return. Companies and tax practitioners

should proactively ensure that their

accounting systems and internal controls

are designed in a way to ensure they

are able to complete an IT14SD within

the required 21 days as failure to do so

may result in SARS issuing a revised

assessment potentially disallowing

all expenditure and the company

therefore being taxed on their turnover.

The process to rectify the assessment

then requires going through the formal

objection process which may cause

further consequences such as interest

being charged and delays in issuing tax

clearance certificates. It is recommended,

in these situations, that companies

follow the pay-now-argue-later principle

by settling the revised assessed taxes

due before submitting the objection.

This is likely to put extreme strains on

most companies’ cash flows that further

justifies the view that it is in companies’

best interests to avoid the potential

pitfalls of the IT14SD through putting the

relevant structures in place.

Qdos is underwritten by Hollard, an authorised financial services provider.

C

M

Y

CM

MY

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CMY

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qdos_WITH HOLLARD.pdf 1 2012/08/06 3:47 PM

18 TaxTalk Nov/Dec

The recent downturn in the

economy affects not only private

companies, but government

organisations too, including the

South African Revenue Services.

SARS has been hard at work to identify a

way to increase the analysis of company VAT,

PAYE and customs information to ensure that

they receive what they are legally due.

In October 2011, the Supplementary

Declaration (IT14SD) form was introduced.

This form primarily ensures VAT compliance

and verification through the reconciliation of

all financial data. Prior to the introduction

of this document, companies could simply

extract a report from their existing financial

system and submit the values. If you were

one of the unlucky ones, you got a visit

from the tax man to double check that the

submitted figures were indeed correct. But

going forward that will no longer be the case.

For the time being, the form only needs to be

completed upon request from SARS. But going

forward it will become a mandatory requirement

for all registered companies to submit it. The

submission of the form is required within 21

days so it really doesn’t give much time to

analyse hundreds or possibly thousands of

items to ensure that they are compliant. Very

few companies have either the systems or

human resources capable of performing these

highly complex reconciliations.

Some companies might be able to upgrade

their existing systems to ensure that they

are able to produce the data in the required

timeframes. However, this is no simple

improvement as the software would have

to be able to do the verified reconciliation

of the differences required by SARS. These

calculations are complex and not easy to bolt

onto existing systems. Furthermore a single

system upgrade might not suffice, as the

form requires VAT, PAYE and customs data,

from data that is stored in multiple separate

systems. In such cases analysis needs to be

done from reports produced from the source

systems. Reports have an inherent weakness

as they can introduce added problems of

information that has been manipulated or

even excluded.

Other companies are forced to use a largely

manual process but lack either the capacity

or specific skills needed resulting in the

appointment of external consulting firms at

additional expense. A manual process is time

consuming and submission deadlines would

need to be renegotiated with SARS. Even

after many months of effort, it is unlikely

that the result will be 100% accurate as

human error will always be a factor.

The best solution would be a fully automated

data analytics system that accesses 100%

of VAT-related data from source regardless

of where in existing software it is housed.

Relevant data from SAP, Oracle, JDE,

AS400, Excel or other systems would be

extracted and processed by examining

every transaction and identifying any the

exemptions that require investigation. The

tax rules and calculations would be applied

correctly and consistently to ensure a reliable

result. An automated system would provide

an easy way to identify problems within

the tax calculations, eliminate human or

system errors, detecting possible fraudulent

transactions and preventing companies having

to face financial penalties from SARS.

CQS Technology Holdings, together with BDO,

have launched a VAT continuous monitoring

solution to address all of these issues. Using

the power ACL, the worldwide leader in

data analytics, VAT|CM is able to ensure tax

compliance for income tax, corporate tax, VAT,

service tax, customs, sales tax, use tax, PAYE

taxes or other taxes that companies may be

required to pay.

Simply stated it produces the IT14SD reporting

as well as the supporting data accurately and

timeously, meeting all of SARS regulatory and

compliance requirements.

SarS aND it14SD

“An automated system would provide an easy way to identify problems within the tax calculations, eliminate human or system errors, detecting possible fraudulent transactions and preventing companies having to face financial penalties from sARs.”

TOTALLY INTEGRATED SOLUTION

Accfin is the only company that offers

a totally integrated software solution

for your tax department. Our tax man-

agement, tax preparation and eFiling

interface are in fact one software pro-

gram. This means that through our

product Tax Advisor you can prepare

the tax return with all the supporting

schedules. Start off by downloading

the tax return and the IRP5 data for

your whole client base. Enter the rest

of the data and then go through a re-

view and a signing process by moving

the tax return around the office elec-

tronically. When signed off by simply

clicking a button you can submit the

return electronically to SARS in sec-

onds. This saves you having to go

onto the SARS eFiling web site and

recapturing the data.

Our system does not stop there be-

cause when SARS processes the

assessment our management sys-

tem, Tax Manager will receive the tax

assessment from SARS in an elec-

tronic format and will produce a daily

assessment difference report. The

ACCFINS TAX SYSTEMS WILL SAVE YOU 50% OF YOUR TAX COMPLIANCE LABOUR

Question is how many tax assess-

ments have you missed and how

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dreaded call from SARS about money

owing and your firm does not even

know about it? What’s more is that

you will receive the assessment no-

tice and balance of account notice

in PDF format which will be down-

loaded to a folder on your system

with a link for easy accessibility - one

click to open, and you still have not

gone on to the SARS eFiling website!

TIME SAVED

Let us just take the actual preparation

of a tax return. The question is if you

are not using our system how many

times do you have to load the return

on the SARS eFiling website before

you finalize and sign off. How many

times do you have to load data into

some software system in order to do

the preparation and calculation?

We can guarantee a saving of 40 min-

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work out on average a charge out rate

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Note that we handle IT14’s, IT12’s and

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If you have read this far I am sure by

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least have a look at our product to see

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For more information please visit our

website at www.accfin.co.za

Mark Silberman

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22 TaxTalk Nov/Dec

In a tax court case in 2010, a taxpayer successfully challenged the levy by the south African Revenue service (sARs) of the so-called ‘exit taxes’, taxes that are imposed when someone changes their place of residence for tax purposes.

Barry Ger | B Bus sc LLB B Com

(Honours) (Taxation) (UCT)

senior Manager, Corporate Tax

barry.ger@kpmg.co.za

vERiFiAbLE ARTicLE

min30

The decision was taken to the Supreme

Court of Appeal (SCA) and, on 8

May 2012, judgment in the case of

Commissioner for the South African

Revenue Service v Tradehold Ltd (case

no 132/2011) was handed down. The taxpayer

was successful once again. What was surprising,

however, was SARS’s somewhat belligerent

response to its defeat: a media statement was

issued immediately that decried the judgement as

contrary to the legislature’s intention and shortly

thereafter (on 5 July 2012) legislative amendments

were proposed that overhauled and extended the

laws relating to exit taxes.

This, it is submitted, was an overreaction. This

article will attempt to show that the decision of the

SCA rested on very specific and unique facts that

are unlikely to be encountered again. Taxpayers

who believe that a loophole has been opened by

this case, allowing a departure from South Africa

without tax are sadly mistaken.

To put this into perspective, it would be useful, as

a starting point to explain a little about how exit

taxes work.

WHAT ARE EXIT TAXES?

Essentially, exit taxes refer to the tax consequences

that arise upon ceasing to be a resident of South

Africa. The case, under discussion, concerned

itself specifically with the capital gains tax (CGT)

consequences.

Upon ceasing to be a tax resident, a person is

deemed to have disposed of certain of its assets

for proceeds equal to their market value. If the

proceeds from this deemed disposal exceed the

base cost of the affected assets, the taxpayer will

be liable for tax on the capital gain that arises.

Moreover, this deemed capital gain is treated as

having arisen on the day before the taxpayer ceases

to be a tax resident so that SARS will still have the

power to tax these gains.

SarS overreactS

AFTER scA DEcisiON ON ExiT TAxEs

TaxTalk Nov/Dec 23

SARS justifies the imposition of these taxes on the basis that once an entity

of person has terminated their South African tax residence, South Africa

loses its right to tax certain assets. But for these taxes, SARS argues, the

latent capital gain that was built up in these assets while the person was in

the country will be forever lost to South Africa’s tax base.

Furthermore, these taxes provide a useful anti-avoidance mechanism

designed to prevent taxpayers from leaving the country purely so that they

may realise their capital assets in jurisdictions which have lower, or no, CGT.

You may ask, of course, just how does one cease to be a tax resident? In the

case of an individual, this may be accomplished by emigrating. In the case

of a company, however, it is generally performed by changing the company’s

place of effective management to another country in a manner that will

result in a shift in tax residence. While a discussion of the concept of a place

of effective management goes somewhat beyond the scope of this article, let

it be understood, as the place where the managerial decisions affecting the

company are taken.

THE DISPUTE

The taxpayer disagreed. It pointed out to SARS that the South

Africa-Luxembourg treaty had a clause in it which stated

that gains from the alienation of property, aside from certain

exceptions, would be taxable only in the country in which

the taxpayer was resident. As the taxpayer was a resident

of Luxembourg from the date when it moved its effective

management there for treaty purposes, the taxpayer argued that

even if a gain was deemed to have arisen upon it ceasing to be a

South African resident, South Africa could not tax it.

SARS rejected this argument. According to SARS, the clause

in the treaty only referred to actual transfers of ownership in

property, not deemed alienations of property, as was the case

here. Hence the treaty could not be used to exempt the taxpayer

from tax. It contended that if the treaty did apply to deemed

alienations, then it would mean that taxpayers who migrated

to countries with similar treaties to the one South Africa had

concluded with Luxembourg would never face exit taxes. (This

was somewhat misguided since the law required the exit taxes to

arise on the day immediately before the day the person ceased to

be a resident of South Africa, in any event.)

A BRIEF DESCRIPTION OF

THE FACTS

The facts in the Tradehold case

were that the taxpayer, Tradehold

Ltd, a South African investment

holding company that had been

listed on the Johannesburg Stock

Exchange, resolved on 2 July 2002

that, since an investment company

requires limited management, all

future board meetings were to be

held in Luxembourg. This meant

that, from 2 July 2002, all future

managerial decisions would be

made outside of South Africa. In

other words, from that date, the

company had its place of effective

management in Luxembourg and

not in South Africa. The taxpayer

had thus become a resident of

Luxembourg. Notwithstanding

this, the taxpayer was viewed as

remaining a resident of South Africa

for domestic purposes only because

it was incorporated here.

However, this state of dual

residency would not last long. On

26 February 2003, the definition

of ‘resident’ in the South African

Income Tax Act changed to make

it clear that it excludes taxpayers

who were deemed to be exclusively

residents of other countries for

the purposes of double taxation

agreements (i.e. treaties that

determine taxing rights between

countries so that countries may

not subject a taxpayer to tax on the

same amount). As the South Africa-

Luxembourg treaty deems taxpayers

effectively managed in Luxembourg

to be Luxembourg tax residents,

the taxpayer ceased to be a South

African resident for domestic tax

purposes as of 26 February 2003.

The loss of domestic residence

was, SARS alleged, the trigger

for the aforementioned exit taxes.

SARS argued that in its tax year

ending on 28 February 2003, the

company would be deemed to have

disposed of its shares and would

thus have to pay CGT on the gain

that was treated as having arisen in

its hands.

“If the proceeds from this deemed disposal exceed the base cost of the affected assets, the taxpayer will be liable for tax on the capital gain that arises.”

cASe STuDy

24 TaxTalk Nov/Dec

SOME OBSERVATIONS

It may be submitted that although the reasoning of the courts is

not beyond reproach, SARS’s response is unwarranted.

As a consequence of the 2003 change to the definition of

resident and the fact that the disposal is deemed to take place

on the day before residence ceases, the circumstances of this

case can never be replicated, and any change to the laws

relating to exit taxes is unnecessary. Tax treaties can be applied

only when two countries have a right to tax the same income.

Sometimes this is because a taxpayer may be resident of one

country but derives income from a source in another. At other

times, this arises because the same income is sourced in two

different countries; or, as in the circumstances under discussion,

a taxpayer is resident of both countries.

At the date when the taxpayer in this case changed its place of

effective management (i.e. 2 July 2002) to Luxembourg, it was

still possible for a South African tax resident to remain a resident

of South Africa and become a resident of another country as

well. It was for this reason that the South Africa-Luxembourg

treaty could be of application on the day before the taxpayer

ceased to be a South African resident (1 July 2002), i.e. the

date on which the deemed capital gain arose.

Since 26 February 2003 though, when the definition of resident

changed, dual residence when a treaty exists is all but impossible.

This means that, on the day before a taxpayer ceases to be South

African resident, the taxpayer can only be South African resident

and a treaty cannot be of application in the same way the South

Africa-Luxembourg treaty was in this case.

If a treaty is not of application, it would not be able to interfere

with the South African laws concerning exit taxes. South Africa

would therefore be free to tax gains arising from the deemed

alienation of a taxpayer’s property without worrying about clauses

in international treaties assigning taxing rights to foreign climes.

While it is heartening to see a taxpayer finally victorious in

the SCA after so many recent dubious decisions that went the

other way, it must be acknowledged that the principles of this

particular judgement are confined to very limited circumstances.

It is unfortunate that SARS did not realise this and has now

burdened our already turgid Income Tax Act with even more

redundant and restrictive amendments. If the proposals are

adopted, companies leaving South Africa will now be worse off

than they were prior to the case. Notwithstanding the judgement

in the Tradehold case, exit taxes are still with us and will be for

some time to come.

RULINGS OF THE COURTS

SARS’s argument did not find sympathy

in the Tax Court or in the SCA. Both

courts upheld the taxpayer’s objection

to its assessment.

In their view, a deemed disposal of

property should not be treated any

differently from an actual disposal of

property for tax treaty purposes. The

term ‘alienation’ in the treaty was

neutral and could refer to both actual

and deemed disposals that gave rise to

capital gains.

The mere fact that taxpayers who

migrated to countries which had

treaties with these clauses and thus

would not be taxed on their deemed

disposals was no reason for concluding

that the treaty did not apply. After all,

the same could be said of taxpayers

who actually disposed of their

property in South Africa but were

shielded from South African CGT

because of this clause in the treaty.

From 2 July 2002 then, the South

Africa-Luxembourg treaty became

applicable to the taxpayer and

Luxembourg had exclusive taxing rights

over all the taxpayer’s capital gains.

THE REACTION TO THE JUDGEMENT

Our revenue authorities reacted almost

immediately to the decision. On the

day following the judgment, a media

statement was released which claimed

that the ruling “that a double taxation

agreement applied to a deemed disposal

and thus did not allow for an exit charge”

had “disturbed the balance that has

been achieved”. It warned that, after the

judgement was studied by the National

Treasury and SARS, amendments with

an effective date running from the day

the judgement was delivered may apply

to clarify that a tax treaty did not apply

to deemed or actual disposal while a

taxpayer is resident in South Africa. This

threat was carried out.

In the Draft Taxation Laws Amendment

Bill, 2012 which was released in July

2012, new measures were proposed to

bolster and extend exit taxes. It has been

proposed that from 8 May 2012, any

persons that change tax residence will

be deemed to end their tax year on the

day before they become resident of the

foreign country. This is to ensure that

they cannot rely on tax treaties to escape

exit taxes.

In addition to the CGT charge, companies

that leave South Africa will be hit with

dividends tax as well. Upon departure,

they will be deemed to have distributed

their assets to shareholders and thus will

be levied with an extra 15% tax on the

value of those assets. (This is similar to

the Secondary Tax on Companies of 10%

that used to be imposed when companies

changed their South African residence

prior to 1 April 2012).

“south Africa would therefore be free to tax gains arising from the deemed alienation of a taxpayer’s property without worrying about clauses in international treaties assigning taxing rights to foreign climes.”

26 TaxTalk Nov/Dec

The process is governed by the Basic Conditions of Employment Act (BCEA), which sets out the legal structure of all employment contracts and the rights of employees to ensure they are fairly

treated in terms of annual leave and severance or notice pay. Many of the calculations for leave pay are quite complex and arriving at the correct allocations manually or on spreadsheets is a time-consuming

The end of the year is in sight and companies face the administrative burden of making the complex calculations related to determining the correct leave pay due to individual employees.

automateD Payroll Software eNSureS

exercise. “All of these calculations have to

be correct or the company will breach the

provisions of the BCEA,” says Phil Meyer,

technology director of payroll and HR

software specialist Pastel Payroll, part of the

Softline Group and Sage Group plc.

The BCEA aims to ensure that leave pay is

fully representative of individual employees’

actual earnings. Meyer says the calculations

have to take into account variable income

types and must be based on the average

earnings of each employee over the 13

weeks preceding the date upon which

leave becomes effective. “There are many

elements that affect the calculations such

as overtime, commissions, allowances and

other payments. The bottom line is that

they lead to fluctuating income so each

employee’s income has to be calculated

individually. It can be a nightmare to

execute this manually or on spreadsheets.”

Automated payroll and HR software retains

detail of all of the variable income paid

to each employee so that the calculation

for the average income over the 13 weeks

preceding the leave is not only accurate,

but is available immediately with a few

key strokes.

Circumstances may lead to some

employees benefiting from higher variable

earnings during the three months prior to

the leave date. For example, accounting

staff may take leave when company

“The automated payroll and HR software therefore always operates in full compliance with the Act, ensuring that the BCEA leave payments are not subject to basic finger trouble, interpretation or even fraud.”

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financial year-end audits are completed, thereby benefiting from the

overtime payments they may have received during the preceding 13 weeks.

Similarly, people employed in the construction industry, which usually shuts

down in mid-December, are also likely to have worked overtime to ensure

contracts are completed before shut-down and therefore their leave pay

calculations will be affected.

“In consultation with management, payroll administrators can establish

parameters that the software will automatically follow so that calculations of

average earnings are always consistent with the requirements of the BCEA

and fair to all concerned,” says Meyer.

Users of automated payroll and HR software also benefit from the fact that

the software developers monitor amendments to the BCEA and provide

updated versions whenever new legal requirements are promulgated.

“The automated payroll and HR software therefore always operates in full

compliance with the Act, ensuring that the BCEA leave payments are not

subject to basic finger trouble, interpretation or even fraud.”

In addition, automated payroll and HR software solutions offer functionality

that enables the user to give the entire company an increase, based on either

a set value or a specific percentage as well as process a production bonus or

commission using only one screen. This not only saves time, it allows global

changes to be made to any transaction within the payroll system for all, or a

selection of employees.

Employee Self Service (ESS) is a web-based self-service tool that enables

employees to manage and maintain their own information online as well

as submit leave online to carry some of the overall HR administration

burden. This saves the payroll administrators time and eliminates manual

leave applications and capturing. In addition, companies can view a leave

summary of their teams according to leave types (annual, sick, family,

unpaid) and leave status (approved, applied, declined) for easy leave

management and skeleton staff planning over December holiday times.

28 TaxTalk Nov/Dec

Consulting a registered tax practitioner offers a

substantial potential benefit to taxpayers in that

it may allow them to qualify for remittances. In

addition, a taxpayer in receipt of an opinion from a

registered tax practitioner is more likely to receive

a reduction in penalties imposed by the South African Revenue

Services (SARS).

With such importance being placed on the opinions of tax

practitioners and advisers, there is a strong need to regulate their

activities and the industry as a whole.

The TAA requires people providing tax advice or completing SARS

documents on behalf of clients to ensure that they comply with

more regulatioN FOR TAx ADvisERs

The role of tax practitioners and other intermediaries is set to change as a result of the new Tax Administration Act, No. 28 of 2011 (TAA) coming into force on 1 October 2012, and the Draft Amendment Bill 2012 (Draft Amendment Bill) published for comment on 5 July 2012.

Nina Keyser, partner; Toinette Beckert, associate; and Charmaine Louw, candidate attorney,

Webber Wentzel

its registration requirements. Its

provisions are to a large extent the

same as those in the Income Tax

Act, No. 58 of 1972 (ITA). Section

67A of the ITA states that every

natural person who provides advice

in respect of the application of any

tax legislation, or who completes

or assists in completing any

document to be submitted to SARS,

must register with SARS as a tax

practitioner within 30 days after

first providing advice or completing

any SARS document. The Draft

Amendment Bill also proposes to

reduce the registration period to 21

days and provides that a registered

tax practitioner must be registered

with both SARS and a controlling

body. Tax practitioners not currently

registered with a controlling body

must register with one prior to

being a registered tax practitioner.

The same exemptions from

registration as is currently the case

under the ITA will apply. These

exemptions include the following

persons:

• Those persons who are removed

from a related profession during

the preceding five years.

• Those persons who have been

convicted of theft, fraud, forgery

or any other offence involving

dishonesty and for which he or

she has been sentenced to a

period of imprisonment exceeding

two years without the option of

a fine, or to a fine exceeding

the amount prescribed in the

Adjustment of Fines Act, No. 101

of 1991.

Failure to register as a tax

practitioner is an offence and a

person may be liable on conviction

to a fine or to imprisonment for a

period not exceeding two years.

A controlling body will include

bodies established voluntarily

vERiFiAbLE ARTicLE

min15

TaxTalk Nov/Dec 29

They will also be required to have at least 1 000 members or

the reasonable prospect of 1 000 members when applying for

recognition with SARS.

A senior SARS official may lodge a complaint with a controlling body

regarding a registered tax practitioner or a person who carries on a

profession governed by the controlling body. These complaints could:

• Relate to anything that, in the opinion of the senior SARS official,

was intended to assist, or by reason of negligence caused, the

taxpayer to avoid or unduly postpone the performance of an

obligation imposed under tax legislation; or

• Include a contravention of a rule or code of conduct that may

result in a controlling body taking disciplinary action against a

registered tax practitioner.

The Draft Amendment Bill proposes further grounds for a

complaint, including:

• Not exercising due diligence in preparing or submitting

documentation to SARS.

• Unreasonably delaying the finalisation of any matter

before SARS.

• Acting with gross incompetence.

• Being grossly negligent with regard to any work performed as a

registered tax practitioner.

• Knowingly providing false or misleading information on matters

relating to the application of any tax act.

• Attempting to influence any SARS employee.

Tax practitioners will need to ensure they comply with all

registration requirements and carefully consider the extent of the

duty on them, particularly when issuing opinions.

more regulatioN FOR TAx ADvisERs

or under law, with the power to

take disciplinary action against a

person who contravenes the rules or

code of conduct of that profession.

These bodies may, in terms of the

Draft Amendment Bill, include the

Independent Regulatory Board for

Auditors, the South African Legal

Practice Council (if and when this

body is formed) or any other similar

statutory body as published in the

Government Gazette by the Minister

of Finance.

The Draft Amendment Bill proposes

that the controlling bodies must

maintain minimum qualification and

experience requirements; continuing

professional education requirements;

codes of ethics and conduct; and

disciplinary codes and procedures.

TecHTALK

FOOTNOTE:

Controlling bodies currently regulating practitioners, voluntary or

statutory, in the broader tax, legal and accounting professions are sAIT,

LssA, sAICA and sAIPA.

“The Draft Amendment Bill also proposes to reduce the registration period to 21 days and provides that a registered tax practitioner must be registered with both sARs and a controlling body.”

“Tax practitioners not currently registered with a controlling body must register with one prior to being a registered tax practitioner.”

30 TaxTalk Nov/Dec

sophia Brink | CA(sA), MCom

taxation, lecturer at the

Department of Accounting of

stellenbosch University.

On 2 October 2012, south Africa’s eighth Idols winner was announced, winning prizes worth R1 000 000 (including R500 000 in cash, a car and a recording deal with Universal Music sA). Almost three million south Africans voted and Kaya Mthethwa was crowned the winner of the singing competition.

The question arises whether this prize received by Mthethwa may be subject to normal income tax. The ‘gross income’ definition in the Income Tax Act No. 58 of 1962 (the Act) includes a general inclusion definition as well as specific inclusions (as set out in paragraph (a) - (n)).

wiNNiNg iDolS is A TAxiNG AFFAiR

“If gambling activities are systematically undertaken, to the extent that they become a business or scheme of profit-making, all the proceeds are income in nature.”

GENERAL DEFINITION

The basis for the levying of normal income tax lies

in the definition of ‘gross income’ in section 1 of

the Act. The definition reads as follows:

“Gross income, in relation to any year or period of

assessment, means –

• inthecaseofanyresident,thetotalamount,

in cash or otherwise, received by or accrued

to or in favour of such resident … during

such year or period of assessment, excluding

receipts or accruals of a capital nature...”

Normal income tax can be levied only if all the

requirements of the definition are met. The

prizes received by Mthethwa will meet the first

three requirements, i.e. total amount, in cash or

otherwise, received by or accrued to. Uncertainty

exists about whether or not the prize received is

of a capital nature.

The general rule is that any prize or winnings

are capital in nature and therefore excluded

from a taxpayer’s gross income. The example

most commonly used is proceeds from

gambling activities. When gambling activities

are undertaken as a means of entertainment or

hobby, the proceeds are capital in nature and not

taxable. If gambling activities are systematically

undertaken, to the extent that they become a

business or scheme of profit-making, all the

proceeds are income in nature. Amounts derived

by a professional gambler or a racehorse owner

are therefore subject to normal income tax where

betting is a regular practice.

vERiFiAbLE ARTicLE

min45

TaxTalk Nov/Dec 31

INTENTION

The most important test used by the courts in

deciding whether a receipt is income or capital in

nature is the intention of the taxpayer. The most

obvious reason an Idols contestant will enter the

competition is to establish a singing career. The

cash and recording deal will realise any amateur

singer’s dreams.

FREQUENCY OF A TRANSACTION

The frequency of a transaction may provide a

useful guide in distinguishing between income

and capital. An isolated or once-off transaction

usually indicates a capital nature. An Idols

contestant can only win the competition once

and therefore it will be a once-off event. A once-

off transaction can, however, be of an income

nature if a scheme of profit-making is present.

SCHEME OF PROFIT-MAKING

An example of a scheme of profit-making

applicable for this scenario could be a Miss

South Africa winner with a long history of

entering beauty pageants. If she entered every

imaginable beauty pageant since she was

five-years old it may indicate a scheme of

profit-making and in considering if the Miss

SA winnings are taxable, the Commissioner

will consider this fact and probably reach the

conclusion that the winnings are income in

nature and therefore taxable.

SIMILARITIES BETWEEN A GAMBLER AND AN

IDOLS CONTESTANT

Although entering the Idols competition differs

in so many ways from gambling, there seems to

be some similarities from a tax perspective.

When a person is not a professional gambler,

gambling activities will be undertaken as

a means of entertainment or as a hobby,

compared to a professional gambler who

would probably have certain strategies, be

very serious about each bet and have a lot

of experience. If an amateur singer enters a

karaoke competition for fun, the winnings

will be of a capital nature and therefore not

taxable. Although Idols is a competition for

amateur singers, we can argue that by the time

the contestants reach the finals they can be

regarded as professionals. Not only do most

South Africans know them, but they already

have a recorded single, appeared in a television

advertisement and have a music video. They

are celebrities and have done shows all over the

country. Mthethwa may have started out as an

amateur but over the past seven months (the

duration of the competition), he has certainly

become a professional (possibly even more

professional than most of the would-be pop

stars these days). Even if he did not walk away

with the title, he would probably still have had

a very successful singing career, as is evident

from previous seasons’ runners-up (Lloyd Cele,

Mark Haze and Andriette Norman).

If a singer should win a music award or if

an employee should receive an award for

outstanding service, that award (even if it is

a lump sum) will be income in nature and

therefore taxable. If Mthethwa can be regarded

as a professional singer at the time of winning

the competition, the winnings will be of an

income nature and taxable.

WHAT DOES THE TERM CAPITAL MEAN?

Unfortunately the Act contains no definition

of the term ‘capital’. From the many

conflicting court rulings on the subject,

it is obvious that a single infallible test to

distinguish between capital and income does

not exist. In CIR v Visser it was determined

that income is what capital produces, or is

something in the nature of interest or fruit

as opposed to principal or tree. Whether an

amount is capital in nature is a question of

fact and several factors must be taken into

account in order to determine its nature. The

following points should be considered.

“Although Idols is a competition for amateur singers, we can argue that by the time the contestants reach the finals they can be regarded as professionals.”

32 TaxTalk Nov/Dec

“The lump sum received by way of a gift or a donation would have been capital in nature in the hands of Cele and therefore not taxable.”

ONUS OF PROOF

Whether or not the winnings are of a capital

nature is clearly a grey area and each case

must be evaluated on its own merits. In terms

of section 82 of the Act, the burden of proof

that an amount is of a capital nature rests upon

the taxpayer. In order for Mthethwa to escape

the tax net in terms of the general gross income

definition, he must indicate that a scheme

of profit-making was not present and that he

cannot be regarded as a professional singer at

the time he was awarded the Idols title.

PARAGRAPH (C) OF THE DEFINITION OF

GROSS INCOME

Although receipts and accruals of a capital

nature are in principal expressly excluded

from the general gross income definition,

they may still be included in gross income

in terms of the special inclusions to gross

income. Paragraph (c) of the definition of

gross income includes in a person’s gross

income any amount received or accrued in

respect of services rendered or to be rendered

including a voluntary award. Even though

Mthethwa is not an employee of the Idols

competition, he still rendered a service and

received an amount based on these services

rendered. He entertained the South African

public for months and based on his services

he received an income. In CIR v Crown Mines

Ltd, it was determined that the words “in

respect of” means that the income would not

have been received had the services not been

rendered. There must be a causal relationship

between the amount received and the services

rendered. Even though an element of chance

is present because the results are in the

hands of the South African public, in the end

he still received the amount based on his

performances (services rendered).

If a scheme of profit-making is present and the

Idols winner can be regarded as a professional

singer the winnings will be taxable in terms of

the general gross income definition. A causal

relationship exists between the prize received and

the services rendered and therefore the amount

will fall within the scope of paragraph (c) of the

gross income definition. Although the amount

may be taxable under the general gross income

definition and paragraph (c), the amount cannot

be included under both provisions as there is a

necessary implication against double taxation.

OTHER IDOLS TAX IMPLICATIONS

Shortly after the announcement of Idols winner

Elvis Blue, he revealed that he and fellow

contestant Lloyd Cele had entered a pact that

whoever was named the winner would share

the R500 000 cash prize with the runner-up.

For tax purposes, Blue won R500 000 and

donated R250 000 to Cele. The lump sum

received by way of a gift or a donation would

have been capital in nature in the hands of

Cele and therefore not taxable. Blue would have

been liable for donations tax at a rate of 20%

after deducting the exemption of R100 000 for

donations by a natural person (Section 56(2)(b)

of the Act).

Most Idols contestants are between ages 16 and

25 and would therefore in all probability not have

paid any taxes before. It is therefore important

that prospective contestants are aware of the

tax implications associated with the winnings

(although this is probably the furthest thing from

their minds when entering the competition).

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Financial Science & Economics

• • • • • • • • •

Financial Science & Economics

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38 TaxTalk Sept/Oct

The African Renaissance concept,

popularised as part of the post-

apartheid intellectual agenda, was

first articulated by Cheikh Anta

Diop in a series of essays beginning

in 1946, collected in his book Towards the

African Renaissance: Essays in Culture and

Development, 1946-1960. Diop wrote the

series of essays as a student, charting the

development of Africa.

Among other things, the African Renaissance

is a philosophical and political movement

to end the violence, elitism, corruption and

poverty that seem to plague the African

continent, and replace them with a more just

and equitable order.

TAXATION AS A RENAISSANCE CATALYST

One of the most pressing issues on the

African continent is the dependence on

foreign assistance and indebtedness. As

Africans we need to focus on boosting tax

revenues through broad-based taxation.

Experience has shown that this will lead to

more predictable revenue collection and meet

the developmental agenda of the continent.

It will also help to ensure that aid-funded

investments are sustainable and prepare for

the gradual exit from aid in the long term.

Most taxable capacity in Africa tends to be

concentrated in a small group of taxpayers. As

a result, individuals and companies with power

and influence deploy aggressive tax-planning

techniques. However, the majority of taxpayers

do not have the means to reduce their tax

liability. In addition their taxable capacity is low

and costly to collect, especially in rural areas.

The result is that the middle class and mid-sized

companies carry most of the tax burden.

The 21st century has begun with some serious

challenges facing the global community. This

has contributed to a significant change in

the role of professionals, especially in the

current difficult economic environment. It is

in this environment that Africa faces its own

special challenges regarding governance

and sustainable State-building, of alleviating

poverty, sustainability and development through

improved tax compliance. It is incumbent

on tax professionals to take responsibility for

developing a healthy relationship between their

clients and revenue administrations, and for

providing the necessary technical guidance and

support for the creation of a satisfactory tax-

compliance culture.

SOUTH AFRICA: LEADING THE RENAISSANCE

The year 2011 saw South Africans lead the

development of tax within Africa. The African

Association of Tax Institutes (AATI) was

formed and is the continent-wide forum for tax

professional bodies. SAIT played an influential

role and made a significant contribution to the

tax profession and the African continent, as

co-founder of the forum and our chief executive,

Stiaan Klue, was elected as the vice-president.

South African Commissioner, Oupa Magashula

was elected to lead the 29 participating members

of the African Tax Administration Forum held in

April 2011.

Taxation is central to the development agenda

of African states. Resource mobilisation is the

financial bedrock on which sustainable, long-

term development is built. The raising of tax

revenues is arguably the most central activity

of any state. Revenue from taxation is what

sustains the existence of the state and provides

the necessary financial resources for social

and economic infrastructure. Taxation is the

administrative heart of government and provides

the funds to supply public goods and implement

effective regulation.

As African tax professionals, we have a duty

to contribute to the development of the African

continent. We should therefore build relationships

with all stakeholders and contribute to the

efficiency of the tax collection system. We are

proud to participate in the African Renaissance.

TAxATiON As A cATALysT FOR ThE africaN

reNaiSSaNceNeil Wright | Chairman of sAIT board

“Most taxable capacity in Africa tends to be concentrated in a small group of taxpayers. As a result, individuals and companies with power and influence deploy aggressive tax-planning techniques.”

TJD

R (C

T) 39

787/

E

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