MARCH 2013 ISSUE 162 CONTENTS

Transcription

1 MARCH 2013 ISSUE 162 CONTENTS ANTI-AVOIDANCE INTERNATIONAL TAX Share repurchases Exit charge on ceasing to be resident CAPITAL GAINS TAX ADMINISTRATION Vesting of dividend rights in exempt body Tax liability and recovery Voluntary disclosure programme COMPANIES TRANSFER PRICING SARS and business rescue Canadian ruling DIVIDENDS TAX VALUE-ADDED TAX Share issue not for cash Professional membership fees EMPLOYEES TAX SARS NEWS Sports agents Interpretation notes, media releases and other documents ESTATE DUTY Transferring a business to a Trust

2 ANTI-AVOIDANCE Share re-purchases (Published March 2013) Judgment was handed down on 16 November 2012 by the Tax Court in the case of A Ltd v Commissioner for the South African Revenue Service. The facts were as follows: A Ltd was a company listed on the JSE. An employee share incentive scheme was being implemented at the time ( ) in terms of which shares in A Ltd would have had to be delivered to employees in future. In order to hedge against price increases, a wholly-owned subsidiary, ALS, was set up to acquire and hold shares in A Ltd. ALS subsequently acquired A Ltd shares in the open market through an interest-free loan from another wholly-owned subsidiary of A Ltd. ALS was not authorised to own more than 10% of A Ltd shares. ALS transferred the A Ltd shares to the employee share incentive trust in A Ltd had substantial amounts of surplus cash, and would have even more if A Ltd were to sell off a subsidiary, PTS. It was proposed during that, unless better investments could be found, PTS should be sold and a 'repurchase' of A Ltd shares be implemented as this would be good for A Ltd s headline earnings per share. It was understood that ALS would continue to be used to buy A Ltd shares. ALS then bought A Ltd shares in In order for ALS not to exceed the 10% limit, A Ltd bought back some of its own shares from ALS in 2004 and they were cancelled. ALS bought more A Ltd shares in 2004 and shortly thereafter A Ltd bought back more of its own shares from ALS. Some A Ltd shares held by ALS was also disposed of by ALS to third parties in respect of other transactions. There were also further purchases by ALS of A Ltd shares in late 2004 and middle All A Ltd shares held by ALS were sold back to A Ltd by the beginning of 2006 and cancelled. This was done in respect of a particular transaction that required a third party to acquire 100% of the issued shares of A Ltd. In respect of each repurchase of A Ltd shares by A Ltd from ALS, the consideration payable in respect of the repurchase constituting a dividend, exemption from secondary tax on companies (STC) was claimed by A Ltd in terms of section 64B(5)(f) of the Income Tax Act, No 58 of 1962 (the Act). The section provides exemption in respect of dividends declared to group companies. If A Ltd directly bought back its own shares in the open market, and not

3 through ALS, no exemption would have been available and A Ltd would have been liable for STC. The Commissioner issued an assessment for STC to A Ltd in respect of the repurchases that took place during 2004 and The Commissioner s case was that the exemptions were claimed pursuant to a transaction, operation or scheme contemplated in section 103(1) of the Act (as it read at the time) in order to avoid paying STC. In respect of the application of section 103, the court noted that the following had to be established: Transaction: a transaction, operation or scheme was engaged in; Effect: the effect is avoidance or postponement of a tax liability; Abnormality: the transaction was entered into or carried out in a manner which would not normally be employed for bona fide business purposes other than obtaining a tax benefit, or created rights or obligations that would not normally be created between persons dealing at arm s length under a transaction of the nature of the transaction in question; and Purpose: the transaction was entered into or carried out solely or mainly for the purpose of obtaining a tax benefit. In respect of the 'transaction' requirement, the court noted that the onus is on the Commissioner to establish this. In this case there were several transactions, but the Commissioner had to establish that they were steps in a single scheme of transactions or a unitary scheme. The court said that there must be sufficient unity between the earlier steps and the later steps so that it can be said that there is a unitary scheme, keeping in mind the 'ultimate objective'. The court found that, on the objective facts, there was no such unitary scheme. This was so because ALS had initially been established for hedging purposes in respect of the employee share incentive scheme and not in respect of selling the shares to A Ltd and cancelling them. Also, even though the repurchase programme envisaged that ALS would purchase A Ltd shares, it was not contemplated that the shares would be on-sold to A Ltd and cancelled. This was only done once ALS neared its 10% limit. Also, the last batch of A Ltd shares were only sold to A Ltd and cancelled to accommodate the transaction with the third party.

4 The court noted that as a prerequisite or jurisdictional requirement for applying section 103 of the Act, the Commissioner must be satisfied that the various requirements are met, including the 'transaction' or 'scheme' requirement. The Commissioner must "stand and fall by his reasons for exercising the power", such as the reasons for being satisfied that the required elements were present. If the Commissioner contends in his statement of grounds of assessment that he was satisfied that there was a particular scheme, he cannot later at the hearing stage argue that he was satisfied that there was some other alternative scheme. In this case the Commissioner had always contended that he was satisfied that there was a scheme and that the scheme was the intentional interposition of ALS so that ALS could buy the shares in A Ltd and then A Ltd could buy those shares from ALS, a group company, and escape STC on the repurchase. In other words, the Commissioner saw the scheme as consisting of two steps, being the purchase of A Ltd shares by ALS and the subsequent purchase by A Ltd of those shares, and those two steps constituted one scheme. The Commissioner could not at the hearing stage accept that the first step may have been commercially justifiable, and proceed to attack only the second step, because that had never been his case. The Commissioner could not now argue that he was satisfied that there was a scheme that was different from the scheme that it had always argued it was satisfied of. The court noted that failure to meet the 'transaction' requirement is sufficient cause for section 103 of the Act not to be applicable, but in any event also considered the other requirements. In respect of establishing the 'effect' requirement relating to the avoidance of a tax liability, the onus is on the Commissioner the Commissioner must prove that the 'scheme' had the 'effect' of avoiding STC. The court noted that A Ltd was under no obligation to buy its own shares and it would only do so if it made good commercial sense to repurchase its own shares. Also, the question had to be asked whether, if A Ltd had to directly purchase the shares in the open market and pay STC, it would have done so despite having to pay STC. The Commissioner did not show that that was the case. In respect of the 'abnormality' requirement, the court noted that the onus is on the Commissioner. Abnormality has to be established objectively and comparisons may be made with persons in similar positions engaging in similar transactions, keeping in mind that what is abnormal as between unrelated parties may be normal as between parties with an existing special relationship. In this case it was established, partly by expert witnesses, that it is quite common for companies to hold treasury shares and to repurchase those shares.

5 In respect of the 'purpose' requirement, the court noted that the onus is on the taxpayer and that the subjective purpose of the parties is a question of fact. The purpose must at least be the dominant purpose over any other purpose. On the evidence the sole or main purpose for entering into the transactions was not to obtain a tax benefit. The purpose was to make an investment into A Ltd s own shares by holding them in treasury and not to sell them immediately to A Ltd and to cancel them. The sale of the shares to A Ltd only happened in circumstances that were not foreseen, such as accommodating the transaction with the third party. Accordingly the taxpayer was successful and the appeal was upheld. Cliffe Dekker Hofmeyr ITA: Section 103(1) CAPITAL GAINS Vesting of dividend rights in exempt body (Published March 2013) In a Binding Private Ruling issued on 25 October 2012 (BPR 125), SARS was asked to rule primarily on the application of paragraph 80(1) read with paragraph 63 of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (the Act). Briefly, the facts were as follows: A resident discretionary trust (Trust) holds 100% of the equity shares in a resident private company (Company). One of the beneficiaries of the trust is recognised as a traditional community under section 2 of the Traditional Leadership and Governance Framework Act, No 41 of 2003 and is exempt from normal tax under section 10(1)(t)(vii) of the Act. It was proposed that the trustees of the trust will, in the exercise of their discretion, distribute dividend rights in respect of the shares held in the Company to the traditional community. Essentially, paragraph 80(1) of the Eighth Schedule to the Act provides that where a capital gain is determined in respect of the vesting by a trust of an asset in a trust beneficiary (other than the Government, a provincial administration, organisation, person or club contemplated in paragraph 62(a) to (e)) who is a resident, that gain: must be disregarded for the purpose of calculating the aggregate capital gain or aggregate capital loss of the trust; and

6 must be taken into account for the purpose of calculating the aggregate capital gain or aggregate capital loss of the beneficiary to whom that asset was so disposed of. It will be noted that paragraph 80 is peremptory in that it provides that any capital gain must be disregarded by the trust and must be taken into account by the resident beneficiary to whom that asset was disposed. Paragraph 80(1) thus recognises the conduit principle and determines that the gain which arises flows through the trust and is taken into account in the hands of the beneficiary. Any capital gain arising on the vesting of an asset by a trust in the Government, a provincial administration, organisation, person or club contemplated in paragraph 62(a) to (e) cannot be attributed to such bodies under paragraph 80(1) since they are specifically excluded from its ambit. As a consequence, capital gains arising from a vesting in such bodies remain in the trust. The traditional community, although constituting a body exempt from tax under section 10(1)(t)(vii) of the Act, does not fall within the ambit of the bodies contemplated in paragraph 62(a) to (e). As a result, any capital gain arising from the distribution of the dividend rights must be taken into account in determining the aggregate capital gain or loss of the traditional community and must be disregarded by the Trust. However, the enquiry does not end there. Paragraph 63 of the Eighth Schedule provides that a person must disregard any capital gain or loss in respect of the disposal of an asset where any amount constituting gross income of whatever nature would be exempt from tax in terms of section 10 of the Act were it to be received by or to accrue to that person. It is not entirely clear whether paragraph 63 applies only to disposals by the exempt body or whether, for instance, it also applies to a disposal by the trustees of a trust by way of the vesting of an asset in an exempt body. Applying the provisions of paragraph 80(1) read with paragraph 63 of the Eighth Schedule, SARS confirmed in BPR 125 that the vesting of the dividend rights by the Trust in the traditional community will not be subject to capital gains tax in the hands of the Trust, in terms of paragraph 80(1) of the Eighth Schedule. Furthermore, in terms of paragraph 63 of the Eighth Schedule, any capital gains arising from the vesting of the dividend rights will not give rise to any capital gains tax liability in the hands of the traditional community, given that its receipts and accruals are exempt from normal tax under section 10(1)(t)(vii). In other words, it is implicit in the ruling that paragraph 63 also applies to capital gains arising pursuant to the attribution thereof in accordance with paragraph 80(1) of the Eighth Schedule to the Act and is not limited to disposals by the exempt body.

7 SARS also confirmed that, as the traditional community will be regarded as the 'beneficial owner' of any dividends declared by the Company, the Company will not be required to withhold dividends tax from any dividends paid to the Trust, provided that the Trust has by the date determined by the Company, or by the date of payment of the dividend, submitted a declaration to the Company that the dividend amount is exempt from dividends tax under section 64F(g) as well as a written undertaking to inform the Company should the traditional community cease to be the beneficial owner of the dividend. BPR125 serves as a useful illustration of the interplay between paragraph 80(1) and paragraph 63 of the Eighth Schedule to the Act. Although paragraph 80(1) is peremptory and provides that any capital must be taken into account by the beneficiary, in circumstances where the beneficiary is exempt from tax in terms of section 10 of the Act, no capital gains tax will be payable by either the trust or the beneficiary. It should be appreciated that the statutory conduit principle as contained in paragraph 80(1) gives way to the special attribution rules contained in paragraphs 68 (attribution of capital gain to spouse), 69 (attribution of capital gain to parent of minor child), 71 (attribution of capital gain subject to conditional vesting) and 72 (attribution of capital gain vesting in a person who is not a resident) of the Eighth Schedule which, if applicable, will override paragraph 80(1). Cliffe Dekker Hofmeyr ITA: Sections 10(1) and 64F(g) Eighth schedule: Paragraphs 62; 63; 68 69; 71; 72 and 80 COMPANIES SARS and business rescue (Published March 2013) An important judgment was handed down in the Western Cape High Court on 31 October This was in the matter of CSARS v Mark Beginsel NO and Others [2012]. Readers will no doubt be aware of SARS' statutory preference legislated in Section 99 of the Insolvency Act, No 24 of 1936 (the Insolvency Act). The fact that SARS is a preferred creditor in a winding up has often gutted the estate leaving pennies for the concurrent creditors. Accordingly, it was with interest that the legal community waited to see what SARS' position would be where a company sought business rescue in terms of section 128 of the Companies

8 Act, No 71 of 2008 (the Companies Act). In this matter that came before Fourie J, the business rescue practitioners had sought an extension for the submission of their proposed business rescue plan, but at the meeting of creditors SARS had insisted that it should be ranked as a preferent creditor and that the business rescue practitioners should accordingly take into account SARS' attitude based on the additional weight it would carry as a creditor. The business rescue practitioners refused to do this saying that they had taken senior counsel's advice to the effect that the classification of creditors in the Insolvency Act was not applicable to Chapter 6 of the Companies Act, which contains no statutory preferences such as are found in section 96 to section 102 of the Insolvency Act. SARS applied to Court for an order declaring unlawful and invalid the decision taken at the meeting of creditors to approve the business rescue plan. Moreover, it sought to interdict the business rescue practitioners from distributing any monies of the company pursuant to the business rescue plan. Following from this the Court was asked to declare that the business rescue practitioners must put the company into liquidation. The legal issue really turned on the interpretation of section 145(4)(a) and (b) of the Companies Act, which stipulates that in respect of any decision, secured or unsecured creditors would have a voting interest equal to the value of their claim in the company, and that a concurrent creditor who would be subordinated in a liquidation has a voting interest independently and expertly appraised equal to the amount which they could reasonably expect to receive in a liquidation. SARS' argument was that its status as a preferent creditor under section 99 of the Insolvency Act meant that its claims would rank ahead of ordinary concurrent creditors under section 103 of the Insolvency Act. As such it is an unsecured creditor in section 145 and had a voting interest at the creditors meeting equal to the value of its claim against the company. SARS' argument was that ordinary concurrent creditors under section 103 are included in the class of concurrent creditors who would be subordinated in a liquidation. Essentially SARS was looking to be considered to be a preferent unsecured creditor under section 145(4)(a) of the Companies Act, and to have a voting interest equal to the value of its claim. The remainder of the non-preferent concurrent creditors, would have been disenfranchised concurrent creditors in terms of the provisions of section 145(4)(b). In such an event the vote of SARS would have carried the day and the business rescue plan would have been rejected at the meeting, contrary to the wishes of the majority of the company's creditors. The judge's view was that SARS' construction was not only contrary to the ordinary grammatical meaning of the words, but also led to an illogical result that failed to balance the

9 rights and interests of the relevant stakeholders. The judge's view was that no statutory preferences were created in Chapter 6 of the Companies Act, and if the intention of the legislature had been to confer such a preference on SARS in business rescue proceedings, it would have made such intention clear. No trace of such an intention could be found in the Act. On the reading of the judge, and having regard to the purpose of business rescue proceedings, only one conclusion was justified, namely that SARS is not by virtue of its preferent status in section 99 of the Insolvency Act a preferent creditor for the purposes of business rescue proceedings. The judge referred to Mars' Law of Insolvency and to Henochsberg on the Companies Act, concerning the notion of a preferent creditor whose claim is not secured, but who ranks above the claims of concurrent creditors. These are those who have the statutory preferences in section 96 to section 102 of the Insolvency Act. The judge considered at length the argument put forward by Henochsberg which was the same interpretation as that put forward by SARS. The judge noted that Henochsberg accepted that this interpretation that a concurrent creditor who would be subordinated in a liquidation in terms of section 145(4)(b) of the Companies Act would be grossly unfair to the concurrent creditors. Fourie J said that in his mind the ordinary meaning of the concept of subordination meant that a creditor's claim that was subject to subordination or back ranking agreement, was what is being considered in sub-paragraph (b). The judge said that in his view section 144(2) of the Companies Act did not lend any support for the interpretation contended for by Henochsberg. Accordingly, SARS would enjoy no greater voting interest than the other concurrent creditors of the company with the result that there is no basis on which to impeach the voting procedure that had been followed by the business rescue practitioners. Cliffe Dekker Hofmeyr Insolvency Act: Sections 96 and 103 Companies Act: Sections 144 and 145 DIVIDENDS Share issue not for cash (Published March 2013) The Companies Act No. 71 of 2008 (the Companies Act) provides the possibility for a company to issue shares where the consideration for the shares will not be received immediately. This will be limited to certain situations, namely where the consideration will be in the form of a negotiable instrument, or in the form of an agreement for future services, future benefits or future payment by the subscribing party. At the time that these shares are

10 issued, the consideration in respect of those shares will remain outstanding. The company will also be required to immediately issue shares in these circumstances, but the shares are required to be transferred to a third party to be held in trust for later transfer thereof to the subscribing party in accordance with a trust agreement. Should a company issue shares in these circumstances, i.e. where the shares are held in trust, and should the applicable trust deed not provide otherwise, the Companies Act provides a default position, which will: suspend the voting and appraisal rights attaching to the shares until the shares are no longer held in trust; suspend the pre-emptive rights attaching to the shares held in trust until, and to the extent that, the instrument is negotiable or the subscribing party has fulfilled its obligations under the agreement; limit the subscribing party s entitlement to the benefit of any dividends payable in respect of the shares held in trust until, and to the extent that, the instrument is negotiable or the subscribing party has fulfilled its obligations under the agreement. The key question is then who is liable for the dividends tax in respect of dividends declared and paid on those shares held in trust. On review of the wording of relevant sections in the Companies Act, it is submitted that dividends would need to be paid either to the subscribing party (notwithstanding that the subscriber may not have fulfilled all his obligations) or the third party qua shareholder (albeit in a fiduciary capacity) in relation to the relevant shares. This is so because limitations of rights under the default position (mentioned above) do not absolve the company from distributing dividends on such shares in the interim. Under the default position in the Companies Act, the company is only obliged to pay the dividend to the subscribing party to the extent that the instrument has become negotiable or the subscribing party has fulfilled its obligations under the agreement. It seems clear that should the company distribute a dividend in respect of the shares held in trust and the instrument is partly negotiable or the subscribing party has partly fulfilled its obligations under the agreement, the dividends are payable to the subscribing party notwithstanding that the shares have not yet been transferred to the subscribing party by the third party. The third party is not obliged to transfer the shares to the subscribing party until the instrument is fully negotiable or the subscribing party has fulfilled all its obligations under the agreement, although it may do so to the extent that the instrument has become negotiable or the subscribing party has fulfilled its obligations under the agreement. It follows that to the extent

11 that the instrument is not negotiable or the subscribing party has not fulfilled its obligations under the agreement, the dividend is payable to the third party holding the shares in trust qua shareholder. It does not seem to us that the default position has the effect of requiring the company to only distribute a dividend in respect of the share to the extent that the instrument is negotiable or the subscribing party has fulfilled its obligations under the agreement. Should the instrument be partly negotiable, or the subscribing party has fulfilled part of its obligations under the agreement, the subscribing party is accordingly entitled to payment of the dividend. The subscribing party will be regarded as the beneficial owner of the dividends payable or creditable to it for dividends tax purposes as it is the subscribing party who by operation of law is entitled to the benefit of the dividend attaching (the) share albeit only in respect of part of the dividend distributed in respect of the shares held in trust. It is not a requirement that the beneficial owner be the owner of the relevant shares, merely that it be entitled to the benefit of the dividend attaching to the share. On the basis that it is the subscribing party that is the beneficial owner of the dividends distributed in respect of the relevant shares, it is open to the subscribing party to claim exemption from the dividends tax or to be taxed at a reduced rate of dividends tax if it meets the relevant requirements for exemption or a reduced rate of tax. By contrast, it is submitted that dividend distributions made in respect of shares held in trust where the instrument is not yet negotiable by the company or the subscribing party has not yet fulfilled its obligations under the agreement, are payable to the third party qua shareholder for the future benefit of the subscribing party. On the basis that the dividends payable in respect of shares held in trust must be paid to the third party holding those shares in trust to the extent that the instrument is not negotiable or the subscribing party has not fulfilled its obligations under the agreement, it is submitted that the third party qua shareholder would be entitled to the benefit of the dividend attaching to the share as contemplated in the definition of beneficial owner and accordingly be the beneficial owner of the dividends distributed in relation to the shares held in trust. It follows that dividends tax will be payable by the third party in respect of dividends payable to it and it is the third party qua beneficial owner that would need to claim exemption or the benefit of a reduced rate of tax. A further issue arises where the third party qua shareholder in respect of the shares held in trust has derived dividend income in respect of the shares and has not distributed the dividend income to the subscribing party, but the shares are now required to be returned to the company for cancellation as the instrument is dishonoured or the subscribing party has not fulfilled its obligations under the agreement. It would seem to us that absent anything to the

12 contrary in the trust agreement, the dividend income should similarly be returned to the company, probably on the basis that to distribute the dividend income to the subscribing party (or any other party for that matter) in these circumstances would amount to unjustified enrichment. Ernst & Young Companies Act: Sections 40(5); 40(6) ITA: Section 64E; 64F; 64D and 64G EMPLOYEES TAX Sports agents (Published March 2013) A sports agent by nature is a mediator or go-between between the player, and in most instances, a sports club. In general, the agent provides a service, for example, the recruitment of a player, who will enter into a legal relationship with a club. Often a club will pay a sports agent a recruitment fee, which will normally include a signing-on fee that has to be paid over by the sports agent to the player. In this scenario, the question arises whether such signing-on fee is subject to employees tax (PAYE) and if so, where the obligation to withhold PAYE lies? The correct withholding of PAYE is an important consideration in any business. One of the challenges in ensuring that one s PAYE obligations are met, is the wide application of the definition of remuneration in the Fourth Schedule to the Income Tax Act No. 58 of 1962 (the Act). Remuneration is defined as follows: means any amount of income which is paid or is payable to any person by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension, superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and whether or not in respect of services rendered,... Signing-on fees by their nature are usually paid as an enticement to a player to contract with a club. We are of the opinion that the signing-on fee will be regarded as remuneration as defined above and will be taxable at the player s marginal rate of tax. Since remuneration as defined in the Fourth Schedule to the Act will then be paid over by the sports agent to the player, could it be said that the agent is liable to withhold PAYE? It seems that this is not the case when one considers the definition of an employer as set out in the Fourth Schedule to the Act, which reads as follows:

13 means any person (excluding any person not acting as a principal),... who pays or is liable to pay to any person any amount by way of remuneration.... The Oxford English Dictionary defines a principal as a person who is the chief actor in... some action or a person for whom another acts as agent or deputy. In our view, in the scenario set out above the sports agent is not acting as a principal in relation to the payment of the signing-on fee and is therefore explicitly excluded from the definition of an employer as defined in the Fourth Schedule to the Act. The sports club will, however, fall within the ambit of the definition, and as an employer, will therefore be liable to deduct or withhold employees tax in accordance with paragraph 2(1) of the Fourth Schedule to the Act, from the signing-on fee and any other subsequent remuneration paid to the player. It is therefore important that this signing on fee is separated from the agent s commission. The agent s commission should not be subject to PAYE because an agent is typically carrying on a trade independently from the sports club and, as such, the commission paid to the agent is excluded from remuneration as defined. There are also other liabilities flowing from being regarded as an employer as defined in the Act, such as the obligation to make contributions to the Unemployment Insurance Fund and to also pay the Skills Development Levy. Therefore, the sports club, as employer, remains liable to withhold employees tax from the signing-on fee. Should the club fail to do so, the club s only defence would be available in terms of paragraph 5(2) of the Fourth Schedule to the Act. This paragraph provides that where an employer has failed to deduct or withhold PAYE and the Commissioner is satisfied that the failure was not due to an intent to postpone payment of the tax or to evade the employer s obligations, the Commissioner may, if he is satisfied that there is a reasonable prospect of ultimately recovering the tax from the employee, absolve the employer from his liability. It is therefore important that when clubs sign on new players, the signing-on fee is contractually separated from the agent s fee and that the obligation to withhold PAYE is understood. Edward Nathan Sonnenbergs ITA: Paragraphs 2(1) and 5(2) of the Fourth schedule Definition of remuneration in the Fourth schedule

14 ESTATE DUTY Transferring a business to a Trust (Published March 2013) The decision of the Supreme Court of Appeal in Raath v Nel [2012] (5) SA 273 (SCA) illustrates a hard truth that transactions that are entered into have consequences that need to be understood before committing to agreements. So, for example, it is hazardous to counsel a person to form a trust and to shift assets into the trust without considering the consequences of doing so. And, as the decision in Raath v Nel shows, a step of this kind can be particularly hazardous where the assets that an entrepreneur transfers into the trust are shares in the company which he uses as the business structure to carry on his trade. For the consequence of doing so is that beneficial ownership of the business then passes out of the hands of the individual founder of the business and into the hands of the trust by virtue of its shareholding. The transfer of personal assets into a trust is not a mere illusion It may be tempting to think that forming a company or trust to carry on a business is just sleight-of hand, that the documents with signatures and official stamps are just legal fairyfloss, and that, in reality, everything will carry on as before. Farlam JA warned of this misconception in Nieuwoudt NO v Vrystaat Mielies (Edms) Bpk [2004] (3) SA 486 (SCA) when (giving the judgment of the court) he referred to the trust there in issue as being typical of a newer type of trust where someone, probably for estate planning purposes or to escape the constraints imposed by corporate law, forms a trust while everything else remains as before. The truth of the matter is that, if the parties truly intend that everything shall remain as before, then the trust is a sham (for there will have been no genuine intent on the part of the founder to divest himself of the assets) and will be treated by the law as such. On the other hand, if the trust is genuine, then it is not the case that everything shall remain as before if the founder has transferred assets to the trust, then they are no longer his assets, and any gains or losses in respect of the assets accrue to the trust. High Court regarded transfer of assets into a trust as artificial When Raath v Nel was being heard in the High Court, the judge himself fell into the trap of regarding the formation of the trust and the transfer of assets as being artificial and

15 therefore to be disregarded. His judgment was overturned by the Supreme Court of Appeal which remarked that The trial judge regarded as artificial the approach that the loss to the trust is not in reality that of the respondent. He found that the business and the trust were in reality built up by the respondent for his old age and for posterity and that he had lawful control over the trust. The fact that no dividends had been declared and paid out.. had no relevance when the bigger picture was considered. The decision in Raath v Nel The facts in Raath v Nel were that Nel was a successful businessman and the driving force behind his numerous successful business ventures. On professional advice and with a view to reducing estate duty on his death he sold all his assets, including his shares and loan account in a company of which he was the sole shareholder, to a discretionary family trust in which he was one of three trustees. He was not a capital beneficiary of the trust but was a potential income beneficiary. Nel was, however, in effective control of the trust in that he had the right to remove a trustee and appoint another in the latter s place. As a result of a failed surgical procedure which saw him hospitalised for a lengthy period, he neglected the business and its profits declined. Nel sued the anaesthetist in the surgical team for the loss he had allegedly suffered in his personal capacity from those declining profits. At issue in the litigation was whether Nel had suffered a loss in his personal capacity or whether the loss had been suffered by the trust which held the shares in the company which now owned the business. In reversing the decision of the High Court, the Supreme Court of Appeal said (at para [14] of the judgment) that although a trust is not a legal persona in its own right, the separateness of the trust estate must be recognised. Given that the business was now owned by the company whose shares were held by the trust, and given that Nel s reduced managerial input into the business had impacted negatively on the company s profits, the question was whether Nel had personally suffered any loss. The court held (at para [17]) that Nel had adduced no evidence of any loss suffered by him in his personal capacity; that the court below had erred in upholding his claim for damages in the absence of proof that he had personally suffered any loss as from the date that the trust

16 had been established, and held (at para [18]) that Nel was entitled to damages for loss of earnings in his personal capacity only for the period prior to the formation of the trust. Although the decision in Raath v Nel was not concerned with the tax implications of what had occurred, the judgment holds an implicit tax planning lesson, for it is clear that any losses suffered by the trust could not, for tax purposes, have been claimed by Nel in his personal capacity. pwc INTERNATIONAL TAX Exit charge on ceasing to be resident (Published March 2013) There has been considerable debate in tax publications concerning a recent decision in the Supreme Court of Appeal. The Minister s statement On 9 May 2012, the Minister of Finance issued a public statement in response to a judgment of the Supreme Court of Appeal in the matter of Commissioner for the South African Revenue Service v Tradehold Ltd [2012] 73 SATC The crux of the statement was that persons who are resident in the Republic should be liable to pay tax on the gains that accumulate in respect of assets held by them, and that taxpayers who cease to be resident in the Republic are deemed to have disposed of their assets, except those with a close connection with the Republic, on the day prior to ceasing to be a resident (the so-called exit charge ). However, the Supreme Court of Appeal had found that the deemed disposal was subject to the provisions of the double tax agreement between South Africa and Luxembourg (DTA), and this disturbed the balance that the law intended. The statement continued: National Treasury and SARS are studying the judgment and, if necessary, I will propose amendments to further clarify that a DTA does not apply to deemed or actual disposals while a taxpayer is resident in South Africa. Measures such as the immediate termination of a taxpayer s year of assessment on the day before becoming non-resident, as is the practice in Canada, are being explored. In order to maintain stability in the tax system, I will propose that any amendment take effect from 8 May 2012.

17 The question is, did the SCA really upset the stability of the tax system, or was there already a problem with the balance that SARS could not overcome? How it all began The saga started on 2 July Tradehold Ltd, a SA incorporated company, moved its place of effective management from the Republic to Luxembourg. It retained an office in the Republic and one of the directors continued to operate on its behalf from this office. The effect was that Tradehold Limited (under the law as then promulgated) was a resident of the Republic under the domestic rules, by reason of its incorporation, and a resident of Luxembourg under Luxembourg law and in terms of the DTA, by reason of its place of effective management. The Income Tax Act No. 58 of 1962 (the Act) at that time provided a primary trigger for the exit charge in this circumstance. The exit charge became payable in the case of: a person ceasing to be a resident a controlled foreign company ceasing to be a controlled foreign company, or a person who is a resident ceasing to be regarded as a resident by reason of the application of a valid double taxation agreement. The resident was deemed to have disposed of its assets (subject to limited exceptions) on the day prior to the date on which the event occurred. Tradehold Limited, having become a resident of Luxembourg by reason of the DTA, was deemed to have disposed of all of its assets on 1 July 2002, while it was still a resident, with the exception of immovable property in the Republic and assets attributable to a permanent establishment in the Republic. SARS did not levy the exit charge as of 1 July 2002 (the date of the deemed disposal). Its only reason for not imposing the tax must have been that it conceded that the office in the Republic constituted a permanent establishment and that the assets of Tradehold Ltd were indeed attributable to that permanent establishment. Closing the office On 29 January 2003, the resident director left South Africa and Tradehold Ltd ceased to have an office in the Republic. The Act at the time contained a provision that operated as a secondary trigger to catch the assets that were excluded from the primary trigger. This imposed an exit charge in respect of:...an asset of a person who is not a resident, which asset... ceases to be an asset of that person s permanent establishment in the Republic otherwise than by way of a disposal contemplated in paragraph 11

18 Tradehold Ltd s assets ceased to be an asset of a permanent establishment in the Republic when the director left the Republic. However, Tradehold Ltd still qualified as a resident under the law as then promulgated, by reason of its SA incorporation. Since it was not a person who is not a resident at that time, no exit charge could be imposed. Herein lay SARS problem. The secondary trigger event for the exit charge, where the assets ceased to have a close connection to the Republic, applied only in the case of a person who is not a resident. Unlike the primary trigger event, which extended to include the situation of a resident being treated as a person who is not a resident in terms of a DTA, this secondary trigger contained no such extension. Had the extension been in place, the DTA between SA and Luxembourg would have given SARS the right to tax the deemed disposal. However, since no tax was imposed under the domestic law, no right to tax could be imported via the DTA. Tradehold Ltd therefore escaped taxation at this point owing to a lacuna an omission in the law. Dual residence ceased Tradehold Ltd continued to hold dual residence until amending legislation was promulgated on 21 February In terms of the amendment, it was no longer possible for any person to enjoy dual residence if such person was regarded as exclusively resident in a country with which SA has a DTA. If the person is exclusively a resident of another state in terms of the DTA, that person is not tax-resident in the Republic in terms of the Act. Tradehold Ltd was exclusively a resident of Luxembourg under the DTA and therefore lost its SA tax-residence the moment the amendment came into effect. SARS therefore sought to levy an exit charge on the basis that Tradehold Ltd was deemed to have disposed of its assets on the day prior to ceasing to be a resident. Tradehold Ltd claimed immunity from taxation in respect of the capital gain arising on the deemed disposal. It claimed that, with effect from 2 July 2002, it was a resident of Luxembourg. At 21 February 2003, it had no permanent establishment in the Republic. Therefore, in terms of the DTA, any capital gain on the alienation of movable assets was taxable only in Luxembourg.

19 SARS contended that the deemed disposal was not an alienation as contemplated in the DTA and that the DTA did not preclude it from taxing the capital gain arising from a notional disposal. The SCA decision The SCA found that the DTA did indeed extend to events that were deemed to be disposals under the domestic law, and that SARS did not have a right to tax the capital gain. It is evident that the perceived balance referred to by the Minister was lacking at the time the relevant events took place. There was inconsistent identification of the persons liable to the exit charge if the primary trigger and the secondary trigger are compared. It may therefore be concluded that the decision of the SCA did not disturb the stability of the tax system: rather, it exposed the imbalance that existed at that time. The stability was in place at 8 May 2012 If the media release is examined in the light of the law as promulgated at 8 May 2012, it is plain that the stability to which the Minister referred was in place at 8 May A company can no longer have dual residence where the competing jurisdiction is a country with which SA has a DTA. Further, where a company ceases to be a resident, it is deemed to have disposed of its assets on the day prior to ceasing to be a resident (i.e. at a time when it is a resident of the Republic only and subject to tax in the Republic). It cannot, in those circumstances, claim immunity under the DTA, as it is not entitled to immunity on the date of the deemed disposal. Is the law really broken and in need of a fix? A rational examination of the reasons for SARS lack of success in the SCA and of the law as currently promulgated clearly establishes that there was a lacuna at the time the events leading to the Tradehold Ltd dispute occurred, but that the subsequent amendments that took effect on 21 February 2003 had effectively addressed the position by removing the possibility of dual residence status where there is a DTA. The present exit charge legislation has been repealed and replaced with new legislation with retroactive effect to 8 May 2012 by means of a new section 9H of the Act. One of its provisions is that, in addition to the person being deemed to have disposed of its assets on the day prior to ceasing to be a resident, the person s year of assessment is also deemed to have

20 terminated on that day. It is difficult to see how this additional fiction relating to the year of assessment affects or improves the existing stability. The proposed new provisions, which are significantly more voluminous than the existing provisions, cannot paper over the fact that the existing law is quite adequate and does not require amendment. pwc ITA: Section 9H TAX ADMINISTRATION Tax liability and recovery (Published March 2013) We analyse below the manner in which the Tax Administration Act No. 28 of 2011 (TAA) will apply to the recovery of tax by the South African Revenue Service (SARS) from a taxpayer that is a company. 1. Tax Administration Act The relevant provisions of the TAA to the recovery of tax are as follows: 1.1 Chapter 10 of the TAA deals with tax liability and payment; and 1.2 Chapter 11 of the TAA deals with recovery of tax. 2. Tax liability and payment in relation to a company Tax liability 2.1 Chapter 10 of the TAA sets out which persons are liable to tax, and the capacity in which they may be liable for tax debts. A distinction is made between a person who is originally chargeable to tax and the person's representative, a withholding agent, and a responsible third party Specifically, section 151 of the TAA defines a "taxpayer, for the purposes of the TAA, as: a person chargeable to tax; a representative taxpayer; a withholding agent; a responsible third party; or a person who is the subject of a request to provide assistance under an international tax agreement.

21 2.3. In certain circumstances (set out in section 161 of the TAA) a senior SARS official may require security from a taxpayer to safeguard the collection of tax by SARS. However, it does not appear that section 161 of the TAA is applicable to the current enquiry. Representative taxpayer 2.4. Section 154(1) of the TAA sets out the liability of a representative taxpayer and states that, as regards: the income to which the representative taxpayer is entitled; moneys to which the representative taxpayer is entitled or has the management or control; transactions concluded by the representative taxpayer; and anything else done by the representative taxpayer, in such capacity as a representative taxpayer, such person is: subject to the duties, responsibilities and liabilities of the taxpayer represented; entitled to any abatement, deduction, exemption, right to set off a loss, and other items that could be claimed by the person represented; and liable for the amount of tax specified by a tax Act Section 155(1) governs the personal liability of a representative taxpayer and states that a representative taxpayer will be personally liable for tax payable in the representative taxpayer s representative capacity, if, while it remains unpaid: the representative taxpayer alienates, charges or disposes of amounts in respect of which the tax is chargeable; or the representative taxpayer disposes of or parts with funds or moneys, which are in the representative taxpayer s possession or come to the representative taxpayer after the tax is payable, if the tax could legally have been paid from or out of the funds or moneys A "representative taxpayer" is defined in section 153(1)(a) of the TAA, for the purposes of the TAA, as a person who is responsible for paying the tax liability of another person as an agent, other than as a withholding agent, and includes a person who is a representative taxpayer in terms of the Income Tax Act No. 58 of 1962 ( the Act) As from 1 October 2012, a "representative taxpayer" is defined in section 1 of the Act as a natural person who resides in the Republic and, in respect of the income of a company, means the public officer thereof Therefore, for the purposes of the TAA, a public officer of a company is a representative taxpayer and is thus liable for the amount of tax specified by a tax Act in relation to the

22 company of which that person is a public officer, within the parameters of sections 154 and 155 of the TAA. Withholding agent 2.9. In terms of section 156 of the TAA, "withholding agent" means a person who must, under a tax Act, withhold an amount of tax and pay it to SARS Section 157(1) of the TAA states that a withholding agent is personally liable for an amount of tax that was: withheld and not paid to SARS; or which should have been withheld under a tax Act but was not so withheld. Responsible third party A "responsible third party" is defined in section 158 of the TAA as a person who becomes otherwise liable for the tax liability of another person, other than as a representative taxpayer or as a withholding agent, whether in a personal or representative capacity In terms of section 159 of the TAA, a third party is personally liable to the extent described in Part D of Chapter Part D of Chapter 11 of the TAA provides that the following persons constitute liable third parties in certain circumstances: a third party appointed to satisfy tax debts; financial management; shareholders; a transferee; and a person assisting in dissipation of assets. Third party appointed to satisfy tax debts In terms of section 179(1) of the Act, a senior SARS official may by notice to a person who holds or owes or will hold or owe any money, including a pension, salary, wage or other remuneration, for or to a taxpayer, require the person to pay the money to SARS in satisfaction of the taxpayer s tax debt A person receiving the notice must pay the money in accordance with the notice and, if the person parts with the money contrary to the notice, section 179(3) stipulates that such person is personally liable for the money.