OCTOBER 2015 ISSUE 193 CONTENTS

Transcription

1 OCTOBER 2015 ISSUE 193 CONTENTS COMPANIES Loans over listed shares REPORTABLE ARRANGEMENTS Obligation to report EXCHANGE CONTROL Shuttleworth s exit charge TAX ADMINISTRATION Invalid assessments ESTATE PLANNING Valuation of a usufruct INTERNATIONAL TAX BEPS Action 8: Introducing hindsight into hard-to-value intangibles VALUE ADDED TAX Payments to welfare organisations Sale agreements for immovable property SARS NEWS Interpretation notes, media releases, rulings and other documents 1

2 COMPANIES Loans over listed shares The ability to enter into loans over listed shares is an important part of the financial industry as it offers sellers of listed shares the ability to comply with their obligations to deliver shares under a short sale contract. This ability could ensure that the sale of listed shares does not result in failed trades, provided the relevant shares can be sourced and borrowed prior to the seller having to deliver the shares. The intended change by the JSE Ltd to move from a T+5 to a T+3 settlement date in order to align with its settlement period with the international norm, reinforces the importance of the share lending industry. As a result of the shorter settlement period, the ability to borrow shares to settle trades will be paramount to ensure as few failed trades as possible. A share loan has various tax implications for both the borrower and the lender. In addition, parties such as JSE brokers and central securities depository participants may pick up tax risks where they are required to withhold or account for taxes such as dividends tax and securities transfer tax (STT) and pay them over to the South African Revenue Service. Lenders, borrowers and intermediaries should therefore understand the tax implications arising from entering into loans over listed shares. Broadly speaking, share lending may have income tax, capital gains tax (CGT), dividends tax, and STT implications for both the borrower and lender. For example, the share loan would typically result in the transfer of beneficial ownership of the shares from the lender to the borrower, and the payment of manufactured dividends and lending fees by the borrower to the lender. 2

3 From an income tax perspective and in the context of a South African resident borrower and lender, as the shares are transferred in terms of a loan, based on case law the receipt of the shares should not have income tax implications. Furthermore, the entering into and closing out of the loan should not have CGT implications provided the loan qualifies as a securities lending arrangement. A securities lending arrangement is defined as a lending arrangement as defined in the STT Act. If the loan does not constitute a securities lending arrangement then it could have adverse CGT implications as a result of paragraph 38 of the Eighth Schedule to the Income Tax Act (the Act). With regard to the income flows resulting from the share loan, the borrower will be subject to income tax on the dividends that accrue to the borrower. Such dividends would not qualify for the exemption from income tax in section 10(1)(k)(i) of the Act. If the borrower on-lent or on-transferred the shares prior to a record date, then it would be taxed on the receipt of manufactured dividends or the sale proceeds, depending on the case. The borrower should be entitled to deduct the expenditure incurred in the production of such income. The lender would similarly be taxed on any manufactured dividends it received except in instances where the lender qualifies for a tax exemption (such as certain retirement funds). Dividends which accrue to the borrower of listed shares would be subject to the dividends tax provisions but may qualify for exemption from dividends tax on the basis that the dividend has been included in the income of the borrower (see above), or if the borrower constitutes a South African resident company or qualifies for one of the other exemptions from dividends tax. 3

4 The dividends tax provisions also contain deeming provisions which deem certain payments by a borrower to a lender to be dividends. In particular, where certain persons (effectively persons that qualify for an exemption from the dividends tax) have borrowed listed shares after the date that a dividend is announced, then any amount paid by the borrower to the lender for the benefit of the lender is deemed to be a dividend for purposes of the dividends tax. The deeming provision only applies to amounts paid by the borrower that do not exceed the actual dividend paid on the shares. This provision places a withholding obligation on the borrower and may result in the lender being subject to dividends tax on such deemed dividend if the lender doesn t qualify for one of the exemptions from the dividends tax. From an STT perspective, the transfer of shares is subject to STT at the rate of 0.25%. The loan results in a transfer for STT purposes from the lender to the borrower and vice versa. However, the lending of listed shares may be exempt from STT provided such loan qualifies as a lending arrangement as defined and complies with the other specific requirements of the exemption. Furthermore, to the extent that the share loan is collateralised, depending on the type of the collateral and the manner in which it is provided, the provision of collateral may also have tax implications. For example, where the security given results in the transfer of beneficial ownership of assets, the income tax and CGT implications resulting from the transfer of such assets, should be considered. In addition, the dividends tax, interest withholding tax and STT implications may require consideration, depending on the type of asset that is provided as security. It is worth noting that, although there is no disposal for CGT purposes where an asset is transferred as security for a debt or by a creditor who transfers that asset back to that person upon release of that security, there is currently no 4

5 STT exemption for the transfer of beneficial ownership of shares as security. Therefore, the transfer of beneficial ownership of shares as security results in STT implications upon entering into and closing out the transaction. The 2015 Budget Review did indicate in the context of securities lending arrangements that the tax treatment of the transfer of beneficial ownership of collateral will be reviewed to reduce negative effects on acceptable business practices. It is expected that this will include an STT exemption where listed shares are transferred as collateral for a share loan. Editorial Comment: Certain amendments are already included in the 2015 Draft Taxation Laws Amendments Bill. It is evident from the above that the entering into of share loans may result in multiple tax implications for the parties involved. Although certain exemptions may apply, both lenders and borrowers should understand the requirements of these exemptions. They also need to understand the circumstances under which they may apply in order to ensure that they correctly account for and disclose the transactions for tax purposes. ENSafrica ITA: Section 10(1)(k)(i), Paragraph 38 of the Eighth Schedule Securities Transfer Tax Act 2015 Draft Taxation Laws Amendment Bill EXCHANGE CONTROL Shuttleworth s exit charge (Refer to article 2379 January 2015 issue 184) 5

6 In an about-turn, the Constitutional Court handed down judgment in the Shuttleworth matter on 18 June Not only was it found that Shuttleworth s exit charge constituted a regulatory charge as opposed to a tax, but it was also found that the Exchange Control Regulations were not unconstitutional. Should one consider the history of the matter, Shuttleworth made an application to the South African Reserve Bank (Reserve Bank) to transfer approximately R2,5 billion out of South Africa. This approval was granted subject to an exit charge of 10% being imposed on the capital that was exported. The payment of this exit charge was challenged by Shuttleworth: in the High Court it was indicated that the exit charge was not unlawful, even though a number of the Exchange Control Regulations were declared unconstitutional; and in the Supreme Court of Appeal it was held that the exit charge was unlawful because it was calculated to raise revenue and that certain procedures prescribed to adopt a money Bill had not been followed. As a starting point it was indicated that the matter was not moot given the fact that the government would be faced with claims amounting to about R2,9 billion, to the extent that the payment of the exit charge is reversed. A number of other emigrants thus waited with baited breath on the judgment of the Constitutional Court as it was quite likely that a flood of claims would have ensued had Shuttleworth been successful in his argument. The judgment, written by Moseneke DCJ, divided the matter into two categories, being: 6

7 whether the exit charge was validly imposed; and the constitutionality of the Exchange Control Regulations. The question pertaining to the levying of the exit charge was in turn split into three questions, being: Was the imposition of the exit charge a decision of the Minister of Finance or the Reserve Bank? Was the exit charge a national tax, levy, duty or surcharge under sections 75 and 77(1)(b) of the Constitution? Was the exit charge calculated to raise revenue as envisaged in regulation 10(1)(c) and section 9(4) of the Currency and Exchanges Act of 1933? With reference to the question whether the exit charge was a decision of the Minister of Finance or the Reserve Bank, it was indicated that it was ultimately a decision of the Minister of Finance. The Reserve Bank had no discretion or mandate to refuse to impose or vary the exit charge. The Minister of Finance thus gave a general permission that was subject to fixed conditions. The Reserve Bank was only responsible for mechanically applying the policy decision of the Minister of Finance and did not have discretion when implementing the decision. The fact that the Minister of Finance made the decision and not the Reserve Bank still does not put an end to the enquiry. The question is then whether the decision of the Minister of Finance was constitutionally valid. 7

8 Should the exit charge have been a charge, levy or tax that was of a kind that could only be imposed after having complied with the procedures of a money Bill, the decision of the Minister of Finance would also have been invalid. A Bill is a money Bill if it imposes national taxes, levies, duties or surcharges. A money Bill must be passed by the National Assembly in a specific manner. The reason for having to adopt this process is that the Executive of government is not entitled to impose a tax burden without due and express consent of elected public representatives. If a law that purports to impose a tax has not followed the due process, it is invalid. In the particular circumstances, however, it was indicated that a law may impose regulatory charges in order to pursue a legitimate government purpose even though it results in money being collected by the government. A money Bill is thus not any Bill that envisages a scenario where revenue is incidentally raised. Moseneke DCJ, indicated that the 'seminal test' is whether the primary or dominant purpose of a statute is to raise revenue or to regulate conduct. It was indicated: "If regulation is the primary purpose of the revenue raised under the statute, it would be considered a fee or a charge rather than a tax. The opposite is also true. If the dominant purpose is to raise revenue then the charge would ordinarily be a tax. There are no bright lines between the two. Of course, all regulatory charges raise revenue." Turning to the facts, it was indicated that the purpose of the exchange control legislation was to curb or regulate the export of capital from South Africa. The exit charge was thus not directed at raising revenue. In addition, it was indicated that the exit charge was imposed on a discrete portion of the population and did not have general effect. 8

9 In addition, it was indicated that the exit charge was not calculated to raise revenue. Given the fact that the primary object of the exit charge was to regulate and discourage the export of capital, it was held that it was not calculated to raise revenue. Any income that may thus have been derived was incidental to the dominant objective of the legislation. Following from the above principle, it was also indicated that national revenue of whatever kind does not only need to be raised by original legislation. It was indicated that not every levy constitutes a national tax. Also, it was indicated that the legislation did not assign plenary legislative power to the President. In doing so, the President has not delegated legislative power as his power was (and still is) to regulate by imposing conditions for export of capital. In any event, it was indicated that one is dealing with exceptional circumstances and that one should consider legislative provisions against the background of what they intend to achieve. It was indicated that the Executive bears a responsibility to secure a stable currency within a good and prospering economy: "This duty is sufficiently exceptional, and paramount, to warrant a broad power that allows the Executive to respond to the uniquely dynamic field of exchange control. The global financial crisis of 2007 is still fresh in many of our memories, a testament to the need for the ability to respond rapidly, and guard against the potential negative impact of drastic market or economic changes. This is particularly true for vulnerable economies such as ours. It is on this basis that we recognise the importance, indeed the public interest, in permitting the Executive to impose a limited charge on the export of capital." 9

10 Turning to the constitutionality of the Exchange Control Regulations, it was indicated that the constitutional attack of Shuttleworth could only be limited to the circumstances and provisions that affect him and not all Exchange Control Regulations. Such an approach would be "academic, hypothetical and speculative". In the context of his specific circumstances, it was indicated that the broad discretionary powers that were conferred by the legislation were not subject to attack given the fact that the exchange control system "requires a flexible, speedy and expert approach to ensure that proper financial governance prevails". One is not able to lay down rules in advance and, for this reason, one has to have broader provisions to cater for whatever circumstances could arise. The Constitutional Court has now decisively indicated that neither the particular circumstances of Shuttleworth nor the general framework of the Exchange Control Regulations, in the context of the levying of the exit charge, could be successfully attacked. Not only was it found that the exit charge did not constitute a tax, but it was also indicated that wide and discretionary powers could be conferred in terms of the legislation given the unforeseen circumstances that can arise in the context of exchange control. Whereas the authorities are probably expressing a sigh of relief, a number of other individuals are probably expressing a sigh of disappointment. Two different sighs, but given in the context of the Exchange Control Regulations having to protect the South African economy in unforeseen and exceptional circumstances. If anything, the only form of scrutiny would now be the way in which the discretion is exercised given the circumstances of the matter as opposed to the framework within which it is exercised. Cliffe Dekker Hofmeyr 10

11 Constitution: Sections 75 and 77(1)(b) Exchange Control Regulations Currency and Exchanges Act: Regulation 10(1)(c) and section 9(4) GENERAL Valuation of a usufruct The value of a usufruct is often needed to be calculated for purposes of taxes, for example, for the purposes of: estate duty, should a testator/testatrix bequeath a usufruct over property to an heir; Editorial Comment: This may also apply when a usufruct ceases. donations tax, should a usufructuary renounce his/her usufructuary rights; or capital gains tax, should a property in respect of which a usufruct is registered be disposed of. In this regard, the value of a usufruct over a property (the Property) is, broadly speaking, calculated with reference to the life expectancy of the usufructuary or the term of the usufruct (whichever is shorter), the market value of the Property and the annual value of the right of enjoyment of the Property (the annual yield). The Income Tax Act of 1962 and the Estate Duty Act of 1955 (the Estate Duty Act) provide that the annual yield of a property means an amount equal to 12% of the value of the full ownership of the property which is subject to the usufructuary interest. However, where the Commissioner is satisfied that the property which is subject to a usufructuary interest could not reasonably be 11

12 expected to produce an annual yield of 12% on the full value of the property, the Commissioner may fix such sum as representing the annual yield as may seem to him reasonable in the circumstances. Accordingly, in certain circumstances, the Commissioner may accept a different percentage annual yield should this be supported by facts. It is therefore possible for a person to provide proof that the Property produces or would produce a yield of less than 12% per annum with reference to, for example, information concerning the price at which related property in the area is leased or a rental valuation prepared by an estate agent. In terms of section 5(1)(b) of the Estate Duty Act, should the Property consist of books, pictures, statuary or other objects of art, the annual value of the right of enjoyment thereof shall be deemed to be the average net receipts (if any) derived by the person entitled to such right of enjoyment of such property during the three years immediately preceding the date of death of the deceased. Furthermore, in C:SARS v Klosser s Estate [2000] 63 SATC 93, the court upheld the Commissioner s use of an annual yield of 2.5% for listed shares. The court held that the Commissioner was required to make predictions regarding the future yield and that such predictions could only be based on the relevant background facts including the yield of such shares at the date of death of the testator and prior thereto. It is accordingly a factual question whether the assets within an estate could be reasonably expected to produce a yield of 12%. It is accordingly recommended that, in determining the value of a usufruct for tax purposes, careful regard be had to the relevant background facts to determine whether a 12% annual yield would be acceptable in the 12

13 circumstances and a 12% annual yield should not, as a matter of course, be applied in determining the value of a usufruct. It is important to adequately consider all relevant background facts in determining the applicable annual yield so as to ensure that excessive tax is not inadvertently triggered. ENSafrica Estate Duty Act: Section 5(1)(b) INTERNATIONAL TAX BEPS Action 8: Introducing hindsight into hard-to-value intangibles (Refer to article 2429 July 2015 Issue 190) On 4 June 2015, the Organisation for Economic Co-operation and Development (OECD) published a discussion draft on hard-to-value intangibles in terms of which the OECD proposes revising its Transfer Pricing Guidelines. In particular, it is proposed that tax authorities will be allowed to use ex post evidence, (i.e. hindsight), to assess the arm s length nature of transfer pricing arrangements in respect of hard-to-value intangibles. What are hard-to-value intangibles? The OECD defines hard-to-value intangibles as meaning intangibles or rights in intangibles for which, at the time of their transfer in a transaction between associated enterprises: no sufficiently reliable comparables exist; and 13

14 there is a lack of reliable projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain. Hard-to-value intangibles therefore include, inter alia, intangibles that are only partially developed at the time of transfer or are not anticipated to be exploited commercially until several years following the transaction, as well as intangibles that are anticipated to be exploited in a manner that is novel at the time of the transfer. The problem faced by tax authorities Due to the specialised and complex nature of many industries, tax administrations depend to a large extent on the disclosures and explanations provided by the taxpayer. Inevitably, this situation has been abused in the past, which has led to systemic mispricing. The OECD s concern is that information asymmetry between taxpayer and tax administrations may be acute and may exacerbate the difficulty encountered by tax administrations in verifying the arm s length basis on which pricing was determined. As the OECD explains, an enterprise may transfer intangibles at an early stage of development to an associated enterprise, set a royalty rate that does not reflect the value of the intangible at the time of the transfer, and later take the position that it was not possible at the time of the transfer, to predict the subsequent success of the product with full certainty. The difference between the ex ante and ex post value of the intangible would therefore be claimed by the taxpayer to be attributable to more favourable developments than anticipated. 14

15 In South Africa the scope for such mispricing is limited due to the exchange control restrictions applicable to the transfer of intangibles developed in South Africa to related parties outside of the country. The OECD s proposed reforms are intended to protect tax administrations from the negative effects of the above described information asymmetry. Proposed changes to the OECD Guidelines The OECD proposes revising the guidance in Section D.3 of the Transfer Pricing Guidelines so that tax administrations may consider ex post (i.e. hindsight) evidence about the actual financial outcomes of the transfer of hard-to-value intangibles. Ex post evidence may be used where: the difference between ex post outcomes and ex ante projections is significant; and where such a difference is due to developments or events that were or should have been foreseeable at the time of the transaction. How taxpayers should prepare for this proposed change In order to avoid the application of hindsight to transfer pricing decisions made by the taxpayer in the context of the transfer or licensing of intangibles, it is necessary for the taxpayer to satisfy the tax administration that the decision taken at the time was based on reliable information. This can be achieved by: providing full details of the ex ante projections used at the time when the decision on the pricing arrangements was made; and providing satisfactory evidence that any significant difference between the financial projections and the actual outcomes is due to unforeseeable or extraordinary developments or events occurring after the determination of the price that could not have been anticipated by the associated enterprises at the time of the transaction. 15

16 Therefore, the importance of the taxpayer preparing a detailed analysis of all potential commercial outcomes when it agrees upon a price or sets a royalty rate involving hard-to-value intangibles cannot be over-emphasised. However, while it might be possible to limit the risk of the tax administration being able to use hindsight in its assessment of the arm s length nature of the transfer and/or licensing of hard-to-value intangibles through the preparation of detailed documentation at the time the decision on the pricing arrangements is made, it is concerning that the judgment of whether or not the ex ante projections used by the taxpayer were reasonable will rest with the tax authority. ENSafrica OECD: Transfer Pricing Guidelines REPORTABLE ARRANGEMENTS Obligation to report (Refer to article 2430 July 2015 Issue 190) The list of reportable arrangements was extended by the South African Revenue Service in a notice (SARS Notice) published on 16 March 2015 in terms of sections 35(2) and 36(4) of the Tax Administration Act of 2011 (the TAA). The SARS Notice has caused some consternation. However, if one considers the obligation to notify SARS of reportable arrangements, the effect of the SARS Notice is perhaps not as far-reaching as it first appears. 16

17 In terms of section 35(1) of the TAA an arrangement is a reportable arrangement if: a person is a participant in an arrangement and the arrangement has certain characteristics; or SARS has listed it in terms of a public notice under section 35(2) of the TAA (the SARS Notice being the first and, so far, only such notice). Notably, in the case of a reportable arrangement listed in a SARS notice under section 35(2) of the TAA, it is not a requirement that a tax benefit is or will be derived or is assumed to be derived by a participant; it is merely a requirement that the transaction be listed in the public notice. Nevertheless, in many cases, while the relevant arrangement may technically be a reportable arrangement in terms of a notice, practically there will be no obligation on any person to actually report the arrangement. The person who must report a reportable arrangement is a 'participant'. A 'participant' is defined in section 34 of the TAA to mean, in relation to an arrangement: a promoter; or a person who directly or indirectly will derive or assumes that the person will derive a tax benefit or financial benefit by virtue of an arrangement. A 'promoter', in relation to an arrangement, is a person who is 'principally responsible for organising, designing, selling, financing or managing the arrangement'. 'Tax benefit' is defined in section 34 of the TAA to mean 'avoidance, postponement or reduction of a liability for tax'. 17

18 In terms of section 34 of the TAA, 'financial benefit' means 'a reduction in the cost of finance, including interest, finance charges, costs, fees and discounts on a redemption amount'. In terms of section 37 of the TAA, the person who must report a reportable arrangement is the participant, that is, either the promoter or the person who derives a tax benefit. In terms of paragraph 2.4 of the SARS Notice the following arrangement has been identified as a reportable arrangement: "Any arrangement in terms of which one or more persons acquire the controlling interest in a company on or after the date of publication of this notice, including by means of acquiring shares, voting rights or a combination of both, that: (a) (i) has carried forward or reasonably expects to carry forward a balance of assessed loss exceeding R50 million from the year of assessment immediately preceding the year of assessment in which the controlling interest is acquired; or (ii) has or reasonably expects to have an assessed loss exceeding R50 million in respect of the year of assessment during which the controlling interest is acquired; or (b) directly or indirectly holds a controlling interest in a company referred to in paragraph (a)." Presumably, the provision is aimed at giving SARS early warning of arrangements that constitute the 'trafficking' in companies that have assessed losses. 18

19 Now, daily, shareholders sell shares in companies that have assessed losses, in some cases significant assessed losses. No doubt in most of these transactions, the intention of a person acquiring the shares in a company is, in good faith, to invest in a company that, for example, operates a viable business and that, coincidentally, has an assessed loss. Consider the example where X is interested in acquiring a controlling stake in Company Y from shareholder Z. Company Y owns valuable intellectual property but has been battling to realise it to its best effect. It has incurred actual losses and also has an assessed tax loss of R60 million. X pays cash for the shares. X identified the opportunity himself and, accordingly, there was no one who is 'principally responsible for organising, designing, selling, financing or managing the arrangement' between X and Z. Accordingly, there was no 'promoter' as defined in section 34 of the TAA. Clearly, the transaction falls within the provisions of paragraph 2.4 of the SARS Notice. But who is obliged to report the arrangement to SARS? As there is no promoter, the only person who in principle is obliged to report the arrangement is one who will directly or indirectly derive a tax benefit or financial benefit. It is not apparent whether X, Company Y or Z is obtaining any financial benefit, that is, a 'reduction in the cost of finance'. Is X, Company Y or Z a 'participant'? That is, are any of them directly or indirectly avoiding, postponing or reducing a liability for tax? 19

20 Conceivably, Z could be selling the shares at a loss and, in so doing, realise a capital loss which it may be able to set off against future capital gains for capital gains tax purposes and, accordingly, be reducing a liability for tax. But let's assume that there is no capital loss. Is X realising a tax benefit? Company Y has an assessed loss and, if it keeps on operating, may be able to set off future taxable income against the assessed loss. Clearly, it may reduce tax in future. However, the reduction does not arise by virtue of the transaction between X and Z; it arose because of the losses it realised in the past. Is X a 'participant'? In other words, is X directly or indirectly deriving or assuming that it will derive a tax benefit by virtue of the arrangement? X derives no direct tax benefit as a result of the assessed loss; the benefit (if any) accrues for the benefit of Company Y, as noted above. In other words, X is not avoiding, postponing or reducing X's liability for tax. Is X indirectly deriving a tax benefit? Again, while X may be deriving a benefit in the sense that it will hold a share in a company that has an assessed loss, it will not be deriving a tax benefit; the tax benefit is that of the company. So, in the example above, the transaction may constitute a reportable arrangement, however, there is no promoter and, apparently, there is no one realising a tax benefit and thus none of the parties involved are obliged to report the arrangement. What we have sought to point out is that while an arrangement may technically constitute a reportable arrangement, in the case where there is no 'promoter', 20

21 there must be at least one party to the transaction who derives a tax benefit, otherwise there is no obligation on any one to report the arrangement. Before notifying SARS of an arrangement that, on the face of it, is reportable, parties should first determine whether there is actually an obligation on any one of them to report the arrangement. Cliffe Dekker Hofmeyr TAA: Sections 34, 35(1), 35(2) 36(4) and 37 Notice 212 in Government Gazette No of 16 March 2015 SARS Draft Notices 2014 and 2015 on Reportable Arrangements TAX ADMINISTRATION Invalid assessments Judgment was delivered by the Supreme Court of Appeal (SCA) in the case of Medox Limited v Commissioner for the South African Revenue Service (20059/2014) [2015]. 77 SATC233 While under provisional liquidation, Medox Limited (the Taxpayer) incurred an assessed loss during its 1996 year of assessment. The Taxpayer failed to submit a return for the 1997 year of assessment. In its returns for the 1998 and subsequent tax years, it neglected to carry forward the assessed loss from The Taxpayer only realised in 2009 that the assessed loss had not been accounted for and set off against its income in the subsequent years of assessment. However, the Taxpayer did not object to the assessments issued by the Commissioner for the South African Revenue Service (the Commissioner) 21

22 in respect of the 1998 and subsequent years of assessment. Rather, the Taxpayer took the view that the issuing of these assessments without taking into account the assessed loss from 1996 was ultra vires, and the assessments were therefore void. On this basis, the Taxpayer approached the High Court in Pretoria for relief, but the High Court dismissed the matter. The Taxpayer then appealed to the SCA. The SCA reasoned that, in order for the Taxpayer to succeed, the Taxpayer had to show that it had an existing, future, or contingent right to have the assessments set aside. However, as was submitted by the Commissioner, the Taxpayer never objected to the assessments and they had thus become final and binding in terms of section 81(5) of the Income Tax Act 1962 (the Act) now section 100 of the Tax Administration Act 2011 (the TAA). The Commissioner also argued that three years had lapsed since the date of all the relevant assessments, and any right to object had effectively prescribed in terms of section 81(2) of the Act now section 104(5)(b) of the TAA. It was submitted on behalf of the Taxpayer that the provisions relating to the finality of assessments only applied to valid assessments, being assessments that were correctly issued in terms of the Act. However, the SCA noted that if this argument is followed through, it would mean that any assessment in terms of which an amount is incorrectly included, or a deduction incorrectly refused, would be invalid, and accordingly not subject to sections 81 to 83, rendering the objection and appeal process irrelevant. This would mean that taxpayers could bypass the Tax Court and directly approach the High Court. 22

23 The SCA specifically noted that the Taxpayer did not base its case on the assessments having been issued as a result of iustus error or fraud. It seems therefore that taxpayers could potentially approach a High Court to set aside assessments in such circumstances. The court accordingly refused to read section 81 as applying only to valid and correct assessments, as such an interpretation would conflict with the intention of the legislature, which presumably was for the objection and appeal procedure to apply to all assessments, whether they are valid and correct, or not. The Taxpayer essentially contended that it was the Commissioner s duty to set off the loss from 1996 against income from the subsequent years. However, the SCA held that it was the Taxpayer s duty to render a return carrying forward any such assessed losses from previous years, and the burden of proof in respect of any set-off of assessed losses lies with the Taxpayer. In this matter, the Taxpayer did not render a return for the 1997 year of assessment, and did not claim the assessed loss in any of the subsequent years. The appeal was therefore dismissed. An additional matter that warrants mention is the SCA s manifest dissatisfaction with the State attorney, who acted for the Commissioner. It appears that the State attorney failed to file timeously its heads of argument and accompanying practice note, which initially lead the court to believe that the appeal would not be opposed. The SCA noted that: " due to a litany of administrative deficiencies, no steps were taken to forward the heads of argument to this court nor was any practice note prepared for filing. 23

24 The administrative deficiencies leading to this sorry state of affairs can only be described as grossly negligent, demonstrating a flagrant disregard for the rules of this court. It is clear that, had this court not brought the failure to file the heads of argument and practice note to the attention of the State attorney, nothing would have been done and the appeal would have been heard without the Commissioner being represented this court has been seriously inconvenienced by the supine attitude adopted by the State attorney " As a sanction, the court disallowed the Commissioner s costs by not making any cost order. Cliffe Dekker Hofmeyr TAA: Sections 100 and 104(5)(b) VALUE ADDED TAX Payments to welfare organisations In the case of Alan George Marshall N.O & Others v CSARS HC 39219/2014 NG, the SA Red Cross Air Mercy Service Trust (the Trust) approached the High Court for a declaratory order regarding the value-added tax (VAT) status of payments it receives from the health departments of provincial governments to provide air rescue services as and when required. In its judgment delivered on 6 May 2015, the High Court found in favour of the Trust that the payments qualify for VAT at the rate of zero per cent. It was common cause that the Trust is a welfare organisation and that its activities constitute welfare activities, being the rescue or care of persons in distress. 24

25 The Trust applied for a declaratory order following a ruling issued by the South African Revenue Service (SARS) that the payments received by the Trust are in respect of actual services rendered to the provincial governments, and are therefore subject to VAT at 14%. The High Court was approached to provide clarity on the application of two sections of the Value-Added Tax Act, 1991 (the VAT Act), i.e. section 8(5) and section 11(2)(n). Section 8(5) provides that a designated entity (which includes a welfare organisation) is deemed to supply services to a public authority to the extent of any payment made by the public authority to the designated entity in the course or furtherance of an enterprise carried on by the designated entity. Section 11(2)(n) provides for the zero rating of services supplied by a welfare organisation comprising of welfare activities, and to the extent that any payment for those services fall within section 8(5), the services are deemed to be supplied to a public authority. The Trust contended that the provisions of section 8(5) of the VAT Act are applicable to any payments it received from the provincial governments, and that the payments received qualify for the rate of zero per cent in terms of section 11(2)(n) of the VAT Act because they related to the Trust s welfare activities. Counsel for SARS argued that section 8(5) only applies to gratuitous payments made by a public authority and not to payments for actual services supplied, and therefore the payments made by the provincial governments fall outside the scope of section 8(5). Counsel for SARS further argued that the gateway into 25

26 section 11(2)(n) is section 8(5), and because the provisions of section 8(5) do not apply, the zero rating provisions of section 11(2)(n) cannot apply. In applying the principles of statutory interpretation as enunciated in various authorities, the High Court found that the wording of the two sections are quite clear when the ordinary meaning of the words therein are examined in the context of the VAT Act. No additional purposive approach is required as there are no ambiguous or unclear words in these sections and the words are clear as they stand. The High Court could therefore not agree with the SARS argument that section 8(5) does not deal with actual services. It agreed with the Trust that the purpose of the deeming provision in section 8(5) is simply to deem the payments received to be consideration for services as opposed to goods. The High Court found that the zero rating provisions of section 11(2)(n) apply because the services rendered by the Trust comprise welfare activities, and that such services are deemed to be supplied to the provincial governments. The High Court therefore granted the declaratory order sought by the Trust that section 8(5) applies not only to services deemed to be rendered but also to actual services rendered, and that the payments received by the Trust from the provincial governments for these services are subject to VAT at the rate of zero per cent. SARS was ordered to pay the cost of the application. It remains to be seen whether SARS will accept the judgment or whether it will lodge an appeal against the judgment to the Supreme Court of Appeal. 26

27 ENSafrica VAT Act: Sections 8(5) and section 11(2)(n) Sale agreements for immovable property Parties to sale agreements of immovable property should take great care when drafting the value-added tax (VAT) clauses. Consider the recent case of Lezmin 2358 CC v Tomeridian Properties CC and others [2015] JOL [GJ]. The facts of the case are complex. Put simply, the seller sold commercial immovable property to the buyer. The sale agreement, which went through a few permutations, stated that: "The purchase price is the sum of R (Twenty Five Million Rand) exclusive of VAT which is payable..." Under the heading 'Transfer and Bond Costs' the agreement provided that the buyer "shall pay all costs of transfer, transfer duty and/or VAT and bond registration costs". However, initially no VAT payment was contemplated because the property was subject to a lease and was sold as a going concern. Accordingly, the transaction was zero-rated for VAT purposes in terms of section 11(1)(e) of the Value-Added Tax Act of (That provision states that if a VAT vendor sells a business to another VAT vendor and certain requirements are met, the transaction attracts VAT at a rate of zero percent). 27

28 The agreement provided further that if the South African Revenue Service (SARS) ruled that VAT was payable (as the zero-rating did not apply for some reason), the buyer had to pay the VAT against delivery of a tax invoice. After the sale, but before transfer, the lease was cancelled. Accordingly, the transaction was no longer zero-rated for VAT purposes. SARS indicated that VAT was payable at the standard rate of 14%. The parties then settled a dispute between them about the agreement on the basis that the property was to be transferred to the buyer 'forthwith' and that the (reduced) purchase price, 'exclusive of Value-added Tax' had to be paid by way of bank guarantees within a stipulated time period. The seller conceded that VAT in terms of the contractual relationship between the parties was payable by the buyer either on delivery of a tax invoice or, in the absence thereof, on the registration of transfer of the property into the buyer's name. The crisp issue was this: on a proper interpretation of the agreements between the parties, should VAT have been considered as part of the purchase price and therefore not separately and, accordingly, when the seller called for a guarantee, was the buyer obliged to provide a guarantee for the purchase price only or for the purchase price plus VAT? The court held that the buyer was only obliged to provide a guarantee for the purchase price portion, and not the VAT portion. 28

29 What the case highlights is that, while it is not always possible for the parties to legislate for all the 'unknown unknowns' (in the words of the US Secretary of Defense, Donald Rumsfeld), the parties should at least provide for the following in the sale agreement: Parties should determine beforehand whether the buyer and seller are both registered VAT vendors. Often the buyer is not a vendor at the time of the sale. In that case, the parties should state by when the buyer must be registered for VAT and what happens if the buyer is not registered for VAT timeously (that is, whether the sale will be cancelled or whether the proceeds of the sale will increase on the basis that the buyer must pay VAT at the standard rate). The parties should determine whether the immovable property is truly a going concern and, accordingly, whether the transaction can be zero-rated for VAT purposes. The parties should also determine whether some or all of the assets necessary for carrying on the enterprise are disposed of to the purchaser. Commercial immovable property cannot be transferred as part of a going concern without further ado. For zero-rating to apply, an enterprise must be carried on in relation to the property. For example, the property must be let, or the seller must carry on its business on the property (say, by way of a manufacturing plant). The agreement should state precisely what the purchase price is and whether it includes or excludes VAT. (If the agreement says nothing about that, then the price is deemed to include VAT). If the transaction is structured as a going concern, zero-rated transaction then the parties should include the prescribed statements in the sale agreement, notably, that the business is sold as a going concern, that the price includes VAT at 0% and that the business will be an incomeearning activity on transfer. 29

30 The agreement should state what happens if SARS decides not to zerorate the transaction. Ideally, the agreement should state that the buyer must pay VAT at the standard rate (14%) in addition to the price. The agreement should also state at what time the VAT would then be payable. It should be noted that, when immovable property forms part of the supply of a going concern, then the time of supply for VAT purposes is the earlier of (i) the date that an invoice is issued or (ii) the date that any payment of the consideration is made. Usually, when immovable property is included in a going concern, the invoice will be issued and the payment will be made on registration of transfer of the property in the name of the buyer. But the parties should make it clear when the VAT will be due. That is, on the date of the issue of the invoice or the date of payment of the price. The agreement should also state that, if the invoice will be issued and the price will be paid on transfer, the buyer must provide a guarantee for both the purchase price and the amount of VAT. Cliffe Dekker Hofmeyr VAT: Section 11(1)(e) SARS NEWS Interpretation notes, media releases, rulings and other documents Readers are reminded that the latest developments at SARS may be accessed on their website Editor: Ms S Khaki 30

31 Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof JJ Roeleveld, Prof PG Surtees, Mr Z Mabhoza, Ms MC Foster The Integritax Newsletter is published as a service to members and associates of The South African Institute of Chartered Accountants (SAICA) and includes items selected from the newsletters of firms in public practice and commerce and industry, as well as other contributors. The information contained herein is for general guidance only and should not be used as a basis for action without further research or specialist advice. The views of the authors are not necessarily the views of SAICA. 31