NOVEMBER 2014 ISSUE 182 CONTENTS TAX ADMINISTRATION

Transcription

1 COMPANIES NOVEMBER 2014 ISSUE 182 CONTENTS TAX ADMINISTRATION STC credits Sale of shares EMPLOYEES TAX Pay now, argue later Default judgment Litigation with SARS SARS must give proper reasons and have proper grounds New tax dispute resolution rules Search and seizure VALUE-ADDED TAX Employment Tax Incentive Developers and owners of land EXCHANGE CONTROL SARS NEWS Domestic treasury management companies Interpretation notes, media releases and other documents 1

2 COMPANIES STC credits Companies should take note of the fact that secondary tax on companies (STC) credits that they have accumulated up to 31 March 2015 will expire on that date. The implication is that companies with STC credits should take advantage of the credits by paying dividends on or before 31 March The benefit of STC credits is only enjoyed at the point where dividends are distributed to shareholders who are not exempt from the dividends tax for example, where dividends are paid to shareholders who are natural persons. Therefore, multi-tier groups of companies will have to pay dividends all the way up and out of the group on or before 31 March 2015 for the non-exempt shareholders to experience a benefit. The benefit derived by a non-exempt shareholder from an STC credit is that the effective rate of dividends tax payable is reduced. For example, say South African resident Company A has two shareholders who each hold 50% of the shares. One shareholder is a South African resident individual and the other is a South African resident Company B. Company A has an STC credit of R100 and pays a dividend of R100 in total. No dividends tax need be withheld by company A from the dividend paid as the STC credit is sufficient to shield the entire dividend paid from dividends tax. Although the dividend paid to Company B would in any event have qualified for exemption from dividends tax, as it is paid to a South African resident company, a benefit arises for the shareholders of Company B as the pro-rata STC credit of R50 is transferred to Company B. If the shares in Company B are held entirely by non-exempt persons such as South African resident individuals, the R50 prorata STC credit that was transferred to Company B can be used to shield from dividends tax, dividends paid by Company B to its shareholders. The potential saving in dividends tax therefore occurs at the level where the dividends are 2

3 paid to non-exempt persons. In this example the monetary benefit of the STC credit is therefore a total of 15 per cent of the R100 available STC credit, in other words R15. The use of STC credits is subject to the notification by the company declaring the dividend of the amount by which the dividend reduces the STC credit of the company. This declaration needs to be made by the date of payment of the dividend and, in terms of the wording of section 64J(1) of the Income Tax Act (the Act), has to be made to all recipients of the company's dividend, without regard to whether or not such recipients are exempt from the dividends tax. The calculation of STC credits available to a company consists of two parts. The first part consists of the amount of the excess of the total amount of dividends that had accrued to the company up to and including 31 March 2012, ignoring certain dividends which were exempt from STC, over the total dividends declared by that company up to and including that date. So if, for example, R2 million in dividends had accrued to a company up to and including 31 March 2012 and R had been declared by the company up to and including that date, the first amount would be R The second part is the sum of the dividends that accrued to the company on or after 1 April 2012 accompanied by the above notification regarding the reduction in the STC credits of the company paying the dividend. Upon replacement of the STC regime with the dividends tax regime with effect from 1 April 2012, it was decided to allow STC credits to be carried forward into the dividends tax regime, but with a three year expiry period. Therefore, with effect from 1 April 2015, STC credits throughout the South African tax system will expire. In view of the monetary value attaching to the STC credits, companies with STC credits should therefore consider the payment of dividends prior to this date. 3

4 It should also be noted that for dividends tax purposes, a dividend other than a dividend in specie that is declared by an unlisted company is deemed to be paid on the earlier of the date of actual payment or when it becomes due and payable. It is submitted that in the case of a demand loan, the crediting of the dividend to the loan results in the amount becoming due and payable'. In the case of a dividend declared by a listed company, the dividend is deemed to be paid on the date that it is actually paid. In planning for the payment of dividends prior to the expiry of the STC credit regime, companies should also be aware that if interest is incurred to finance the payment of a dividend, such interest may well not be tax deductible as it will not be considered to be incurred in the production of income'. BDO ITA: Section 64J(1) Sale of shares Judgment was handed down by a full bench of the High Court, Western Cape Division, in the matter of Capstone 556 (Pty) Ltd v Commissioner for the South African Revenue Service, on 26 August The matter was on appeal from the Tax Court (ITC 1867 [2013] 75 SATC 273). Facts Profurn was a listed company and by 2001 it had run up a bank debt of nearly R900 million. R600 million of the debt was subsequently converted into equity, after which the bank held approximately 78% of the shares in Profurn. 4

5 JDG, another company in the same industry, was introduced, along with Jooste (an intermediary), and Daun (a German businessman). JDG agreed to take over Profurn in exchange for issuing JDG shares to the bank. The bank received the JDG shares in April 2003, and then sold nearly all of these JDG shares, in equal parts, to the taxpayer, and a German company Daun et Cie (being one of Daun s companies). The taxpayer acquired its JDG shares on 5 December 2003, and funded the acquisition of the JDG shares through the issue of preference shares to the bank and by borrowing money from shareholders. By April 2004, 5 months after the taxpayer acquired the JDG shares, it sold the shares to a purchaser. Capital or revenue? In respect of the taxpayer's 2005 year of assessment, the taxpayer accounted for the proceeds on the disposal of the JDG shares as being of a capital nature. However, the South African Revenue Service (SARS) assessed the taxpayer on the basis that the proceeds of the sale constituted gross income. The Tax Court agreed with SARS, reasoning that Jooste was the 'controlling mind' behind the taxpayer, and on the objective facts, Jooste s intention was clearly to make profit at the time of the sale, even if there was previously a mixed intention. The High Court took the approach that, despite the objective facts pointing to the taxpayer having sold the JDG shares shortly after acquiring them, and by making use of short-term finance, the taxpayer s explanation of the events, 5

6 including his or her intention in respect of the transaction in question, is relevant and must be tested in the light of all the other circumstances it would be an over-simplification to focus too closely on the bare facts in drawing an inference as to the intention of the taxpayer. The court found that the purpose of the entire scheme was a rescue operation, and not a profit-making scheme. On the broader evidence, such rescue operation would take between 3 and 5 years, and the parties involved could not be said to have a short-term intention. The taxpayer s intention was to make a 'strategic investment' in the relevant industry and to hold the shares until the rescue was successful. Also, the taxpayer did not have to prove that it bought the shares as a long-term investment, but only that it did not buy the shares as trading stock as part of a profit-making scheme. As for the intention of the taxpayer at the time of selling the shares, the court found that it was really Daun who controlled the decision to sell, and not Jooste as shareholder of the taxpayer. Jooste, and thus the taxpayer, were obliged to go along with Daun s decision as the main partner in the consortium. Thus there was no actual decision by the taxpayer other than to follow Daun. Additionally, the court noted the following factors regarding the taxpayer, being a special purpose vehicle, that convinced it that the shares were acquired and held as capital assets: as a special purpose vehicle, the taxpayer was contractually precluded from doing anything other than acquiring and holding the shares it could not trade with the shares; the taxpayer s financial statements reflected the shares as 'non-current' assets; and 6

7 no trade was conducted by the taxpayer, and the taxpayer did not hold any board meetings. The taxpayer s appeal, on this point, was accordingly upheld. Equity kicker In the tax court, the taxpayer sought to claim a deduction for payment of a socalled 'equity kicker' in circumstances where the proceeds on disposal of the JDG shares were found to constitute gross income. However, on the finding of the High Court that the proceeds did not constitute gross income, the question was whether the equity kicker could be included in the base cost of the JDG shares. The taxpayer was partially funded by a loan from its shareholder BVI, which was in turn funded by a loan from its shareholder Gensec. BVI and Gensec agreed that in addition to BVI having to pay back its loan to Gensec, it also had to pay an 'equity kicker', being an amount representing a portion of the growth in the value of the JDG shares, calculated by means of a formula. The taxpayer was not formally party to that agreement, and on the face of it had no unconditional liability to pay the equity kicker to anyone. However, the taxpayer actually paid the equity kicker. The Tax Court found that the equity kicker was deductible by the taxpayer because in substance, the amount was incurred by it. The High Court agreed that the amount was actually incurred by the taxpayer, also for capital gains tax purposes. However, the High Court found that the equity kicker constituted 'borrowing costs', which are generally excluded from being added to an asset s base cost. However, an exception exists where the asset is a listed share, such as the JDG shares were, allowing for one third of certain borrowing costs to be taken into account for purposes of determining the base cost of the shares. 7

8 The High Court therefore allowed one third of the equity kicker to be included in the base cost of the JDG shares. Indemnity payments In the Tax Court, the taxpayer also sought to deduct an amount paid to Daun et Cie in respect of an indemnity that Daun et Cie had provided to the bank. The amount was payable to Daun et Cie irrespective of whether any actual liability arose under the indemnity. SARS argued that no amount had actually been expended by the taxpayer during the 2005 year of assessment, but the Tax Court concluded that, on the evidence, the amount had actually been incurred in July 2004, and thus fell within the 2005 year of assessment. The High Court noted that the decision by the taxpayer to pay Daun et Cie was in respect of a different aspect. The amount paid could therefore not be included in the base cost of the shares. Costs The High Court provisionally ordered SARS to pay 80% of the taxpayer s costs of appeal. (Refer to article 2317 in June 2014) Cliffe Dekker Hofmeyr (Editorial Comment: In terms of paragraph 20(1)(c) of the Eighth Schedule to the Income Tax Act, costs of disposal are to be included in the base cost.) ITA: Eighth Schedule 8

9 EMPLOYEES TAX Employment tax incentive It is no secret that unemployment in South Africa remains considerably high. According to the World Economic Forum Global Risk 2014 Report, structural unemployment and underemployment appears second overall in the Ten Global Risks of Highest Concern as many people in both advanced and emerging economies struggle to find jobs. The youth and minorities are especially vulnerable. Youth unemployment rates hover around 50% in some countries and South Africa was listed among them. Therefore, previous similar reports encouraged the South African government to introduce a cost-sharing taxation structure in order to encourage the employment of young and less experienced work seekers. This has occurred in the form of the Employment Tax Incentive Act 2013, No. 26 of 2013 (the ETIA) that commenced on 1 January The ETIA provides an employment tax incentive in the form of an amount by which employees' tax, also known as Pay-As-You-Earn (PAYE), may be reduced. However, this incentive has further income tax implications, and accordingly it is necessary for employers to understand not only the qualifying criteria for the employees tax incentive, but the accounting and income tax treatment as well. Briefly, the ETIA provides that eligible employers who can receive the incentive are private entities that are duly registered for PAYE, and that are not disqualified from receiving the incentive by the Minister of Finance (the Minister) due to the displacement of an employee or by not meeting, inter alia, the training and classification conditions as prescribed by the Minister by regulation. Eligible employers must employ qualifying employees who are between 18 to 29 years old at the end of the month the incentive is claimed, and who have South African identity documents or asylum seeker permits. 9

10 However, the age limit is not applicable if the employee renders services to an employer who operates in a special economic zone or an industry designated by the Minister. The employee must not be employed as a domestic worker, nor be a 'connected person' in relation to the employer or an associated person in relation to the employer on or after 1 October Furthermore, the employee must be paid the applicable minimum wage in that sector or industry, or be paid a wage of not less than R2 000 if a minimum wage is not applicable. Section 7 of the ETIA sets out the formulae to determine the amount of the employment tax incentive. For instance, from 1 January 2014 for each month of the first 12 months of which an eligible employer employs a person for a full month and who earns R2 000, the employer will enjoy a reduction of R1 000 in their monthly PAYE liability. Regarding the accounting and income tax treatment of the employment tax incentive, e.g. R1 000, section 13 of the ETIA read together with Schedule 1 refers to the amendment of section 10 of the Income Tax Act No. 58 of 1962 (the Act) by the addition of section 10(1)(s). Section 10(1)(s) provides that: There shall be exempt from normal tax any amount by which the employees' tax as defined in section 1 of the ETIA, payable by an employer as contemplated in section 3 of that Act is reduced in terms of section 2(2) of that Act or paid in terms of section 10 of that Act. It follows that the benefit enjoyed in the form of the above employment tax incentive is exempt from income tax, and will be accounted for as income in the accounting records of the employer. The ETIA also provides for the "roll-over" of the incentive amount, whereby the incentive amount may be rolled over to the next month in three instances. 10

11 Firstly, where the incentive exceeds the PAYE otherwise due in a month; secondly, if the employer did not claim the available incentive in the appropriate month; and finally, if the employer failed to submit any tax return or is liable for any tax debt that is outstanding and which is not subject to an agreement entered into with SARS. In these circumstances, the employer will be allowed to carry forward the incentive to the next month and this timing difference creates a deferred tax asset that should be accounted for in the balance sheet of the employer. Furthermore, section 10 of the ETIA provides for a reimbursement from SARS of the excess amount of the incentive so carried forward at the end of each employees tax reconciliation period. Such reimbursement would result in the correction of the overstated expense in the income statement and be shown as a current asset on the balance sheet. In conclusion, the Quarterly Labour Force Survey released by Statistics South Africa on 5 May 2014 has confirmed that unemployment in South Africa continues to rise. This raises the question as to whether the tax incentive is attracting enough employers to create new jobs because the unemployment rate in South Africa rose to 25.2% in the first quarter of 2014, up from 24.1% in the fourth quarter of Therefore, the effects of the tax incentive are still to be felt. However, those employers who have taken advantage of the employees tax relief should ensure that they have treated it correctly for tax and accounting purposes. (Refer to article 2271 in the January 2014 issue) ENSafrica ETIA: Sections 1, 2(2), 3, 7, 10 and 13 ITA: Section 10 11

12 EXCHANGE CONTROL Domestic treasury management companies During 2013, a treasury management company regime was introduced for exchange control purposes to encourage the establishment of group treasury management functions in South Africa and to further enhance South Africa s position as a gateway into Africa. For exchange control purposes, each entity listed on the JSE Limited (JSE) may establish one subsidiary to fund African and other offshore operations, which is not subject to the exchange control restrictions generally applicable to South African companies. The regime was recently expanded to unlisted companies. These domestic treasury management companies must register with the Financial Surveillance Department of the South African Reserve Bank (SARB) and will be subject to the following conditions: The domestic treasury management company must be incorporated and effectively managed in South Africa, i.e. it must be a South African tax resident. Initially, only one domestic treasury management company per JSE listed entity or unlisted entity will be allowed; however, this limitation will be considered further by National Treasury in future. Appropriate governance arrangements will be required. From an exchange control perspective, benefits to be enjoyed by a domestic treasury management company include: In the case of a JSE listed entity, transfers of up to R2 billion per annum (previously R750 million) from the parent company to the domestic treasury management company will be allowed without prior SARB 12

13 approval, provided transactions are not undertaken to avoid tax. A JSE listed company will also be able to apply to the SARB to transfer up to 25 per cent of its market capitalisation, provided the anticipated benefit to South Africa can be demonstrated; In the case of an unlisted entity, transfers of up to R1 billion per annum are permitted from the parent company to the domestic treasury management company. The unlisted entity can also apply to the SARB to transfer additional amounts. These amounts may be freely deployed to fund foreign group operations; Domestic treasury management companies will be allowed to raise and deploy capital offshore freely, provided such funds are without recourse to South Africa. Additional domestic capital and guarantees may be allowed on request to the SARB; Such companies will be allowed to operate as cash management centres for South African multinationals and cash pooling will be allowed without limitations. Local income generated from cash management will be freely transferable; and Foreign currency accounts as well as a Rand-denominated account for operational expenses may be operated. In the case of a JSE listed entity, listing of the domestic treasury management company will be considered on application. Whilst the Rulings issued by the SARB state that a domestic treasury management company should hold African and offshore operations we understand that it is not a requirement that the company must hold shares in foreign subsidiaries. Further, although the Rulings are not explicit, it is understood that funds transferred to the domestic treasury management company can be used to fund bona fide expansion abroad (e.g. to acquire shares in a foreign entity) in line with the parameters set out in the foreign direct investment allowances for South African companies. 13

14 Income tax considerations In line with the above, certain tax concessions were also introduced in 2013 to promote the use of the domestic treasury management company regime. Essentially, a domestic treasury management company is permitted to use its functional currency, as opposed to Rand, as a starting point for currency translations for tax purposes, thus providing relief in respect of unrealised foreign currency gains or losses. However, interest income derived by the domestic treasury management company will continue to be subject to South African income tax. The relief is therefore limited to exchange gains and losses. It should thus be ensured that the company s treasury operations are primarily concluded in its functional currency. The broad idea is therefore to allow South African groups to avoid having to set up an offshore treasury company and, instead, to allow such groups to utilise a South African entity to fund their offshore operations. In the case of an offshore treasury company it is noted that such a company would typically constitute a Controlled Foreign Company (CFC) and an amount equal to its taxable income would be allocated to and taxed in the hands of its South African shareholders unless an exemption applies, such as the exemption applicable where interest is received by one CFC from another CFC where such CFCs form part of the same group of companies. An analysis of both the foreign and South African tax consequences should be undertaken when deciding whether it is more tax efficient to set up a domestic treasury management company or an offshore treasury company. (Refer to article 2278 in the February 2014 issue) 14

15 ENSafrica ITA: section 9D Exchange Control TAX ADMINISTRATION Pay now, argue later Possession, as they say, is nine tenths of the law. Generally in commercial litigation where, for example, a claim for an outstanding amount is brought against a party, such party is not required to make payment to the claimant until a court has adjudicated on the matter. However, when it comes to matters of tax, the Tax Administration Act No. 28 of 2011 (the TAA) requires taxpayers to first make payment to SARS on assessment and then to pursue their various remedies against SARS. It is true that if the taxpayer eventually persuades SARS or a court that the assessment was incorrect and the tax was not owed by it, the disputed amount will be refunded to the taxpayer with interest. However, the payment of the tax generally places the taxpayer at a disadvantage as it may have to fund the tax payment for a number of years whilst it pursues its various remedies. One recent tax case took approximately ten years from date of assessment until judgment by the Supreme Court of Appeal in Bloemfontein. It is therefore important that a taxpayer understands in what circumstances it may not have to make payment to SARS of the disputed tax. The pay now, argue later principle was dealt with in the case of Metcash Trading Ltd v Commissioner, South African Revenue Service [2000] 62 SATC 15

16 84. In this case, the legality of the concept survived scrutiny by the Constitutional Court in the context of value-added tax (VAT) when a taxpayer sought to impugn the VAT legislation contending it to be incompatible with section 34 of the Bill of Rights. It was held in the case of Capstone 556 (Pty) Ltd v Commissioner, South African Revenue Service that: the considerations underpinning the pay now, argue later concept include the public interest in obtaining full and speedy settlement of tax debts and the need to limit the ability of recalcitrant taxpayers to use objection and appeal procedures strategically to defer payment of their taxes. The court went on to say the following: There are material differences distinguishing the position of self-regulating vendors under the value-added tax system and taxpayers under the entirely revenue authority-regulated income tax dispensation. Thus the considerations which persuaded the Constitutional Court to reject the attack on the aforementioned provisions of the VAT Act in Metcash might not apply altogether equally in any scrutiny of the constitutionality of the equivalent provisions in the [Income Tax] Act. However, not every taxpayer has the appetite for a constitutional challenge to the pay now, argue later principle. Instead, taxpayers generally wish to understand the provisions set out in the TAA dealing with a suspension of their obligation to make payment to SARS. In this regard, the TAA provides that a taxpayer is liable to pay tax once an assessment has been raised by SARS. In terms of section 164 of the TAA, unless a senior SARS official otherwise directs in terms of subsection (3), the obligation to pay tax and the right of SARS to receive and recover tax will not 16

17 be suspended by an objection or appeal or pending the decision of a court of law. In terms of section 164(2), a taxpayer may request a senior SARS official to suspend the payment of tax or a portion thereof due under an assessment if the taxpayer intends to dispute or disputes the liability to pay that tax. Section 164(3) provides that a senior SARS official may suspend the payment of the disputed tax or a portion thereof having regard to: The compliance history of the taxpayer. The amount of tax involved. The risk of dissipation of assets by the taxpayer concerned during the period of suspension. Whether the taxpayer is able to provide adequate security for the payment of the amount involved. Whether the payment of the amount involved would result in irreparable financial hardship to the taxpayer. Whether sequestration or liquidation proceedings are imminent. Whether fraud is involved in the origin of the dispute. Whether the taxpayer has failed to furnish information requested under the Tax Administration Act for purposes of a decision under section 164. Section 164(6) states that, from the date that SARS receives a request for suspension and ending ten business days after notice of SARS decision, no recovery proceedings may be taken against the taxpayer unless SARS has a reasonable belief that there is a risk of dissipation of assets by the taxpayer. Therefore, as soon as the taxpayer receives an assessment from SARS which it intends to challenge, it should consider making application for a suspension of payment under section 164(2). 17

18 The taxpayer should refer to and argue its case in terms of each of the grounds set out in section 164(3). The test is a composite one and therefore it is not necessary for a taxpayer to pass each of these tests. One of the key grounds is whether payment of the amount of tax would result in irreparable financial hardship to the taxpayer. One suspects that if a taxpayer states that the payment of the disputed tax will not result in irreparable financial hardship then SARS will simply argue that the tax should be paid. Conversely, if the taxpayer argues that the tax will result in irreparable financial hardship then SARS may be concerned that the taxpayer will not be good for the money at a later stage and therefore refuse to suspend payment. However, this is simply one of the grounds that the senior SARS official must consider. In addition, the concept of irreparable financial hardship does not mean that the taxpayer will likely go into liquidation if it is required to make payment of the tax. Instead, it covers circumstances where, for example, the taxpayer may be required to dispose of illiquid investments in a fire sale thereby resulting in irreparable financial hardship since the taxpayer will lose money which it is unlikely to recoup in the future. If SARS decides not to grant the request for suspension of payment, a taxpayer cannot object and appeal against such decision. However, the exercise of the power granted to SARS to approve or refuse a request for a suspension of payment constitutes administrative action and is therefore reviewable by a court in terms of the principles of administrative law. Review proceedings are instituted by the filing by the applicant of a notice of motion (which sets out the relief sought) supported by a founding affidavit in which all of the relevant facts are set out under oath, together with the basics of 18

19 the applicant s case. If the applicant requires the record of the decision that is being challenged, the applicant may call upon the administrator (in this case SARS) to dispatch the record within fifteen days. Once the applicant receives the record, it may amend its notice of motion and file a supplementary founding affidavit within ten days. The respondent (SARS in this case) has fifteen days after receipt of the notice of motion or any amendment thereof within which to file a notice of intention to oppose the application, and has thirty days after receipt of the amended notice of motion or supplementary affidavit within which to file an answering affidavit in which the respondent sets out the facts on which it relies, the basis of its case in law and responds to the applicant s case. The applicant then has ten days within which to file a replying affidavit in which the applicant replies to the matters raised by the respondent in its answering affidavit. Further affidavits can only be filed with the consent of the court. Accordingly, all of the relevant evidence is placed before the court on affidavit and as a result witnesses are not called. If the applicant does not require the record of decision (because it already has reasons for the decision and accordingly does not need it) then the process of asking for the record and filing supplementary affidavits can be dispensed with, resulting in a shorter and simpler procedure. As stated above, in terms of section 164(6) of the TAA, once SARS has refused a request by a taxpayer for a suspension of payment of tax, there is an obligation on the taxpayer to pay the tax to SARS. This obligation remains, regardless as to whether or not the taxpayer is of the view that the decision by SARS constitutes unfair administrative action and makes application to court for a judicial review of such decision. Therefore, the only way in which the taxpayer can prevent SARS from taking collection steps against it, is by obtaining an interim interdict 19

20 from a court prohibiting SARS from taking any steps to collect the tax pending the outcome of the review application. An interim interdict can only be obtained by way of motion proceedings. The prescribed time periods will apply, unless it would result in the applicant not being able to obtain the required relief, in which event the applicant can bring proceedings on an urgent basis. The evidence is presented on affidavit and accordingly, no witnesses are called to give evidence. The applicant must make out its case in the founding affidavit, including establishing a basis for the urgency and expedited timetable, and must show that it will suffer irreparable harm if the tax is collected. The applicant will also have to act as expeditiously as possible in order to satisfy the court that the matter is indeed urgent. ENSafrica Constitution of the Republic of South Africa: Section 34 TAA: Section Default judgment In terms of the previous Tax Court rules published under the Income Tax Act No. 58 of 1962 (the Act), where the Commissioner for the South African Revenue Service (SARS) did not comply with the prescribed time frames in respect of dispute resolution, practically, there was little that a taxpayer could do. The position has changed somewhat in terms of the new tax court rules promulgated under section 103 of the Tax Administration Act No. 28 of 2011 (the TAA) on 11 July To illustrate the difficulty faced by the taxpayer in terms of the previous tax court rules in having matters promptly dealt with, SARS, in a fairly recent unreported case, sought condonation for the late filing of a statement in terms of rule 10 of the current Tax Court rules. In delivering its judgment in favour of 20

21 SARS, the court noted that it should be very careful not to place a threshold at so high a level that it would result in the inability of SARS to prosecute what may well be a legitimate case regarding unpaid taxes from a party such as the taxpayer, that the public interest demands that all South African citizens pay their due taxes and that technical arguments should be placed in proper perspective. The court acknowledged that the purpose of the condonation application was to introduce some nature of pragmatism into the manner in which parties litigate and was of the view that the taxpayer s insistence that the condonation application be made, postponed the matter unduly. The court concluded that this was not the kind of case where condonation should be refused and it would be a significant overreach of the scope of the powers of the court to set aside SARS assessment. Had the court dismissed the condonation application, this would have left the matter in limbo since it would not have been possible for the next step of the dispute resolution process to be taken by SARS. However, the assessment would still stand. In this case, the taxpayer would have been required to make yet a further application to court to set the matter aside. It appears that the new Tax Court rules will simplify this process. Part F of the new Tax Court rules allow for an application for default judgment to be made in the event of non-compliance with the rules by either the taxpayer or SARS. If, for example, SARS is at fault, the taxpayer may deliver a notice to SARS informing SARS of its intention to apply to the Tax Court for a final order in the event that SARS fails to remedy the default within 15 days of delivery of the notice. In the event that SARS fails to remedy the default within the prescribed period the taxpayer may apply, on notice to SARS, to the Tax Court for a final order to the effect that SARS s assessment or decision be altered. 21

22 From a litigation point of view, for example, careful consideration of issues such as delays, requests for extensions and the granting of extensions may become very important if an application under this new rule is to be brought. The new dispensation could thus prove to be favourable to both the taxpayer and SARS where either party does not comply with the prescribed time periods and obligations in the dispute resolution process. ENSafrica TAA: Section 103 New Tax Court Rules Litigation with SARS New rules governing the procedures to be followed in respect of objections and appeals, which are now prescribed in terms of section 103 of the Tax Administration Act No. 28 of 2011 (the TAA), were published in the Government Gazette on 11 July One of the frustrations experienced by taxpayers involved in litigation with SARS is the fact that SARS frequently fails to deliver documents or decisions within the time limits prescribed in the rules governing the conduct of disputes. In the event of such failure the taxpayer could apply to court for an order compelling the submission of the relevant document or decision, but there appeared to be no remedy whereby the taxpayer could apply for judgment in his favour. Many taxpayers have felt powerless to compel the resolution of disputes where SARS has been in lengthy default of its obligation to deliver a decision on objection or the statement of grounds of assessment (under Rule 10 of the old rules now referred to as a reply to the statement of grounds of appeal under Rule 33). The new rules provide taxpayers with a means to change this 22

23 unfortunate position. This is found in Rule 56, which is headed Application for summary judgment in the event of non-compliance with rules. Rule 56 gives either party the right, in the event of the failure of the other party to comply with a period or obligation prescribed by the rules or an order of the tax court, to apply to the tax court for judgment, without the court hearing the matter further. The non-defaulting party is required to notify the defaulting party that it intends to make application to the tax court for a final order if the default is not remedied within 15 days (for the purposes of the rules, day means a business day). If the defaulting party should fail to remedy the default within 15 days, then the non-defaulting party may, on notice to the defaulting party, make application to the tax court for a final order by notice of motion within 20 days of the expiration of that period. The application to the tax court must be signed by the applicant or the applicant s representative, set out in full the nature of the order that is sought and be supported by an affidavit specifying the facts on which the applicant relies for the relief. In the case of a failure to comply with a time limit for the submission of pleadings in an appeal, the affidavit would: set out the procedural history of the appeal, specifying the document which the defaulting party was required to submit and the latest date upon which that document should have been submitted in terms of the rules; state that due notice had been given to the defaulting party of the intention to apply for an order of court in the event of failure to remedy the default within 15 days, attaching a copy of the notice and proof of delivery of the notice in support; and state that, notwithstanding the notice, the defaulting party had failed to remedy the default within the specified time limit. 23

24 The notice would also specify a date, being not less than 10 days after delivery of the notice, by which the defaulting party is required to give notice of intention to oppose the application, and in the event that the application is not opposed, the matter will be set down for hearing on the first available date, being not less than 15 days after delivery of the notice. The defaulting party, if it chooses to oppose the application, must give notice of intention to oppose the application and deliver an answering affidavit within 15 days after delivery of the notice of intention to oppose. If no notice is given of intention to oppose the application or if no answering affidavit is received, application may be made for the matter to be set down for hearing. If an answering affidavit is received, the applicant may file a replying affidavit within 10 days of delivery of the answering affidavit. Thereafter application may be made for the matter to be set down for hearing. The registrar of the tax court must deliver notice to the parties that the matter has been set down for hearing not less than 10 days before the date of hearing. The tax court may, on hearing the application: make a final order in terms of section 129(2) of the TAA; or give the defaulting party further time to remedy the default, failing which a final order will be made. The introduction of a procedure to enable a party to apply for summary judgment will, hopefully, speed up the processing of appeals to the tax court. The procedural rules cut both ways in this regard. Both taxpayer and the Commissioner have the right to bring applications for summary judgment. That 24

25 said, the new rules provide a welcome opportunity for taxpayers locked in longstanding unresolved litigation with SARS to force the pace of proceedings. PwC TAA: Sections 103 and 129 New Dispute Resolution Rules SARS must give proper reasons and have proper grounds The Tax Administration Act No. 28 of 2011 (the TAA), together with the new rules for dispute resolution promulgated under the TAA on 11 July 2014 (Rules), govern the resolution of disputes between taxpayers and the South African Revenue Service (SARS). Generally, and in terms of section 104 of the TAA, a taxpayer who is aggrieved by an assessment may object to that assessment. In terms of Rule 9(1), after considering the objection, SARS must notify the taxpayer of the allowance or disallowance of the objection "and the basis thereof". Rule 9(1) overlaps to an extent with section 106(4) of the TAA which provides that SARS must, by notice, inform the taxpayer of its decision to disallow or allow the objection in whole or in part. Section 106(5) states that SARS's notice "must state the basis for the decision". If SARS decides to disallow an objection, a taxpayer may appeal against the decision. In ITC 1811 [2006] 68 SATC 193 the court considered the provisions of rule (3)(1)(a) of the repealed rules dealing with procedures promulgated under section 107 of the Income Tax Act, No. 58 of 1962 (the Act). Those rules 25

26 entitled a taxpayer aggrieved by an assessment to ask for reasons for the assessment. The rules implied that SARS had to provide "adequate reasons". The court endorsed the findings of a previous judgment which held that, in respect of the phrase "adequate reasons", the act in question: " requires the decision maker to explain his decision in a way which will enable a person aggrieved to say, in effect: 'even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging'. This requires that the decision-maker should set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute) and the reasoning process which led him to those conclusions. He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation. The appropriate length of the statement covering such matters will depend upon considerations such as the nature and importance of the decision, its complexity and the time available to formulate the statement. Often those factors may suggest a brief statement of one or two pages only. The court accordingly directed the Commissioner for SARS "to structure his reasons so as to motivate his assessment clearly dealing with the exercise of each statutory power and setting out..." - the relevant statutory provisions ; the findings of fact on which his conclusions depend ; and the reasoning process which led him to those conclusions " The words "adequate reasons" are not used in the TAA or the Rules. 26

27 Instead, rule 6(1) states that SARS must provide reasons for the assessment "required to enable the taxpayer to formulate an objection". However, it is submitted that the guidelines provided in ITC 1811 should still be helpful when determining whether the reasons provided by SARS are sufficient for purposes of the Rules. As to the reasons why an objection has been disallowed, section 106(4) of the TAA as read with rule 9(1) states that SARS must notify the taxpayer of its "decision" as well as "the basis thereof". It would have been better if the words "required to enable the taxpayer to formulate an appeal" had been used in section 106(4) of the TAA as read with Rule 9(1) as this would have provided guidance as to what the decision should state. However, despite the terminology used, it is submitted that the notice of SARS's decision to disallow an objection should also comply with the principles set out in ITC Practically, this means that SARS cannot, for example, simply refer a taxpayer to previous correspondence or to the legislative provision in terms of which it is acting (see L Olivier "SARS has to provide adequate reasons for its decisions ITC 1811 [2006] 68 SATC 193" Tydskrif vir die Hedendaagse Romeins- Hollandse Reg 72 at p507). As Olivier points out, when providing reasons for its decision, SARS must act in accordance with the principles of just administrative action laid down in section 33 of the Constitution of the Republic of South Africa and the Promotion of Administrative Justice Act No. 3 of

28 In this context, it is also appropriate to consider the judgment in Commissioner for the South African Revenue Service v Pretoria East Motors (Pty) Ltd [2014] ZASCA 91. In that judgment the court held as follows in respect of an additional assessment: "The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis upon which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong." In other words, where an additional assessment is raised, even at the time the assessment is raised (before SARS is asked for reasons for the assessment) SARS must have properly formulated the grounds for the additional assessment if only internally. Cliffe Dekker Hofmeyr Constitution of the Republic of South Africa: Section 33 The Promotion of Administrative Justice Act No. 3 of 2000 ITA: Section 107 TAA: Sections 104 and 106 New Dispute Resolution Rules New tax dispute resolution rules 28

29 On 11 July 2014, the new dispute resolution rules (new Rules) under s103 of the Tax Administration Act No. 28 of 2011 (the TAA) were promulgated in Government Notice 550, published in Government Gazette No These new Rules replace the rules promulgated under section 107A of the Income Tax Act No. 58 of 1962 (old Rules) with immediate effect. The Rules essentially prescribe the procedures to be followed in respect of objection and appeal proceedings or certain administrative decisions by the South African Revenue Service (SARS). These decisions are listed under section 104(2) of the TAA. The Rules also deal with the procedures to be followed in respect of alternative dispute resolution, and various other issues relating to the Tax Court. Importantly, the new Rules are much more comprehensive than the old Rules. Some of the most noteworthy departures, amongst others, relate to the following: A taxpayer who is aggrieved by an assessment may, prior to lodging an objection, request SARS to provide reasons for the assessment to enable the taxpayer to formulate an objection. In terms of the old Rules, SARS had 60 days within which to provide the taxpayer with such reasons. The new Rules now prescribe that SARS has 45 days to provide the taxpayer with reasons, where adequate reasons were not provided. Further, in terms of the TAA, when a taxpayer lodges an objection, SARS is required to notify the taxpayer of the allowance or disallowance of the objection and the basis thereof. In terms of the new Rules, SARS now has 60 days, after delivery of the taxpayer s objection, to notify the taxpayer of the outcome of the objection, whereas prior to the promulgation of the new Rules, SARS was afforded 90 days. SARS may extend the 60 day period for a further period not exceeding 45 days, if in the opinion of a senior SARS official, more time is required to take a decision on the objection due to exceptional circumstances, the complexity of the matter, or the principle or amount involved. 29

30 Another important provision in the new Rules relates to 'test cases'. Section 106(6) of the TAA states that if a senior SARS official considers that the determination of an objection or an appeal, whether on a question of law or question of fact or both, is likely to be determinative of all or a substantial number of issues involved in one or more other objections or appeals, the official may: o designate that objection or appeal as a test case; and o stay the other objections or appeals by reason of the taking of a test case on a similar objection or appeal before the tax court. The aforementioned provision gives effect to section 106(6) of the TAA and provides that a SARS official who designates an objection or appeal as a test case, must provide the taxpayer with a notice informing such a taxpayer of the common issues involved in the objections or appeals that the test case is likely to be determinative of, the questions of law or fact or both, and the importance of the test case to the administration of the relevant tax Act. The taxpayer involved may, within 30 days of receiving the notice, oppose the decision to designate an objection or appeal as a test case or alternatively oppose the staying of an objection or appeal pending the final determination of a test case. If the objection or appeal is to be stayed, the taxpayer may request a right of participation in the test case. One of the most notable changes brought about by the new Rules relates to the exchange of pleadings between SARS and a taxpayer who has lodged an appeal. According to the old Rules, after the taxpayer had delivered its notice of appeal, SARS was required to deliver to the taxpayer a statement of the grounds of assessment and opposing appeal. This statement would contain the consolidated grounds of appeal, the facts in the notice of appeal that were admitted and opposed to by SARS, and the material facts and legal grounds upon which SARS based its assessment. Thereafter the taxpayer would deliver its statement of grounds of appeal which listed the grounds upon which the taxpayer s 30

31 appeal was based, the facts in the statement of grounds of assessment and opposing appeal that the taxpayer admitted and opposed, and the material facts and legal grounds the taxpayer relied on. The new Rules have added one further step to this process. Following the taxpayer s statement of grounds of appeal, SARS may deliver a reply to the statement of grounds of appeal setting out a clear and concise reply to any new grounds, material facts or applicable law. Having regard to the above, it is interesting to note that the draft rules (released in February 2013) proposed that the taxpayer would first have to provide SARS with a statement of grounds of appeal and only thereafter would SARS be required to deliver a statement of grounds of assessment. SARS would therefore only be required to provide its statement after the taxpayer had provided its defence. We welcome the decision by SARS not to follow through with the proposal to invert the order of the pleadings as that would have been to the prejudice of the taxpayer and most probably in breach of the principles of administrative justice. The new Rules brought about some notable changes that could assist in ensuring that taxpayers are treated in an administratively fair manner when engaged in disputes with SARS. It will be interesting to see whether these rules, and specifically the prescribed time periods, will be adhered to in practice. Cliffe Dekker Hofmeyr ITA: Section 107A TAA: Sections 103, 104 and 106 New Dispute Resolution Rules Search and seizure 31