JUNE 2013 ISSUE 165 CONTENTS

Transcription

1 JUNE 2013 ISSUE 165 CONTENTS DEDUCTIONS TAX ADMINISTRATION Maintenance contracts and section 24C The dangers of self-representation Legal professional privilege EMPLOYEES TAX VALUE-ADDED TAX Retirement funds for employees who worked abroad Non-compliance with the Act FRINGE BENEFITS SARS NEWS Draft Interpretation Notes Interpretation notes, media releases and other documents DEDUCTIONS Maintenance contracts and section 24C (Published June 2013) (Editorial comment: This article deals with maintenance contracts found in the motor industry which are often intended to recover costs incurred by the motor vehicle manufacturer and are not intended to generate a profit.) The Commissioner for the South African Revenue Service (the Commissioner) has published a Draft Interpretation Note (the Draft) on the allowance of future expenditure on contracts in terms of section 24C of the Income Tax Act No. 58 of 1962 (the Act). In the Draft the 1

2 Commissioner has taken a firm view on what he regards as a high degree of probability and inevitability that expenditure will be incurred, especially with regard to maintenance contracts. The view taken by the Commissioner may very well lead to many taxpayers, particularly vehicle manufacturers, having to reconsider the fine print of their maintenance plans and contracts, ultimately resulting in an additional cost burden spilling over to consumers. Section 24C Section 24C(2) of the Act provides that: If the income of any taxpayer in any year of assessment includes or consists of an amount received by or accrued to him in terms of any contract and the Commissioner is satisfied that such amount will be utilised in whole or in part to finance future expenditure which will be incurred by the taxpayer in the performance of his obligations under such contract, there shall be deducted in the determination of the taxpayer's taxable income for such year such allowance (not exceeding the said amount) as the Commissioner may determine, in respect of so much of such future expenditure as in his opinion relates to the said amount. Accordingly, section 24C grants an allowance for expenditure to be incurred in a future year of assessment under a contract, when income under that contract is received or accrued in advance. Before a taxpayer is entitled to a section 24C allowance, the taxpayer must be able to demonstrate: that an amount is included in the taxpayer's income in terms of a contract; to the Commissioner s satisfaction that the above amount will be used wholly or partially to fund expenditure that will be incurred by the taxpayer in the future to fulfil his obligations in terms of the contract; and that the future expenditure will be deductible for income tax purposes. As regards the first requirement, an amount will constitute gross income in a taxpayer s hands if it meets the requirements of the gross income definition, that is, it constitutes an amount, which is received by the taxpayer or to which the taxpayer is unconditionally entitled, during the year of assessment and which is not of a capital nature. 2

3 The second requirement is that the Commissioner must be satisfied that the taxpayer will use the income derived from the contract to incur expenditure in fulfilling its obligations in terms of the contract. The Commissioner therefore has discretion in this regard. With regard to the third requirement, the expenditure incurred by a taxpayer in fulfilling its obligations in terms of contracts will be deductible for income tax purposes if it meets the requirements of the general deduction formula contained in section 11(a) read with section 23(g) of the Act, namely it constitutes expenditure or a loss, actually incurred by the taxpayer, in the production of income, not of a capital nature, for purposes of the taxpayer's trade during the year of assessment. Vehicle maintenance contracts Vehicle maintenance contracts relieve consumers of most of the risks of maintaining their vehicles, subject to the payment of a monthly fee. Typically, such maintenance contracts are structured for consumers based on a combination of expected kilometres, vehicle application and the expected cost of providing such a risk-free contract. The contracts will ordinarily include services, replacement of clutches as and when they break, etc. Whereas a warranty provides consumers with cover against defective workmanship or material, a maintenance contract is designed to maintain or repair components (including lubricants) which are necessitated due to wear and tear. If a taxpayer is entitled to claim a section 24C allowance in respect of the fees accruing to it from maintenance contracts during a year of assessment, it will be in a tax neutral position. The neutral effect is achieved through the following: A taxpayer will include in its gross income the total fees accruing to it during the year of assessment in respect of the maintenance contracts. A taxpayer will claim income tax deductions in respect of the expenditure actually incurred during the year of assessment in complying with its obligations in terms of the maintenance contracts. A taxpayer will claim a section 24C allowance in respect of that portion of the fees accruing to it during the year of assessment which was not expended in the relevant year. In the event that a taxpayer incurs a loss or earns a profit in respect of a maintenance contract, that loss or profit will be deductible or taxable in the year that it is actually incurred or earned. A profit or loss would only arise on the termination of the contract if the vehicle in question required more or less expenditure than the predetermined repairs and maintenance. 3

4 The section 24C allowance will therefore ensure that a taxpayer is not subject to tax in the current year of assessment in respect of an amount that will be incurred as an expense in a future year. The Draft The Draft suggests that the words will be incurred indicate that the Commissioner must be satisfied that there is a high degree of probability and inevitability that the expenditure will be incurred. A taxpayer must therefore be able to demonstrate that, although the expenditure is contingent at the end of the year of assessment, there is a high degree of certainty that the expense will in fact be incurred in a future year. In this regard, the Draft relies on ITC 1601 [1995] 58 SATC 172 wherein the court held that: Counsel for the Commissioner, in my view, correctly contended that the Commissioner will not be satisfied that future expenditure will be incurred where there is only a contingent liability. There must be a clear measure of certainty as to whether the expenditure in contention is quantified or quantifiable. The Draft goes further and mentions that in circumstances where the performance is not contractually obligatory, but is only potentially contractually obligatory due to an act other than just the taxpayer s customer taking action, the degree of certainty required is unlikely to be met. In addition, the Draft addresses maintenance contracts specifically and although it mentions that it is not possible to formulate a general rule and each case must be determined on its own merits, it contains a firm statement that the Commissioner will not be satisfied where maintenance is only required in the event of breakage, as opposed to where certain maintenance must be done at regular intervals. Commercial reality The reality is that many manufacturers, especially vehicle manufacturers, provide consumers with maintenance contracts which include regular services, as well as maintenance and replacement or repair of components such as clutches in the event of breakage. This adds value to vehicle users, especially having regard to fleets of vehicles having to cover long distances on poor roads. Not allowing vehicle manufacturers an allowance for future expenditure on these contracts, will lead to manufacturers either having to withdraw maintenance contracts or increase the cost thereof to consumers in order to protect themselves against upfront taxation. 4

5 However, the Draft also makes mention of the Commissioner rather performing an analysis at a higher level by taking a number of contracts into consideration, as opposed to considering contract by contract. It remains to be seen what the effect of such a higher level analysis by the Commissioner will be and whether the Commissioner will take cognisance of the commercial and economic effect of disallowing future expenditure on vehicle maintenance contracts, or whether the issue will be adjudicated by the courts. Edward Nathan Sonnenbergs ITA: Sections 11(a); 23(g) and 24C EMPLOYEES TAX Retirement funds for employees who worked abroad (Published June 2013) The application of the apportionment rules to South African retirement fund benefits due to South African residents who contributed to these funds while they worked abroad is currently not clear. The South African Revenue Service (SARS) holds the view that lump sum benefits should be treated differently from annuity payments. This view impacts on the tax treatment of provident fund payments and the lump sum portion of pension fund payments. The apportionment rules as they applied up to December 2011 The Income Tax Act (the Act) contained specific statutory source rules that applied to the apportionment of pension fund benefits. Previously, section 9(1)(g)(ii) in principle, provided that a portion of a pension granted to an individual would be deemed to be from a source within South Africa, if the services were rendered in South Africa for at least 2 years during the 10 years immediately preceding the date on which the pension first became due. The application of this statutory rule meant that a resident who worked outside of South Africa for more than 2 out of the 10 years prior to his retirement would be able to apply the apportionment rules and exempt all or a portion of his/her pension benefit, depending on the amount of time he/she spent working outside of South Africa. The apportionment rules applicable from January 2012 Section 9 of the Act has been amended with effect from 1 January This also affects the source rules applicable to retirement fund payments and consequently, the apportionment of these benefits. 5

6 In terms of section 9(2)(i) of the Act, an amount is deemed to have been received by or accrued to a person from a source in South Africa if that amount constitutes a pension and the services in respect of which that amount is so received or accrues were rendered in South Africa. However, in terms of the proviso to section 9(2)(i), if the amount is received for services which were rendered partly within and partly outside South Africa, the portion of the amount to be included in the individual s taxable income must be calculated pro rata to the time spent rendering services in South Africa, e.g. if 4 out of any 10 years of services were rendered in South Africa, 40% of the pension will be sourced here. The portion of the pension which is sourced outside South Africa in terms of this provision and is received as consideration for past employment outside South Africa will be exempt from South African tax in terms of section 10(1)(gC) of the Act. Concern with lump sum payments The apportionment of retirement fund benefits has been simplified through the amendment of the source rules and certainly provides some clarity for individuals working abroad. The issue we have encountered with SARS is, however, that they only apply the apportionment rules to annuity payments and not to the lump sum component of retirement fund payments. This appears to be because of their strict interpretation of the meaning of a pension payment. We do not agree with this view because retirement fund lump sum benefits are specifically included in the gross income of a taxpayer in paragraph 2(1) of the Second Schedule to the Act. SARS current view of the treatment of lump sum benefits unfairly prejudices individuals who have participated in a provident fund. The effect of this view is that individuals who retire from a provident fund and receive a lump sum benefit are not able to claim a tax exemption in respect of the portion that relates to their services rendered outside South Africa. It is unclear, why in principle, the apportionment rules relating to lump sum payments should be any different from those applicable to annuity payments. This view also does not correspond with international guidelines set out in the OECD commentary. We understand that the issue is currently being addressed by National Treasury and SARS and hope for clarification and confirmation of the uniform treatment in the next set of legislation. Edward Nathan Sonnenbergs 6

7 ITA: Sections 9(1)(g)(ii); 9(2)(i); 10(1)(gC) Second schedule: Paragraph 2(1) FRINGE BENEFITS Draft Interpretation Notes (Published June 2013) The South African Revenue Service (SARS) recently published four draft Interpretation Notes dealing with the taxation of allowances and fringe benefits. These draft Interpretation Notes are as follows: Issue 3 of Interpretation Note No. 14 on allowances, advances and reimbursements; A draft Interpretation Note on the right of use of a motor vehicle; A draft Interpretation Note on long service awards; and A draft Interpretation Note on the use of employer-provided cellular phones or computer equipment and employer-funded telecommunications services. Although these interpretation notes are not law, they do provide taxpayers with useful guidance as to the tax treatment of such benefits and allowances, and include examples illustrating the practical application thereof. Some of the guidelines which may be useful to employers are highlighted below. Allowances, advances and reimbursements The previous version of Interpretation Note No. 14 dealt with allowances, advances and reimbursements in general, but did not provide any specific guidance in relation to travel allowances. Issue 3 includes commentary and examples of the calculation of the deduction from subsistence allowances, as well as a new section dealing with travel allowances. In regard to subsistence allowances, the draft Interpretation Note deals with the meaning of the phrase obliged to spend at least one night away from his or her usual place of residence in the Republic in the context of subsistence allowances (section 8(1)(a) of the Income Tax Act, 1962 (the Act). The Interpretation Note refers to ITC 1668 [2006] 61 SATC 445 in which the court distinguished between employees who lived far away from their place of employment and were given an accommodation allowance, and the situation where performing the duties of employment required the employee to spend nights away from home. In the first situation, the new accommodation would become the employee s new usual place of residence and no deduction would be available against the subsistence allowance provided in those circumstances. 7

8 In respect of travel allowances, the draft interpretation note gives examples of what constitutes business travel and private travel for purposes of the deduction for business travel expenses and states that the location of a recipient s place of employment or place of business is a factual enquiry. The examples distinguish between business and private travel as follows: An employee who is employed to work as a shop assistant in his employer s V&A Waterfront store for 2 days a week and the Canal Walk store for 3 days a week travel between home and either of the stores is regarded as private travel. Where the employee normally works at the V&A Waterfront store but travels from his home to his employer s store in Pretoria to assist with an annual stock count, that would be regarded as business travel. In terms of employees tax, with effect from 1 March 2010, 80% of a travel allowance or advance must be included in remuneration. However, in the event that an employer is satisfied that at least 80% of the use of the motor vehicle for a year of assessment will be for business purposes, only 20% of the travel allowance or advance is included in remuneration and is subject to employees tax. The draft Interpretation Note states that the word satisfied suggests that the employer must actively look into the facts of each employee s circumstances and objectively weigh up and apply his or her mind to whether or not the employee should qualify. Employers must satisfy themselves that employees will use their vehicles for at least 80% business use and this can be done by regularly reviewing employees logbooks which detail business and private travel and taking into consideration changes in the role or function of the employee. The draft Interpretation Note refers to the logbook for the previous tax year, but states that there may be other acceptable methods that employers can use to satisfy themselves of the 80% requirement based on the particular employee s circumstances. Company cars This new draft Interpretation Note sets out the tax treatment of company cars in detail. With effect from 1 March 2011, any VAT borne by an employer (that is, the employer was not entitled to claim an input tax credit) must be included in the determined value of the motor vehicle. This applies even where the vehicle was purchased before 1 March With regard to maintenance plans, the draft interpretation note states that in order for the fixed monthly percentage (3.5%) to be reduced to 3.25%, the maintenance plan must commence at the same time that the motor vehicle is acquired by the employer. It states further that a motor vehicle is not the subject of a maintenance plan in circumstances where 8

9 the maintenance plan is either a top-up or add-on plan which was taken out after the acquisition of the vehicle and in this case the rate of 3.5% must be used. The draft interpretation note also deals with circumstances in which the determined value of the vehicle may be reduced where the employee only had the use of the motor vehicle for part of a month. The taxable benefit may be apportioned for part of a month, except where the vehicle is temporarily not used by the employee for private purposes. The examples given illustrate SARS view which distinguishes the situation where the vehicle was being repaired and the employee was recovering from injuries after a car accident (no reduction in taxable value), from the situation where the employee was assigned to work abroad for 2 months and had to return the car to his employer while he was away (no fringe benefit for the 2-month period). Where the employee makes a contribution towards the cost of the motor vehicle, the draft Interpretation Note states that when determining the original cost to the employer, the employer may deduct the employee s contribution from the full cost price of the vehicle. However, the cost to the employer is only relevant where the employer acquired the vehicle under an agreement of sale or exchange. In all other cases, the determined value is equal to the retail market value, the cash value or the market value of the motor vehicle and may not be reduced by any contribution paid by the employee towards the cost of the vehicle. The draft Interpretation Note also provides some guidance on how the exemption for employees who are regularly required to use the motor vehicle for the performance of their duties outside their normal hours of work should be interpreted. It comments on the meaning of private use which is infrequent or is merely incidental to the business use of the vehicle, using the example of a lift engineer who is on call after hours for emergency lift repairs, has another vehicle for other private travel and keeps a logbook for travel in the company car. Long service awards This is a new interpretation note dealing with long service awards in the form of assets. The draft interpretation note deals, inter alia, with gift vouchers and confirms that a gift voucher is a form of property, as it represents a right to acquire goods or services from a merchant, and is an asset for the purposes of paragraph 2(a) of the Seventh Schedule. Accordingly, gift vouchers (other than meal vouchers) granted for long service fall within the scope of paragraph 2(a) and qualify for a reduction in value of the asset provided the length of service requirements are met. In our recent experience, SARS has argued that gift vouchers are cash and do not qualify for the exemption for long service awards, so this clarification is to be welcomed. 9

10 For an award to qualify as a long service award and for the R5 000 reduction in value to apply, the asset must have been given by an employer to an employee for being in employment with the same employer for an initial unbroken period of service of at least 15 years, or a subsequent unbroken period of service of not less than 10 years. For example, employees who receive an initial long service award at, for example, 20 years must wait for a further 10 years, in other words until he or she has worked for the same employer for 30 years, before the R5 000 reduction in the value of the asset may be applied again. Company cell phones, computer equipment and telecommunications services This new draft interpretation note deals with the following benefits: Private use by an employee of employer-provided telecommunications equipment (for example, cell phones) or computer equipment (for example, a laptop), i.e., right of use of an asset, or employer-funded telecommunications services, that is, free/cheap services. Any allowance or reimbursement granted by the employer in respect of the employee s privately owned equipment or service contract which is used for business purposes. In terms of the Seventh Schedule to the Act, no value is placed on the private or domestic use of an asset consisting of telephone or computer equipment which the employee uses mainly for the purposes of the employer s business. The word mainly has been interpreted by the courts to mean a quantitative measure of more than 50%. Therefore, if more than 50% of the total use of the asset is for business purposes then no value will be placed on the private or domestic use of that asset. It is important to note that SARS will assess whether or not the asset is used mainly for business purposes on a case by case basis taking all the facts and circumstances of the particular employee into account. This will include a consideration of, amongst other factors, the nature of the employee s work and official duties, qualifying criteria for entitlement to the use of the asset or service and the conditions of use/terms of the grant. There must be a close link between the grant of use of the asset and the employee s job responsibilities. The employer and the employee bear the onus of proving that, based on the facts and circumstances, the particular asset is required due to the nature of the employee s job and the associated responsibilities and that it will be used mainly for business purposes. The same considerations apply to communication services provided by an employer in terms of whether the service is used mainly for business purposes. If an employee is reimbursed for actual business expenditure incurred on the instruction of the employer and for which proof was provided to the employer, such amounts are excluded 10

11 from the taxable income of the employee. However, if the employee receives an allowance, such an allowance will be included in the taxable income of the employee and generally no deduction may be claimed against this allowance. In this regard, the draft interpretation note states that where an employer pays a predetermined reimbursement based on expected business usage, this would not constitute a reimbursement within the true meaning of the word. Payments based on expected or anticipated business usage and not linked to actual expenditure are treated as allowances and not as reimbursements. The draft Interpretation Note sets out a formula which SARS will accept to determine the cost of free minutes where the contract includes a free cellular phone and deals with the tax treatment of split billing arrangements. The draft Interpretation Note emphasises that employers are responsible for ensuring that the assets/services are used mainly for business purposes, failing which they will be required to include a taxable fringe benefit in the employee s gross income and remuneration for purposes of calculating employees tax. Edward Nathan Sonnenbergs ITA: Section 8(1)(a) Seventh schedule: Paragraphs 2(a); 5(2)(b); 6(4)(bA) and 7 SARS Draft Interpretation Note 14 (Issue 3) TAX ADMINISTRATION The dangers of self-representation (Published June 2013) SARS is in the business of maximising tax collections. It is under no obligation to protect a taxpayer s interests by giving him advice (although a notice of assessment must provide a summary of the procedure for lodging an objection to a tax assessment; see section 96(1)(g) of the Tax Administration Act No. 28 of 2011) and once a dispute arises will usually deal with a taxpayer on an adversarial basis. Once a taxpayer disputes the correctness of an assessment to tax that he has received from SARS, he should, without delay, take professional advice. The advice that he receives will relate not only to the substance of the disputed tax liability that is to say, whether the amount of tax has been correctly calculated by SARS but also to critically important 11

12 aspects of the process to be followed in objecting to the assessment and contesting the matter in the Tax Court. Errors in process may be fatal to a taxpayer s objection A taxpayer who has a strong case in a dispute with SARS for arguing that he is not liable for the amount of tax reflected in the assessment may find that the merits of his case never come up for consideration by the court and that the court dismisses his objection to the assessment on the basis of a procedural error he has made in bringing the matter before the court or on the basis of some flaw in the document he has filed in the course of the dispute. The latest instance of a taxpayer who has learned this lesson the hard and expensive way is the recent decision of the Supreme Court of Appeal in HR Computek (Pty) Ltd v CSARS [2012] ZASCA 178 where judgment was handed down on 29 November Confined to the grounds put forward in notice of appeal At the heart of the process of objection and appeal in relation to a disputed tax assessment is a simple principle, laid down in the rules provided for in section 107A of the Income Tax Act No. 58 of 1962 and section 103 of the Tax Administration Act. Rule 4 provides that an objection to an assessment must be in writing, specifying in detail the grounds upon which it is made and Rule 12 says that The issues in any appeal to the [Tax] Court will be those defined in the statement of the grounds of assessment read with the statement of the grounds of appeal. In the Computek case, the taxpayer seems to have taken it on himself to draft the allimportant notice of appeal to the Tax Court, for he expressed the grounds on which he was appealing against a VAT assessment in loose, layman s terms as follows Unfair imposition of 200% additional tax. Unfair imposition and incorrect penalty. Unfair imposition and incorrect interest charge. Unfair tax procedural matters. In fact, as later transpired, the crux of what the taxpayer really wanted to contest was the capital amount (the turnover) on which the VAT assessment had been calculated. His 12

13 contention was that the turnover attributed to him was, in reality, the turnover of a related, but different legal entity, which was accordingly liable for the VAT in question. Neither the taxpayer s formal notice of objection nor his self-drafted notice of appeal, quoted above, gave any hint that the taxpayer was disputing the VAT assessment on those grounds. The taxpayer raised the real grounds of his objection too late. A month or so later, the taxpayer filed a statement under Rule 11, which for the first time, raised the contention that, in calculating his VAT liability, SARS had included the turnover figures of a related, but different trading entity. When the matter came to trial in the Tax Court, the judge ruled that the taxpayer had not contested the capital amount of the VAT assessment, and was now debarred from raising that issue. On that basis alone, the taxpayer s objection to the assessment failed. The taxpayer then appealed to the Supreme Court of Appeal, but that court upheld the decision of the Tax Court, saying The taxpayer has sought, on appeal, to assail the conclusion of the tax court:...that the notice of objection and the letter accompanying it does not cover the issue which the appellant now wishes to raise, namely, that the capital amount levied for VAT is wrong. In my view, for the reasons that follow, the conclusion of the tax court is unassailable. In its notice of objection read together with the letter that accompanied it (both dated 24 March 2004), it is quite clear that the taxpayer did not object to the capital amount.... It follows that not having raised an objection to the capital assessment in its notice of objection, the taxpayer was precluded from raising it on appeal before the tax court. The taxpayer was out of time to lodge a fresh objection The Supreme Court of Appeal went on to say, in effect, that the only way in which the taxpayer could contest the capital amount on which VAT had been calculated was by filing a new objection. However, the time limit, laid down in the rules, for objecting to an assessment had expired and the Value-Added Tax Act laid down in section 31A that SARS is not permitted, of its own accord, to issue a reduced assessment once three years have elapsed since the date of the assessment. So, even if the taxpayer were able to convince SARS, outside of the court proceedings, that the VAT assessment was erroneous, SARS would be statutorily barred from issuing a reduced assessment. 13

14 In short, all avenues were now closed to the taxpayer to contest the assessment, which had become final and the amount of tax reflected in the assessment thus had to be paid. Legal disputes must achieve finality A moment s reflection reveals that the fundamental concepts underlying the Computek decision are not merely sound, but indispensible in any legal system. As Cloete JA said in CSARS v Brummeria Renaissance (Pty) Ltd [2007] 69 SATC 205 It is obviously in the public interest that the Commissioner should collect tax that is payable by a taxpayer. But it is also in the public interest that disputes should come to an end interest reipublicae ut sit finis litium... memories fade; witnesses become unavailable; documents are lost. In other words, the public interest demands that legal disputes must have an end. And, when it comes to litigation, involving SARS or otherwise, a litigant must define what it is that he is disputing, and the court will then adjudicate that dispute and, having done so, and having given judgment, the matter is res judicata. That is to say, it is a matter on which the courts have made a determination, and a disappointed litigant cannot have a second bite at the cherry. He may have a right to appeal against the judgment to the higher court, but the appeal court will adjudicate the self-same issue, and the litigant cannot introduce new issues. (Editorial comment: Also refer to item 2204) pwc ITA: Rules in terms of section 107A TAA: Sections 96(1)(g) and 103 VAT Act: Section 31A Legal professional privilege (Published June 2013) The issue of whether legal professional privilege (LPP) may be extended to apply in respect of communications between accountants (or other advisors) and their clients in the course of providing tax advice, and the different opinions in this regard, has now been dealt with in a UK court case.. In the case of R (Prudential plc and another) v Special Commissioner of Income Tax and Another [2013] UKSC 1, the Supreme Court of the United Kingdom gave judgment on the 14

15 issue of whether LPP should be extended to non-lawyers. The case was on appeal from the Appeal Court where the extension of LPP had been denied. In short, the taxpayer received a statutory notice from the revenue authorities, forcing it to produce documents in connection with its tax affairs. The matter concerned legal advice given by accountants in respect of a tax avoidance scheme. The taxpayer argued that it was entitled to refuse to comply with the notice on the grounds that the documents were covered by LPP. The Supreme Court confirmed that LPP should not extend to communications in connection with advice given by professional people other than lawyers. In particular, the court observed that: As long as LPP is limited to advice from members of the legal profession, the strong, and justified, presumption will be that LPP does not apply in connection with any communications in that context, because lawyers normally only give legal advice. In other words, extending LPP to non-lawyers would likely lead to what is currently a clear and well understood principle becoming an unclear principle, involving uncertainty. If there are reasons of public policy to extend LPP to non-lawyers, the matter should be left to Parliament as the courts are not best placed to assess how profound such a change would be, whether there are good reasons of policy for making it, and what protections (if any) are needed to ensure that the ambit of the privilege is kept within limits. In a South African context, there was an opportunity to extend LPP to non-lawyers with the enactment of the Tax Administration Act No. 28 of 2011, which came into operation with effect from 1 October However, despite submissions by certain tax practitioners when the legislation was before Parliament, SARS has indicated that the matter would be reviewed in the coming months. For the time being, LPP may only be relied on where lawyers are involved and does not extend to communications between accountants (or other professionals) and their clients in the course of providing tax advice. Cliffe Dekker Hofmeyr VALUE-ADDED TAX Non-compliance with the Act (Published June 2013) 15

16 The decision of the Supreme Court of Appeal, handed down on 29 November 2012 in General Council of the Bar of South Africa v Geach; Pillay v Pretoria Society of Advocates; Bezuidenhout v Pretoria Society of Advocates [2012] ZASCA 175 concerned, inter alia, an eminent senior counsel who had failed, over a period of many years, to register for VAT or to add VAT to his professional fees. A minority judgment of the SCA takes the view that a senior counsel who fails to register for and charge VAT should be disbarred. The judgment highlights how seriously the courts view such conduct on the part of a member of the profession. This decision concerned thirteen practising advocates at the Pretoria bar. One of the advocates, whose misdemeanours are dealt with at length in the judgment, was a senior counsel who, on his own admission and over a period of nearly twenty years, failed to register as a vendor, though obliged to do so in terms of the Value Added Tax Act No. 89 of 1991 (the VAT Act.). The court pointed out that, in failing to register, Geach had committed an offence. The major interest of the reported decision lies in the minority judgment and the harsh view it took of a failure, on the part of a practising advocate, to register as a VAT vendor where he was obliged to do so, and of his failure to charge VAT in respect of his fees. The minority judgment would have ordered removal from the roll of advocates By way of background, it is significant that the General Council of the Bar had intervened in the High Court proceedings and had sought an order striking the name of the senior advocate from the roll of advocates thus indicating the serious view taken by the professional controlling body of fiscal misconduct by a member. In his minority judgment, Wallis JA (with whom Leach JA concurred) also took the view that removal from the roll of advocates was the appropriate sanction. Wallis JA said that the advocate had... failed to register for, or to pay, VAT from its inception in 1992 until That was a sustained course of dishonesty for which he gave a dishonest explanation. When he was required to make his books of account available for inspection he disclosed what would have been apparent from them, namely that he had never registered as a vendor in terms of the Value Added Tax Act notwithstanding the fact that he had for many years earned considerably more than the statutory threshold at which such registration is mandatory. Nor 16

17 had he accounted for VAT on his fees. His non-compliance with s 23(1) of the VAT Act was an offence in terms of s 58(c) of the VAT Act and rendered him liable on conviction to a fine or a sentence of imprisonment of up to two years. In addition, for the reasons explained in the following paragraphs, his non-payment of VAT caused a loss to the fiscus and was potentially detrimental to his clients. His non-registration does not mean that he did not have to charge VAT on his fees and pay it to SARS. Defrauding the revenue is no less serious than defrauding a client or the public Wallis JA went on to quote from a decision of the Australian courts which rejected the proposition that defrauding the revenue authorities for personal gain is less serious than defrauding a client or a member of the public. Both categories of conduct, it was said, involve an unfitness to be trusted. Further, Wallis JA said, the conduct, which spanned many years, had caused substantial losses to the public purse; moreover, he did not avoid paying VAT because of personal or financial stress, and the only possible explanation was personal financial advantage. And there had been no recognition on his part of the seriousness of his misconduct. Wallis JA said At the least what was required was a full and frank disclosure to the court of his position with regard to the payment of VAT and the arrangements he made with SARS to remedy his position. That was not forthcoming. When that is taken together with his other misconduct and the absence of any exceptional circumstances either mitigating that misconduct or demonstrating reform, in my view the only possible sanction is that his name should be removed from the roll of advocates. By way of comment, it is fair to say that the order of the court, favoured by this minority judgment (but not endorsed by the majority judgment) that the senior advocate ought to be removed from the roll of advocates for his VAT misdemeanours coupled with other professional misconduct has caused shock waves within and outside the legal profession. It is not clear in what sense Wallis JA believed that the advocate had derived a personal financial advantage. It was not the case that the latter had charged and collected VAT and then put it in his own pocket. Nor is there any indication that his fees had been inflated to the extent of the VAT that should have been charged. The lack of contrition or acknowledgement of the seriousness of the misconduct 17

18 It is difficult to avoid the impression, on reading the minority judgment, that it was Geach s lack of contrition on the VAT issue and his attempt to make light of his transgressions in this regard that rankled with Wallis and Leach JJA. The minority judgment and the view of the General Council of the Bar that being struck off the roll was the appropriate sanction stands as a warning to all members of the practising professions that failure to comply with their tax obligations can result in more than just the imposition of additional tax. Their professional organisation may also take action against them, in which event they risk losing their livelihood through loss of their professional accreditation. In short, if the minority judgment of the Supreme Court of Appeal had prevailed, the consequence for this particular taxpayer of not registering for VAT (and not adding VAT to his fees and collecting the funds for the fiscus) would have been that he would be barred from practising his profession indefinitely. The financial loss over the remainder of a working lifetime (let alone the reputational damage) for any high-earning professional is scarcely calculable. pwc VAT Act: Sections 23(1) and 58(c) SARS NEWS Interpretation notes, media releases and other documents Readers are reminded that the latest developments at SARS can be accessed on their website Editor: Mr P Nel Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees. 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 18

19 used as a basis for action without further research or specialist advice. The views of the authors are not necessarily the views of SAICA. All rights reserved. No part of this Newsletter covered by copyright may be reproduced or copied in any form or by any means (including graphic, electronic or mechanical, photocopying, recording, recorded, taping or retrieval information systems) without written permission of the copyright holders. 19