integritas-#409972-v3-integritax november 2012 issue no 158 · 2012. 10. 26. · november 2012 –...

NOVEMBER 2012 – ISSUE 158

CONTENTS

CAPITAL GAINS TAX

2121. Returns of Capital

2122. Share block relief

TAX ADMINISTRATION

2128. Non-compliance penalties

COMPANIES

2123. Conversion of par value shares to no

par value shares

TRADING STOCK

2129. Valuation of trading stock

EXCHANGE CONTROL

2124. Intellectual property

TRANSFER PRICING

2130. SARS’s 5-year strategy plan.

2131. South African developments

GENERAL

2125. Tax Clearance Certificate

2126. Form of Assessments

VALUE-ADDED TAX

2132. Consumer business industry.

INTERNATIONAL TAX

2127. Australian GAAR to be amended

retrospectively

SARS NEWS

2133. Interpretation notes, media releases and

other documents

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COMPANIES

2121. Returns of Capital

(Published November 2012)

1 April 2012 has come and gone, and by now all April fools' jokes should be forgotten.

However, 1 April 2012 could still have some significance for taxpayers, as it could have

triggered a capital gains tax (CGT) liability for taxpayers holding shares, even if they did not

receive any distributions and did not dispose of their shares.

Taxpayers would thus be well advised to consider the potential application of these provisions

before they complete their provisional tax returns for the relevant tax year (which for individuals

would be the 2013 tax year).

Paragraph 76A of the Eighth Schedule to the Income Tax Act - part-disposal of shares

In the past, it was common practice for companies to make returns of capital (also referred to as

capital distributions) to shareholders. A return of capital was not regarded as a dividend and was

therefore not subject to secondary tax on companies (STC), nor did it trigger CGT at the time.

CGT would only be triggered on the ultimate disposal of the share. If a share was never disposed

of, the capital distributions would effectively remain untaxed. At the time of the ultimate

disposal of the share, any returns of capital received over the years had to be included in the

proceeds on disposal, which had the effect of 'gathering up' the amounts received prior to

disposal.

However, all that changed during 2007, when paragraph 76A was introduced in the Eighth

Schedule. Paragraph 76A now provides for three different potential scenarios:

Scenario 1: Returns of capital received on or after 1 October 2007 but before

1 April 2012, triggered a deemed disposal of a part of that share on the date that the

return of capital is received by or accrues to the shareholder. The shareholder would thus

have to calculate the capital gain or loss on the disposal of part of the share and include it

in his/her tax return for the relevant tax year.

Scenario 2: Where returns of capital were received on or after 1 October 2001 but before

1 October 2007 and the taxpayer disposed of the share before 1 April 2012, the loss or

gain on the part disposal would have been triggered on the date of disposal of the share.

Scenario 3: Where returns of capital were received on or after 1 October 2001 but before

1 October 2007 and the taxpayer has not disposed of the shares by 1 April 2012

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("untaxed returns of capital”), the taxpayer must be deemed to have received a return of

capital on 1 April 2012.

In the case of scenarios 1 and 2, (an actual disposal or deemed part-disposal of the share before

1 April 2012) the value of the return of capital must be treated as proceeds on disposal. In the

case of a part-disposal, paragraph 33 of the Eighth Schedule prescribes how part of the base cost

of the asset should be taken into account for purpose of calculating the capital gain or loss on

disposal.

However, in the case of scenario 3, the capital gain or loss must be calculated in terms of the new

rules in terms of paragraph 76B.

Paragraph 76B - reduction in base cost of shares as a result of distributions

The above rules regarding part-disposal only apply to returns of capital between 1 October 2001

and 31 March 2012. The 2011 Taxation Laws Amendment Act No 24 of 2011 introduced

paragraph 76B which sets out new rules regarding returns of capital. These rules apply to returns

of capital received on or after 1 April 2012.

Briefly summarised, while paragraph 76A provided for the value of the return of capital to be

included in the proceeds on disposal, paragraph 76B provides that the value of the return of

capital will reduce the shareholder's base cost in the share.

If the return of capital exceeds the expenditure in respect of the shares to which the return relates,

the excess must be treated as a capital gain during the year of assessment in which the return of

capital is received or accrued (whichever is earlier).

If the shares in question were acquired before 1 October 2001, the calculation is complicated

somewhat as the shareholder's base cost in the shares is calculated by determining the market

value of the share on the date of the return of capital and then deducting (or adding to it) the

notional capital gain (or loss) which would have been realised if the share was disposed of on

such date. The same principle as set out in the previous paragraph still applies, i.e. where a return

of capital is received, the base cost in the share would then be reduced by the value of such

return of capital and if the return of capital exceeds the expenditure, the excess must be treated as

a capital gain.

To conclude

4

Any "untaxed" returns of capital received between 1 October 2001 and 1 October 2007, in those

instances where the underlying shares have not been disposed of by 31 March 2012, will

potentially trigger tax in terms of paragraph 76B, by virtue of the deemed return of capital

provided for in paragraph 76A.

The new rules contained in paragraph 76B may be less negative for taxpayers than the deemed

disposal rules in paragraph 76A: In terms of paragraph 76A a capital gain could be triggered

each time that a return of capital is received. However, in terms of paragraph 76B, a capital gain

will only be triggered when and to the extent that the return of capital exceeds the base cost.

When paragraph 76A was first introduced during 2007, it was envisaged that a deemed disposal

would take place on 1 July 2011 in the case of "untaxed" returns of capital. While it may seem

like a reprieve that the deemed return of capital date was postponed to 1 April 2012 and that a

potential gain would have to be calculated in terms of paragraph 76B rather than paragraph 76A,

there is a sting in the tail. The downside in those instances where a capital gain would in fact

materialise, is that such gain may be subject to the higher effective CGT rates as a result of the

increased inclusion rates announced by the Minister of Finance in his February 2012 Budget

Speech. While a company could still "escape" the higher effective CGT rates depending on when

its financial year ends, a natural person would feel the pain of the higher CGT rate.

Taxpayers owning shares would thus have to keep this in mind when completing their

provisional and final tax returns, to ensure that it is dealt with correctly.

Bowman Gilfillan

IT Act: Eighth Schedule paragraphs 33; 76A; 76B

2122. Share block relief


Under a share block arrangement, a company holds immovable property and in turn, the

shareholders hold shares in the company and a right to use some or all of that property

exclusively for a specified period in every year.

Although share block is less popular now, many share block companies are still in operation.

The Share Blocks Control Act, No 59 of 1980 regulates share block companies. Among other

things that Act provides for a company to convert share block into sectional title. Provided

5

certain requirements are met, the conversion does not trigger any transfer duty, capital gains tax

(CGT) or value-added tax (VAT) consequences for the shareholders or the company.

However, no similar tax relief was available if the company simply transferred 'freehold'

property or sectional title properties (otherwise than as a result of a conversion) to its

shareholders. The draft Bill proposes that the relief now be extended to cover those cases.

It is proposed that, to qualify for the relief, the shareholder must acquire a specified part of the

immovable property to which that person had a right of exclusive use. Further, for the transfer

duty relief to apply, the initial acquisition of the shares in the company must have been subject to

transfer duty.

As to CGT, the base cost of the shares in the hands of the shareholder effectively becomes the

base cost of the part of the immovable property acquired.

The transfer will also be free of dividends tax in the hands of the shareholder.

For example: A share block company owns a number of plots of seafront land. A house was built

on each plot. Each shareholder of the company has the right to exclusively use one of the houses.

The company would be able to transfer each plot (with the house) to the shareholder holding the

exclusive right of use in respect of that plot free of CGT, dividends tax and VAT. The transfer

would, however, only be free of transfer duty in the hands of the shareholder if the shareholder

was liable for transfer duty when he acquired the share initially. If not, the shareholder would

now have to pay transfer duty when he acquires the plot.

It appears as if the proposed relief ties into the policy of the Government to reduce the number of

companies that purely hold residential type immovable property and the related tax relief

provided to persons who wish to remove residential property from companies and close

corporations (that are not share block companies), which endures until 31 December 2012.

The further relief takes effect on 1 January 2013. So, while persons who want to take advantage

of the relief can start planning, they must wait until then to implement any steps.

(Editorial comment: It must be noted that these are proposals at this stage and the final Act

must be consulted.)

6

Cliffe Dekker Hofmeyr

The Share Block Control Act

2123. Conversion of par value shares to no par value shares


In a recent binding class ruling regarding the conversion of ordinary par value shares to no par

value shares, as directed under item 6 of Schedule 5, read with Regulation 31 of the Companies

Act, No 71 of 2008 (Companies Act), the South African Revenue Service (SARS) ruled that

there will be "no disposal" on conversion for the shareholders as contemplated in paragraph

11(1)(a) of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (the Act). SARS further

ruled that there will be no 'receipt' or 'accrual' for the shareholders under the definition of gross

income in section 1 of the Act, provided the converted shares are held on revenue account.

Finally, the ruling provided that the conversion will not be a 'transfer' under section 1 of the

Securities Transfer Tax Act, No 25 of 2007. This ruling was obtained subject to the rights

relating to the Applicant’s shares remaining unchanged, as envisaged by item 6 of Regulation 31

of the Companies Act.

The draft Taxation Laws Amendment Bill, 2012 also proposes to insert provisions regulating,

among others, the mandatory conversion of par value shares to shares of no par value as required

under the Companies Act. These provisions are to be inserted under section 43 of the Act. The

rationale behind these provisions is that current rollover relief for recapitalisations is too narrow

and not in line with the reorganisation rules, as the relief does not currently apply to shares held

as trading stock and the permissible types of share consideration are too narrow, not making

provision for share splits, consolidations or conversions. The change is also necessitated by the

removal of par value shares under the Companies Act.

Under the proposed section 43, the required conversion of shares under the Companies Act will

fall under the definition of a "substitutive share-for-share transaction" and will not be treated as a

deemed disposal event, the base cost remaining the same.

With the introduction of section 43, taxpayers will no longer be advised to apply for a ruling

regarding the consequences of a conversion of shares in terms of the Companies Act, as the tax

consequences will be regulated by section 43, should the draft provision be enacted.

7

(Editorial comment: It must be noted that these are proposals at this stage and the final Act

must be consulted.)


IT Act: Sections 1 (definition of gross income) and 43

IT Act: Eighth Schedule paragraph 11(1)(a)

Securities Transfer Tax Act: Section 1

Companies Act: Regulation 31

EXCHANGE CONTROL

2124. Intellectual Property


When the Exchange Control Regulations were promulgated on 1 December 1961, South Africa

had just become independent from British rule and became a Republic. Its policies relating to

racial segregation were frowned upon by most of the outside world and there were internal fears

of unrest, with Sharpeville still fresh in the minds of many. This caused the authorities to fear

capital outflows on a large scale and, to prevent this, the Exchange Control Regulations, Orders

and Rules came into being.

Since the advent of the Regulations to 1995, the purpose of these rules remained to prevent and

restrict capital outflows. They also served the purpose of assisting in the management of the

country’s foreign exchange reserves.

However, the need for these restrictions eased up after the first democratic elections in 1994 and

it has now become the South African government’s declared policy to gradually abolish

exchange controls.

Over the years, intellectual property has never featured prominently in the application and

administration of the exchange control regime. In fact, for more than forty years, it was not

mentioned in either the Exchange Control Regulations or the Exchange Control Rulings, the

latter being the “handbook” issued to Authorised Dealers (banks) containing standing authorities

and administrative procedures to be fulfilled by them. Intellectual Property was deemed by the

market to be no different to any other commodity and, provided full proceeds were received, the

relevant exchange control requirements were taken as having been fulfilled.

8

In about 2002, the Financial Surveillance Department of the South African Reserve Bank

amended the Exchange Control Rulings, adding a section which makes specific reference to

intellectual property and advised that intellectual property is deemed to be capital in terms of

Regulation 10(1)(c). It further informed Authorised Dealers that the sale, assignment or cession

and/or waiver of rights in favour of non-residents in respect thereof, will require specific prior

approval.

This point of view was supported in a 2004 court case, Couve and another vs Reddot

International (Pty) Limited and others [2004] (6) SA 425 (W), in which the court held that

intellectual property is capital. However, in March 2011, in the case Oilwell vs Protec

International Ltd and Others [2011] ZASCA 29, the judge found that the previous ruling was

incorrect and that intellectual property is not capital insofar as the Exchange Control Regulations

are concerned.

This effectively meant that intellectual property could be “exported” without the need for

exchange control approval as long as fair value was received.

This was clearly not acceptable to National Treasury who had the Regulations amended. On

8 June 2012, per Government Notice number R 445 of 8/6/2012, an amendment was made to

Regulation 10 to the effect that capital shall include any intellectual property right, whether

registered or unregistered. The regulation further prohibits the export of intellectual property.

From the above, one can deduce that intellectual property has suddenly gained unusual

prominence for exchange control purposes. The question that arises is why this is the case.

Bearing in mind the purpose of exchange controls, one can make the assumption that in the past

ten years, the exportation of intellectual property has become a threat to the country’s foreign

exchange reserves and, to such an extent, that it was considered necessary to legislate to prevent

this.

This development flies in the face of the South African government’s stated policy of gradual

abolishment of exchange controls and it can, and probably will, be seen as a tightening of these

controls.

9

Interestingly, the exportation of intellectual property has not only seen a tightening of exchange

controls. From a tax perspective, the legislation has also tightened in the last ten years or so,

culminating in the introduction of section 23I in the Income Tax Act (the Act).

This section is an anti-avoidance provision which seeks to nullify tax arbitrage by prohibiting the

deduction of expenditure incurred for the use or right of use of ‘tainted intellectual property’ (as

defined), if the recipient of the royalty is not liable to South African tax.

If one analyses the policy decision underpinning section 23I, it is clear that an exodus of South

African invented and developed intellectual property by South African residents got the better of

the National Treasury.

The feeling was that the Act lacked effective mechanisms to prevent tax arbitrage where a

taxpayer assigned South African intellectual property to a foreign entity which licensed that

intellectual property back to fully taxable South African taxpayers (the licensee would make

deductible payments to the holder of the intellectual property rights). In many instances, the

royalty payments were simply returned to the licensee/payer in the form of exempt dividends,

whilst the tax deductions for payments made by the licensee might be so large as to reduce the

licensee’s taxable income to little or nothing.

This was no doubt perceived to be eroding the South African tax base and it was against this

background that National Treasury responded with the introduction of section 23I.

Since its inception, section 23I has (like most anti-avoidance provisions in the Act) gone through

a number of amendments. In its current form, it targets not all intellectual property rights but

only those that are comprised of ‘tainted intellectual property’ falling into one of the following

categories:

Intellectual property that –

was the property of the ‘end user’ (as defined) or ‘connected person’ (as defined) in

relation to the end user;

is the property of a ‘taxable person’, excluding, inter alia, a non-resident;

a material part of which was used by a taxable person in carrying on a business while

that property was the property of a taxable person, and the end user of the property

acquired that business or a material part thereof as a going concern; or

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was discovered, devised, developed, created or produced by the end user of that property

or by a taxable person that is a connected person in relation to the end user, if that end

user, together with any such taxable person, holds at least 20% of the participation rights

in a person by or to whom an amount is received or accrues by virtue of the grant of use,

right of use or permission to use that property or, where that receipt, accrual or amount is

determined directly or indirectly with reference to expenditure incurred for the use, right

of use or permission to use that property.

The example below illustrates, inter alia, cases where the section would be applicable

A South African developer develops and sells intellectual property to a foreign person. The

developer then licenses the intellectual property from the foreign person. The developer uses the

intellectual property in the production of income, and does not sublicense the intellectual

property (i.e. the South African developer is an ‘end user’ as defined). As consideration, the

developer makes royalty payments to the foreign person. Section 23I will prohibit the South

African developer from claiming deductions in respect of the royalty payments.

Deductions will equally be prohibited if a connected person in relation to the South African

developer licensed the intellectual property from the foreign person.

Furthermore, the section will also apply where a South African developer sells intellectual

property to a Controlled Foreign Company (CFC) (as defined) with the developer then licensing

the intellectual property from the CFC. Any royalty payment to a CFC will not be claimable as a

deduction unless the royalty generates net income which will be imputed back to a South African

resident resulting in South African tax.

Any taxpayer that believes it has out-manoeuvred exchange control regulations to export

intellectual property (which seems difficult to achieve given the recent developments), needs to

carefully assess the tax implications of the resultant royalty payments if the intellectual property

concerned is ‘tainted’.

(See also article 2112)

Deloitte

IT Act: Section 23(I)

Currency and Exchanges Act: Regulation 10(1)(c)

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GENERAL

2125. Tax Clearance Certificate


In Zikhulise Cleaning Maintenance and Transport CC v CSARS [2012] ZAGPPHC 91, a

decision handed down by the North Gauteng High Court on 29 May 2012, Wright AJ declared,

in relation to the South African Revenue Service’s (SARS) summary withdrawal of the

taxpayer’s tax clearance certificate, that SARS’s decision to invalidate or cancel the Tax

Clearance Certificate in issue (which apparently stated that it was valid for a calendar year)

“shall be of no force or effect”; that the tax clearance certificate was “deemed to be valid and

current” pending the taxpayer’s application to court for relief in terms of the Promotion of

Administrative Justice Act, No 3 of 2000 (PAJA) and “permitting the applicant to rely on the

Tax Certificate” pending the outcome of that application for relief.

The judgment is lacking in detail

The judgement is sparse. The critical passage reads as follows:

“Whether the decision is reviewable, via the Promotion of Administrative Justice Act 3 of 2000

or through the principle of legality, is not something I need decide. The applicant was entitled to

reasonable notice of SARS’ intention to call the certificate into question and an opportunity to

put its case to SARS.”

The judgment gives no indication of the arguments and counterarguments put to the court by

SARS and the taxpayer, respectively.

Is the refusal or cancellation of a tax clearance certificate “administrative action”?

It is far from clear whether the refusal or cancellation of a tax clearance certificate constitutes

“administrative action” as envisaged in the PAJA and is consequently subject to judicial review,

for it is arguable that the refusal to issue or cancellation of a certificate, in and of itself, does not

meet the requirement that it “adversely affects the rights of any person” – which is a precondition

for relief under that Act.

The judgment is explicit in leaving open the question whether SARS’s withdrawal of a tax

clearance certificate constitutes “administrative action”, as defined in the PAJA. Nonetheless,

says the judgment:

12

“The applicant was entitled to reasonable notice of SARS’ intention to call the certificate into

question and an opportunity to put its case to SARS”.

No authority is cited for this proposition, and it must be inferred that it is based either on

common law principles relating to the audi alteram partem principle or on the constitutional

right to fair administrative action. No text or decided case is cited in the judgment in support of

the application of these principles in the circumstances of this case.

It is trite that “administrative action”, as defined in the PAJA, can be taken on judicial review in

terms of that Act and can be set aside if it was unfair, arbitrary, capricious or irrational.

Tax clearance certificates are vital to taxpayers who tender for government contracts

The issues raised in this case are of great importance to taxpayers who tender for government

business and are consequently required to submit tax clearance certificates with their tender

application. Such clearance certificates attest to the fact that the taxpayer is up to date with the

lodgement of tax returns and that no tax is outstanding. The certificate states the period for which

it is valid. The withholding or revocation of a tax clearance certificate of course has a serious

impact on the business of such taxpayers.

Curiously, the Income Tax Act makes no provision for the issuing of tax clearance certificates

and they are issued by SARS purely as a matter of practice.

A taxpayer is entitled to advance notice of SARS’s intention to cancel a tax clearance

certificate

In this particular case, SARS had apparently furnished the taxpayer with reasons for the

cancellation of the tax clearance certificate, albeit (apparently) subsequent to the cancellation.

That, in the view of the court, was not sufficient – it was held that SARS ought to have given the

taxpayer prior notice and the opportunity of responding and advancing grounds on which the

certificate ought not to be withdrawn.

The scope of SARS’s actions that may be affected by this judgment

Given the importance of the issue and the range of proposed actions by SARS vis-a-vis taxpayers

of which advance notice must now (arguably) be given with an opportunity to make

representations, it is regrettable that this judgment is so sparse. However, the relief that was

granted was of an interim nature, pending the institution of an application for judicial review of

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the withdrawal of the tax clearance certificate, and it is to be expected that the relevant issues

will be fully canvassed in that application.

(Editorial comment: The above article was written before the Tax Administration Act No 28 of

2011 (TAA) became effective. The TAA now specifically deals with Tax Clearance Certificates)

pwc

Promotion of Administrative Justice Act

2126. Form of Assessments


The decision in ITC 1855 [2012] 74 SATC 58 concerned the fundamental question of what

constitutes an “assessment” for purposes of the Income Tax Act No 58 of 1962 (the Act) and in

particular whether a document other than SARS’s customary form IT34 can be an assessment.

The implications of this question

The answer to this question impacts on many important issues such as rights of objection and

appeal and the associated time limits for doing so, and on SARS’s power to issue a revised

assessment.

In this particular case, the issue was whether an assessment issued by SARS in respect of the

2002 tax year and bearing a due date of 1 June 2004, had prescribed three years later on 31 May

2007, in which event it could not have been superseded by a purported revised assessment, such

as the one dated 4 May 2007.

SARS cannot issue a reduced assessment once three years have elapsed from the original

assessment

Section 79A of the Act provides, in effect, that the Commissioner does not have the power to

issue a reduced assessment once three years have gone by since the date of the original

assessment.

The issue in this case was whether the Commissioner had issued an additional assessment within

that three year prescriptive period.

On 5 June 2006, the taxpayer had written to the Commissioner requesting a reduced assessment

for the 2002 tax year in terms of section 79A of the Act on the basis that certain expenses that

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qualified for deduction had not been claimed as deductions in its tax returns for the 2001 to 2004

years of assessment.

The issue was whether the Commissioner’s power to issue a revised assessment had prescribed,

in which event the assessment, even if incorrect, was final and could not be reduced.

At the heart of the matter was whether a letter sent by SARS to the taxpayer on 4 May 2007 and

headed “Income tax revised assessment for the years of assessment 2001 to 2004” (which was a

response to a letter from the taxpayer raising certain objections to the assessment), constituted a

revised “assessment” as envisaged in the Act.

SARS contended that the letter of 4 May 2007 was not a revised assessment and, since three

years had elapsed since the date of the assessment (namely 1 June 2004), the assessment for the

2002 year of assessment had become final.

The taxpayer argued that SARS’s letter of 4 May 2007 was indeed a revised assessment and

consequently that the assessment for the 2002 year of assessment had not become final.

The customary forms used by SARS are not prescribed by law

The Tax Court held that although SARS uses various set forms for particular purposes, such as

form IT34 for assessments, these forms are not prescribed by law.

It was further held (following the decision in ITC 1740 [2001] 65 SATC 98 that an “assessment”

means a “purposeful act, whereby the document embodying the mental act is intended to be an

assessment”.

In Irvin & Johnson (SA) (Pty) Ltd v CIR [1946] 14 SATC 24 it had been held that, subjectively,

an assessment is an abstraction which has no real existence until it is published in a manner

which conveys a meaning to others; thus, the unexpressed thoughts of the assessing officer

would not constitute an assessment. Furthermore, that an assessment must result in an amount

which the Commissioner may then reduce or alter in terms of section 76(4) of the Act.

Applying these principles to the facts of the matter before it, the court held that SARS’s letter of

4 May 2007 was indeed an “assessment” and that SARS power to issue a revised assessment for

the 2002 tax year had therefore not prescribed. The court said in this regard that –

15

‘the said letter [from SARS to the taxpayer, dated 4 May 2007] did indeed constitute an

intentional published act of assessment, giving the required ‘amount’, i.e. a zero tax liability.

For those reasons it is found that the assessment for the tax year 2002 had not prescribed’.

(Editorial comment: The above article was written before the Tax Administration Act No 28 of

2011 (TAA) became effective. The TAA now specifically deals with forms of assessment.)

pwc

IT Act: Sections 76(4) and 79A

INTERNATIONAL TAX

2127. Australian GAAR to be amended retrospectively


The Australian General Anti-Avoidance Rule (GAAR) is found in Part IVA of the Income Tax

Assessment Act, 1936. It was originally introduced in 1981 to combat 'blatant, artificial and

contrived' schemes entered into with the sole or dominant purpose of reducing tax.

Since 2010, the Australian Tax Office (ATO) has lost six out of thirteen Part IVA cases argued

before the Federal Court. This has led to a flurry of action that will culminate in legislative

changes to Part IVA during the Spring 2012 Parliamentary sittings.

In brief, the requirements for Part IVA's application are:

There must be a scheme within the meaning of the applicable provisions.

A tax benefit must be derived from said scheme.

The taxpayer's dominant purpose must have been to obtain such tax benefit.

Where the Commissioner is satisfied that said requirements are present, he can make a

determination to cancel the tax benefit. The taxpayer bears the onus in relation to Part IVA

proceedings.

In two recent Part IVA cases, the taxpayers made a 'no tax benefit' argument and won.

In essence, the 'no tax benefit' argument seeks to prove that the transaction could not have been

done in any other way. This means the taxpayer either would have done nothing (in which case

no tax whatsoever would have been payable because the scheme would not have been

16

implemented), alternatively, it could have done the transaction in a manner yielding a

comparable tax result, that is the tax outcome would have been similar to that achieved under the

scheme.

In RCI Pty Ltd v Commissioner of Taxation [2011] FCAFC 104, the Full Federal Court found

that there was no 'tax benefit' because RCI would not have implemented the restructure of the

group (and the consequent sale of shares) if the costs of doing so (including the tax costs), were

prohibitively high. In February 2012, the High Court refused the ATO special leave to appeal.

The case of FCT v Futuris Corporation Limited [2012] FCAFC 32 followed in March 2012. In

Futuris, the taxpayer showed that had it not done the transaction in that particular manner (by

restructuring to divest a certain services division through a public listing), it would not have

entered into the transaction at all. The Futuris case held that direct evidence of what the taxpayer

would have done (or could reasonably be expected to have done), but for the scheme, was not

required.

By accepting the 'no tax benefit' argument, the Australian courts held, in effect, that a taxpayer

should not be taxed on the basis of a transaction that it would never have entered into.

On 1 March 2012, the Assistant Treasurer announced that Government would act to protect the

integrity of Australia's tax system by introducing amendments to Part IVA. Said amendments "...

would ensure that ... Part IVA, continued to be effective in countering tax avoidance schemes

that are carried out as part of broader commercial transactions". Furthermore, "The Government

amendments will confirm that Part IVA always intended to apply to commercial arrangements

which have been implemented in a particular way to avoid tax. This also includes steps within

broader commercial arrangements".

Treasury promised extensive consultation but indicated that the envisaged amendments would

apply retrospectively from 1 March 2012.

The public consultation process started in May 2012. The ATO representative indicated that the

Commissioner was now required (under the RCI and Futuris approach) to present the most

reliable prediction regarding the alternative course of action that a taxpayer would take.

Consequently, the new test required of the ATO to "undertake a hypothetical fact finding

exercise". Prior to the RCI and Futuris cases the court would, of its own accord, have decided

what would have happened had the taxpayer not implemented the scheme.

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The upcoming Part IVA amendments have been widely criticised. One commentator stated:

"There was no suggestion at the time Part IVA was designed to prevent ordinary business

planning. The selection of one option out of a number of choices taking tax into account was

outside the scope of the rule". Another expressed fear that the amended Part IVA might enable

the ATO "... to impose tax if one of the possible ways in which the transaction could have been

implemented would have involved paying more tax, whether or not that possibility was probable,

or even likely". The retrospective effect of the amendments has also been condemned.

The South African GAAR provisions are found in Part IIA of the Income Tax Act No. 58 of

1962. Section 80A provides that "An avoidance arrangement is an impermissible avoidance

arrangement if its sole or main purpose was to obtain a tax benefit...". Section 80L defines

'avoidance arrangement' as "any arrangement that, but for this Part, results in a tax benefit". 'Tax

benefit' is defined in section 1 to include "any avoidance, postponement or reduction of any

liability for tax".

In relation to onus regarding the alleged 'tax benefit', section 80G provides that "An avoidance

arrangement is presumed to have been entered into or carried out for the sole or main purpose of

obtaining a tax benefit unless and until the party obtaining the tax benefit proves that, reasonably

considered in light of the relevant facts and circumstances, obtaining a tax benefit was not the

sole or main purpose of the avoidance arrangement".

The aforementioned makes it clear that the concept of 'tax benefit' is pivotal to the local GAAR.

It is foreseeable that, under appropriate circumstances, a SA taxpayer could testify that:

It would not have entered into any transaction at all (that is where the tax consequences

of the hypothetical alternative would have been more onerous than those of the

transaction it actually implemented); or

Out of a suite of alternatives, it could have entered into a different transaction but such

transaction would have resulted in a similar tax outcome compared to that of the

transaction actually implemented.

The gist of the taxpayer's argument would consequently be that there was no 'avoidance,

postponement or reduction of any tax liability' seeing that it would either have done nothing,

alternatively it would have undertaken a transaction where the fiscus would have seen an

equivalent tax result. SARS might have its work cut out to convince the court that, despite the

18

taxpayer's evidence to the contrary (that could be hard to contest seeing that it is solely in the

taxpayer's domain), there does exist some 'tax benefit'. Without a benchmark (the hypothetical

alternative transaction) against which the tax benefit of the actual transaction could be measured,

SARS might be hard-pressed to postulate a 'tax benefit'?

It would therefore be interesting, in light of the Australian experience, what South African

Courts will make of the ‘no tax benefit' argument.


IT Act: Sections 1 (definition of tax benefit); 80A; 80G and 80L

TAX ADMINISTRATION

2128. Non-compliance penalties


The Tax Administration Act 28 of 2011 (“TAA”) although promulgated, will only come into

operation on a date to be determined by the President by proclamation in the Government

Gazette. The South African Revenue Service (“SARS”) has indicated that this will be within the

next three months.

(Editorial comment: With the exception of provisions relating to interest, the TAA became

effective on 1 October 2012).

The TAA provides for two types of penalties to be imposed, namely administrative non-

compliance penalties contained in Chapter 15 of the TAA, and understatement penalties

contained in Chapter 16 of the TAA. The administrative non-compliance penalties will be

discussed in further detail below.

There are two different types of administrative non-compliance penalties, namely; fixed amount

penalties and percentage based penalties, both of which relate to the failure to comply with

administrative requirements of a tax act. These penalties are very similar to the current

administrative penalties for non-compliance imposed under section 75B of the Income Tax Act

58 of 1962 (the Income Tax Act) and its Regulations.

Fixed amount penalties in terms of the TAA

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Section 210 of the TAA states that when SARS is satisfied that “non-compliance” by a person

exists, SARS must impose the appropriate penalty in accordance with the table in section 211 of

the TAA. “Non-compliance” is defined as a failure to comply with an obligation that is imposed

by or under a tax act and is listed in a public notice issued by the Commissioner, other than the

failure to pay tax subject to a percentage based penalty and non-compliance subject to an

understatement penalty.

The fixed amount penalty imposed by the table in section 211 varies from R250 to R16 000 per

month and depends on the amount of an assessed loss or taxable income for the preceding year.

The amount of the penalty will increase automatically by the same amount for each month that

the person fails to remedy the non-compliance. According to the Explanatory Memorandum,

fixed amount administrative penalties may only be imposed in respect of non-compliance listed

in a public notice by the Commissioner, and not any non-compliance with an obligation under a

tax act.

Percentage based penalties in the TAA

In terms of section 213 of the TAA, when SARS is satisfied that an amount of tax was not paid

as and when required under a tax act, SARS must, in addition to any other penalty or interest for

which a person may be liable under Chapter 15, impose a penalty equal to the percentage of the

amount of unpaid tax as prescribed in the relevant tax act. The Explanatory Memorandum states

that the procedures for the imposition and remittance of a percentage based penalty are regulated

by the TAA, but the circumstances that trigger the imposition of the penalty remain in that tax

act.

Comparison to penalties under the Income Tax Act

Section 75B of the Income Tax Act makes provision for an administrative penalty in respect of

non-compliance with any procedural or administrative action or duty imposed or requested in

terms of the Income Tax Act. The penalties system as set out in the section 75B Regulations

came into effect on 1 January 2009 and provides for penalties for a range of non-compliance,

which are determined according to the taxpayer’s assessed loss or taxable income for the

preceding year. The penalties range from R250 up to R16 000 a month. This is the same as the

amounts of the administrative non-compliance penalties contained in the section 211 table of the

TAA. The penalties system in the Regulations cover a range of non-compliance including the

failure to register as a taxpayer, the failure to inform SARS of a change of address and other

details, as well as the failure to submit a return, other documents and information. It also

20

contains a catch all provision that includes any other non-compliance with an obligation imposed

under the Income Tax Act.

The Regulations also provide for percentage-based penalties for non-compliance by employers,

in respect of their employees’ tax withholding obligation, and by provisional taxpayers in respect

of the filing obligations imposed on them.

Conclusion

The TAA consolidates the common administrative provisions currently contained in a number of

the tax acts. Where the TAA refers to “a tax act” it is therefore referring to, inter alia, the Income

Tax Act, the Value-Added Tax Act 89 of 1991, the Transfer Duty Act 40 of 1949, and the Estate

Duty Act 45 of 1955.

The percentage based penalties contained in the Income Tax Act are similar to those provided for

in the TAA. The TAA however seems broader in scope in that it does not specifically list the

non-compliances as currently set out in the section 75B Regulations. The TAA merely requires

that “an amount of tax was not paid as and when required under a tax act”. Furthermore, the

Regulations impose a 10 per cent penalty whereas the TAA imposes a penalty equal to “the

percentage of the amount of unpaid tax as prescribed in the tax act”. It seems as if this

percentage will still have to be determined.

Edward Nathan Sonnenbergs

IT Act: Section 75B and its Regulations

Tax Administration Act: Sections 210; 211 and 213

TRADING STOCK

2129. Valuation of trading stock


To respond accurately and promptly to customer needs, and to also improve operating

efficiencies, many wholesale and retail businesses have recently opted for their own centralised

warehousing and distribution centres.

These centralised distribution centres allow for a single location stocking a vast number of

products and they are generally set up in areas to service a number of stores. Suppliers deliver

products in bulk and products are distributed to the stores as and when required.

21

Recently, a number of wholesale and retail companies received letters from the South African

Revenue Service (SARS) requesting details and schedules of costs directly incurred in operating

these distribution centres. In addition, requests have been received for similar information

relating to the costs of operating the purchasing departments.

SARS is seeking to include costs associated with centralised distribution centres and purchasing

departments in the valuation of trading stock.

According to SARS, it appears that procurement costs should be inclusive of costs associated

with planning, sourcing, selection, negotiation, evaluation, comparison and testing costs, as well

as maintenance of stock assortment and volume, establishment and maintenance of vendor

contacts, general administration and management supervision, coordination and control.

Section 22(3) of the Income Tax Act No. 58 of 1962 (the Act), states that the cost price at any

date of any trading stock in relation to any person includes:

costs incurred by such person, whether in the current or any previous year of assessment,

in acquiring such trading stock; and

any further costs incurred up to and including the said date in getting such trading stock

into its then existing condition and location.

The section provides that ‘further costs’ shall mean the costs to be included in the valuation of

trading stock in terms of any generally accepted accounting practice (GAAP), as approved by the

Commissioner for SARS.

The Act was amended in 1984 to require taxpayers to include in the value of their trading stock

‘further costs’ which are required to be included in terms of GAAP as approved by the

Commissioner. Prior to this amendment, taxpayers argued that it was not necessary to include

overhead costs, being the ‘further costs’ in the value of stock for purposes of determining taxable

income.

According to the Explanatory Memorandum, the GAAP approved by the Commissioner for this

purpose was AC108. AC108 has since been superseded by IAS 2.

In terms of IAS 2, further costs include purchase costs (including taxes, transport, and handling)

net of trade discounts received, the costs of conversion (including fixed and variable

22

manufacturing overheads) and other costs incurred in bringing the inventories to their present

location and condition. However, in terms of IAS 2, further costs exclude certain overheads,

including administrative overheads that do not contribute to bringing inventories to their present

location and condition.

Based on recent queries, it appears that SARS is of the view that overhead costs relating to

procurement and costs relating to operating centralised warehousing and distribution centres,

should be included in the valuation of trading stock for purposes of determining taxable income.

Should this result in an adjustment to the value of trading stock when determining taxable

income, it would imply that trading stock has not been correctly valued in terms of IAS 2 for

accounting purposes.

As AC108 has been superseded by IAS 2, it is not clear if the principles in AC108 are still

applicable for tax purposes or whether the Commissioner has also approved of IAS 2.

We recommend that professional advice is sought should wholesale and retail businesses receive

letters from SARS seeking to include costs of procurement and costs of operating centralised

warehousing and distribution centres in the valuation of trading stock for purposes of

determining taxable income. We are of the view that sound arguments exist to exclude these

costs from the cost price of trading stock.

Deloitte

IT Act: Section 22(3)

TRANSFER PRICING

2130. SARS’ 5-year strategic plan


The introduction of the new South African transfer pricing rules with effect from 1 April 2012,

as well as the repeatedly delayed publication of the SARS Interpretation Note, has ensured that

transfer pricing has been a hot topic of discussion during the last few months. The introduction

of the new transfer pricing rules has caused considerable speculation regarding SARS’ view on

the application of the transfer pricing principles to intra-group financing transactions in general,

and thin capitalisation in particular. The speculation surrounding SARS’ approach to transfer

pricing in future will only subside once the new Interpretation Note on transfer pricing has been

published. In the meantime we make reference to SARS’ recently issued 5-year Strategic Plan

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for the period 2012/13 to 2016/17, setting out SARS’ mandate, vision, values and core outcomes,

as well as its 5-year strategy to achieve these core outcomes.

Independent of the more practical guidance to be provided in the interpretation note though, it is

important to understand that transfer pricing is one of SARS’ main strategic focus areas for the

next few years. Therefore, transfer pricing must be on the radar screen of any tax director who is

responsible for a company involved in intra-group cross-border transactions.

In terms of the Strategic Plan, transfer pricing has been identified as one of the main strategic

risks currently faced by SARS, due to the growing presence of multi-national corporations in

South Africa, the emergence of large local original players and the position of South Africa as an

investment conduit into Africa.

As South Africa, with its corporate tax rate of 28%, is a relatively high tax jurisdiction compared

to some of its global competitors, SARS is concerned that multi-national corporations, with their

ability to potentially shift profits from high tax jurisdictions to low tax jurisdictions, could shift a

substantial portion of their tax base out of South Africa to lower tax jurisdictions. Such

jurisdictions include Mauritius, Switzerland and even the UK where the corporate tax rate has

been reduced to 24% as of 1 April 2012.

Considering statistics which show that nearly 70% of worldwide trade is currently conducted

within multi-national companies, SARS’ concern in this regard is more than understandable. It is

in this context that one has to consider SARS’ additional comment stating that the current OECD

and UN transfer pricing frameworks are seen to favour developed countries, even though SARS

provides no further explanation for this statement.

In order to address the compliance problems which SARS has been encountering as regards

transfer pricing, the Strategic Plan sets out a seven step approach to be undertaken in order to

increase tax compliance by South African taxpayers in respect of the transfer pricing rules. The

seven steps can be summarised as follows:

Ensuring that the new format of the company tax return provides the detail required by

SARS’ transfer pricing unit by submitting input to the new reporting standard (XBRL)

roll out;

The development of a local South African database containing information on South

African companies, their goods and services and thereby enabling SARS to perform local

benchmarking for transfer pricing purposes;

24

The continued use by SARS of third party data, including information obtained from the

South African Reserve Bank, to validate information declared by taxpayers;

The exploration of the possibility of offering bilateral and multilateral advanced transfer

pricing agreements (“APAs”);

The adoption of the use of multiple data;

The introduction of statutory documentation and disclosure requirements; and

The strengthening of the transfer pricing capability within SARS through intensive

practical training courses and exploring secondment options to and from other tax

jurisdictions such as India.

Most of the above described steps are in line with the steps undertaken by tax authorities in other

jurisdictions and are, as such, not necessarily controversial. However, two of the steps could be

of concern to South African taxpayers.

The first is the proposed development of an internal database of local companies and their goods

and services. While the development of a South African/Pan African database for transfer pricing

purposes should be welcomed by all tax authorities, advisors and taxpayers, the problem with the

proposed approach is that the database appears to be an internal SARS database. Such a database

will effectively result in SARS being able to use so called “secret comparables”, i.e. comparables

to which taxpayers and/or their advisors will not have any access to, for benchmarking purposes.

The second step of concern is the potential influence which the Indian tax authorities might have

on SARS. As anyone practicing in the area of transfer pricing will know, the Indian tax

authorities have consistently been extremely aggressive during the past few years when it comes

to transfer pricing as well as other tax areas, often ignoring generally accepted international

principles such as the OECD Guidelines. While we have understanding for SARS’ concern that

the current international transfer pricing framework might favour developed countries, as well as

their desire to align themselves with other BRIC countries from a political perspective, we would

urge SARS not to blindly copy the Indian approach.

Considering the difference in size of the two economies, and South Africa’s dependence on

foreign direct investment, an aggressive approach similar to the one taken by the Indian tax

authorities, which disregards international principles such as the OECD Guidelines, could result

in serious damage being inflicted on South Africa as an investment destination.

25

While the overall size of the Indian market might be big enough to lure foreign investors, despite

the aggressive approach taken by its tax authorities, we are doubtful as to whether the same

would apply to South Africa - a substantially smaller and less strategically important market.

Edward Nathan Sonnenbergs

2131. South African developments


South Africa’s transfer pricing and thin capitalisation regime, as contained in section 31 of the

Income Tax Act, No 58 of 1961 (the Act) has undergone some extensive principle changes over

the past two years.

In respect of transfer pricing, the focus had always been on the supply of goods and services

between certain connected persons, usually a resident and a non-resident. Where the price for

such goods or services was not at arm’s length, the South African Revenue Service (SARS)

could adjust the consideration paid so that the parties would be taxed as if they did deal at arm's

length. A secondary adjustment also entailed a deemed distribution of a dividend in respect of

which the now-repealed secondary tax on companies would have had to be accounted for.

Thin capitalisation had always been dealt with as something separate from transfer pricing. The

principle was always that where a non-resident granted financial assistance to a resident, SARS

could deny the resident a deduction in respect of excessive interest or finance costs paid to the

non-resident. Any such excessive amount was also deemed to be a dividend declared by the

resident. Thin capitalisation was, however, subject to the so-called safe-harbour rule which was

that where the debt to equity ratio of the resident was less than or equal to three-to-one,

deductions would not be denied.

With effect from 1 April 2012, transfer pricing now focuses not only on the supply of goods or

services but on any cross-border "transaction, scheme, agreement or understanding" between or

for the benefit of certain parties, usually a resident and a non-resident (but it also applies to

certain other parties), where one or both of the parties gain a tax benefit.

Another change is that, instead of SARS simply being empowered to adjust the price concerned

for tax purposes, the parties are actually required to calculate their own tax as if the price had

been at arm's length. In fact, this is so not only in respect of price, but in respect of any term or

condition of the transaction, scheme, agreement or understanding.

26

Thin capitalisation is also no longer treated as separate from transfer pricing but has been

incorporated into the transfer pricing rules and is now treated as an extension of the transfer

pricing provisions. The transfer pricing provisions are sufficiently wide to include the provision

of financial assistance, and therefore, if a party derives an undue tax benefit, such as excessive

interest deductions from such financial assistance, the arm’s length principle will apply and the

parties will have to calculate their taxes accordingly. The rule also now incorporates the making

available of intellectual property.

A secondary adjustment mechanism was also introduced. In terms of this mechanism the amount

of any difference in price (i.e. the amount of the 'adjustment') will be regarded as a loan extended

by the resident party to the other, which itself will be subject to the transfer pricing rules. In other

words, the terms of the loan will have to be at arm’s length, including the charging of interest.

The resident will therefore be treated as having interest accruing to it in respect of the deemed

loan, until such time as the other party pays the amount of the loan to the resident. If the non-

resident pays the amount to the resident within the same year of assessment in respect of which

the "adjustment" is made, no deemed interest will accrue to the resident.

It should also be noted that the transfer pricing rules do not only apply to income tax, but also

other taxes such as dividends tax and possibly donations tax.

There also exists certain exclusions from the transfer pricing provisions for headquarter

companies.

In the draft Taxation Laws Amendment Bill, 2012 it is proposed that the transfer pricing

provisions should not apply in respect of loans or intellectual property where the holder is a

South African company and the debtor or licensee is a Controlled Foreign Company (CFC) in

relation to that South African company. The CFC also has to be highly taxed and has to have a

foreign business establishment. The CFC will be considered "highly taxed" if it has an effective

tax rate of 75% of the applicable South African tax rate.

It is expected that SARS will take a more aggressive stance in respect of transfer pricing,

especially given the fact that the new provisions are wide and geared towards eliminating undue

tax benefits.

27


IT Act: Section 31

VALUE-ADDED TAX

2132. Consumer Business Industry


Treatment of rebates and discounts

It is common in the FMCG industry (fast moving consumer goods) for wholesalers to grant

allowances to retailers in the form of discounts, rebates and incentives.

These allowances may either result in the previously agreed consideration for a supply being

altered, or may represent payment by the supplier for a supply of services by the retailer.

In the first instance, the wholesaler (supplier) would be obliged to issue a credit note to the

recipient of the discount. In the latter instance, the recipient of the payment (the retailer) would

be obliged to issue a tax invoice to the wholesaler in respect of the service rendered.

To the extent that zero-rated goods had been supplied, an alteration of the price would have no

VAT effect, whereas a rebate comprising consideration for the supply of a service would allow

the party paying the rebate an input tax deduction, whereas the recipient would have to account

for output tax.

Where standard rated goods or services are the subject of the sale, the same net VAT effect will

result, whether the rebate constitutes a discount or consideration for a separate service.

The supporting documentation will, however, not be the same in each instance – the one case

requiring a credit note and the other a tax invoice.

It is often difficult to establish whether a rebate is granted in order to alter previously agreed

consideration for a supply or whether there is payment for a supply of services. It was in order to

address this uncertainty that SARS issued Binding General VAT Ruling (BGR) No. 6 in 2011.

In order to establish whether any payment has been made in respect of, in response to or for the

inducement of the supply of a service, one would normally ask whether the recipient has actually

been paid to do something.

28

Perhaps illustrating just how difficult it is to determine whether a rebate is paid in respect of

“something done”, or as an alteration to the purchase price, SARS has opted to distinguish rather

between variable and fixed allowances, the first being considered an alteration to a previously

agreed price and the latter, consideration for a separate service.

In terms of the BGR, a variable allowance is granted to a retailer where the retailer is obliged to

satisfy certain conditions stipulated in the terms of trade agreement. Examples of variable

allowances include guaranteed allowances, early settlement allowances, growth rebates,

advertising allowances, swell allowances, category management allowances, incentive

discount/trade rebates, franchise store allowances, broad-based range scorecard allowance,

house/brand/quality assurance allowances and bulk allowances.

These allowances would typically be calculated as a variable of the value of purchases or sales.

Fixed allowances, on the other hand, are considered to be payment for actual services rendered.

These allowances include a new store allowance, a major refurbishment allowance, a specific

promotional/Gondola/Ad hoc allowance and a post-recession allowance.

In proposing this distinction, SARS seems to have opted for a pragmatic approach that would

render greater certainty as opposed to a principled approach. It is difficult, for instance, to see

how payment for the undertaking to exchange information (e.g. category management

allowances) would not be consideration for something done, even though it is agreed upon

upfront as a variable allowance.

Similarly, it is hard to see how a post-recession allowance paid to a retailer to decrease the

effects of a recession could be payment for “something done”, simply because it is a fixed

allowance and not variable. It does not appear as if the retailer would actually undertake to “do

something” in return for this receipt and it may well simply be a reduction in the price of the

goods purchased in order to allow the retailer to weather the recession.

Difficult questions as to whether or not a rebate constitutes payment for a service or an alteration

to an agreed price may, however, now be avoided by structuring the rebate as either a variable or

fixed allowance, based on the distinction in the BGR.

29

The BGR does indicate, however, that the rebates listed do not constitute an exhaustive list.

When specific rebates are agreed upon that fall outside the list in the BGR, contracting parties

would probably be well-advised to carefully consider the nature of the rebates in question.

In this regard, the distinction made by SARS does not seem well-founded in law and SARS

would technically only be bound by the BGR relative to the items explicitly listed in the BGR.

The mere fact that a rebate is made variable, as opposed to a fixed allowance, may not always be

enough to guarantee that it would not be seen as consideration for the making of a supply.

A further complexity that SARS has not addressed in the BGR is the finding of the court in GUD

Holdings (Pty) Ltd v Commissioner for the South African Revenue Service [2007] 69 SATC 115

where it was held that an early settlement discount does not so much constitute a discount as it

does a late payment penalty.

Whereas the granting of a discount would require an adjustment to the VAT accounted for on the

original supply, the payment of a penalty brings into question whether VAT should have been

accounted for at all on the part of the payment that constitutes the penalty.

Unallocated deposits and duplicate payments

At a time of austerity measures all round, it is interesting to note how often vendors still receive

duplicate payments or cash deposits that they are unable to allocate to any specific supply.

A year or two ago, SARS recognised the frequency and magnitude of such payments and

pronounced that it too would want its share where the overpayments were not refunded.

Section 8(27) of the Value Added Tax Act No 89 of 1991 was introduced in 2006. This section

provides that where any amount is received –

in respect of a standard-rated taxable supply,

in excess of the consideration charged for that supply, and

where such excess amount is not refunded within four months of receipt thereof,

such excess amount shall be deemed to be consideration for a supply of services performed in the

course or furtherance of that vendor’s enterprise.

Output tax would therefore have to be accounted for in respect of such excess amount in the

period in which the end of the four month period fell.

30

To the extent that the amount is subsequently refunded, the vendor may claim the tax fraction of

such amount as a deduction.

The example used in the Explanatory Memorandum issued by SARS at the time of the

amendment refers to a customer who makes a payment on receipt of a tax invoice for a taxable

supply, with the same payment being made later on receipt of a statement. Clearly, the excess

payment in this example would relate to the making of a taxable supply and section 8(27) would

apply.

It is not so clear, however, whether or not unallocated deposits could be said to have been

received in respect of a standard rated taxable supply. In this situation, vendors may well be able

to formulate a reasonable argument why such receipts would not be subject to VAT at 14%.

In this context, however, it is important to note that if and when questioned by SARS, the onus

will be on the taxpayer to demonstrate why such receipts were not subjected to VAT.

Deloitte

VAT Act: Section 8(27)

Binding General Ruling: BGR 6

SARS AND NEWS

2133. Interpretation notes, media releases and other documents

Readers are reminded that the latest developments at SARS can be accessed on their website

http://www.sars.gov.za

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

31

newsletters of firms in public practice and commerce and industry, as well as other contributors.

The information contained herein is for general guidance only and should not be used as a basis

for action without further research or specialist advice. The views of the authors are not

necessarily the views of SAICA.

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.

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