SARS ruling on tax on taking over contingent liabilities in sale of business

The South African Revenue Service (SARS) has sought to provide guidance on a difficult tax issue: the assumption (taking over) of contingent liabilities on the acquisition of a business as a going concern. In this regard SARS has issued Interpretation Note 94 dated 19 December 2016 (IN). The matter is best discussed by way of examples. Example 1: The seller (S) runs a toy shop. He owns the shop building and a stock of toys. The value of the building is R60 and the value of the stock is R30. He owes a supplier R15. S has two employees:

When is an error a bona fide inadvertent error?

Authors:  Louis Botha, Heinrich Louw and Mark Morgan. On 4 November 2016 judgment was handed down by the Tax Court of South Africa (held in Cape Town) in the matter of ABC Holdings (Pty) Ltd v The Commissioner for the South African Revenue Service, Case number ITI13772. In this case the court had to consider whether the taxpayer, ABC Holdings (Pty) Ltd, was entitled to claim a deductible allowance of enhancement income of R9,354,458.00 received in terms of a contract for future expenditure in terms of s24C of the Income Tax Act, No 58 of 1962 (Act) for its 2011 year of assessment. The other issue that arose in this case and which is the focus of this article, was whether the South African Revenue Service (SARS) was correct to levy an understatement penalty in the circumstances.

Further welcome tax incentives announced for renewable energy sector

Renewable energy is seen as the long term future to the planet’s energy demands as a result of the increasing effects of climate change due to the long term use of fossil fuels. South Africa, in particular, has certain obligations as a party to the United Nations Framework Convention on Climate Change (UNFCCC) to ensure the reduction of greenhouse gas emissions and to incentivise investments in low carbon, clean energy. In addition to the environmental factors, South Africa’s load shedding and insufficient power supply has resulted in a further demand for the greater procurement and use of renewable energy.

Funding for small and medium-sized enterprises

The Venture Capital Company (VCC) Tax Regime was introduced into the Income Tax Act 58 of 1962 (Act) to encourage investment into small and medium-sized enterprises (SMEs) and junior mining companies. Since its inception in 2008 and despite subsequent amendments in 2011, there has been limited take-up in the market, with only a handful of VCC funds having become fully funded and operational.

A step in the right direction: small business corporations regime extended to personal liability companies

Authors: Gigi Nyanin and Mark Morgan. On 8 July 2016, National Treasury (Treasury) released a draft Taxation Laws Amendment Bill (TLAB) and specific draft regulations related thereto, all of which aim to give effect to the various tax proposals announced in the 2016 National Budget Speech. One of these proposals relates to the extension of the small business corporations (SBCs) tax regime to personal liability companies (PLCs).

Successive corporate reorganisation transactions

Authors: Gigi Nyanin and Nicole Paulsen. The South African Revenue Service (SARS) released Binding Private Ruling No 230 (Ruling) on 4 May 2016, which deals with successive corporate reorganisation transactions. The Ruling concerns the tax consequences of the disposal of an asset in terms of an ‘asset-for-share’ transaction as defined in s42(1) of the Income Tax Act, No 58 of 1962 (Act) within 18 months of its acquisition in terms of an ‘intra-group transaction’ as contemplated in s45(1)(a) of the Act. The Ruling concerns the tax consequences of the disposal of an asset in terms of an ‘asset-for-share’ transaction as defined in s42(1) of the Income Tax Act, No 58 of 1962 (Act) within 18 months of its acquisition in terms of an ‘intra-group transaction’ as contemplated in s45(1)(a) of the Act.

Tax Administration – Onus of proof for understatement penalty

As a basic principle, under section 102(1) of the Tax Administration Act 28 of 2011 (the TAA), the onus of proof that an amount is not taxable or that an amount is deductible, rests on the taxpayer, whereas under section 102(2) of the TAA, the onus of proof pertaining to the facts upon which an understatement penalty is imposed, is upon the South African Revenue Service (SARS). Too often, upon the conclusion of investigations or reviews, SARS threatens exorbitant understatement penalties for seemingly innocuous and easily resolvable queries. A good example is the classic turnover/expenditure reconciliation process which could produce, in certain instances, horrendous results for a taxpayer where the calculations are devoid of commercial logic.

Pay Now, Argue Later: Are There Any Exceptions To This Rule?

Author: Alan Lewis (Practitioner in Private Practice). We look at exceptions to SARS’ pay now, argue later rule and how they are being applied At first glance, it appears that the “pay now, argue later-rule” approach, which applies when SARS’ demands payment of all outstanding or assessed taxes, is set in stone. In terms of Section 164 (1) of Tax Administration Act (TAA), a taxpayer’s obligation to pay taxes, and SARS’ right to recover taxes, is not suspended by an objection, appeal, or pending the decision of the Tax Court. This means that, in most cases, a taxpayer’s pleas for an extension of their obligation to pay these taxes falls on deaf ears. 

Prescription rules: When the clock stops ticking

Author: Kyle Mandy (PwC). In order to prevent the five year rule from being abused, there are certain exceptions. Section 99 of the Tax Administration Act regulates the prescription of tax periods. The most important circumstances in which SARS is barred from raising further assessments in relation to a tax period are those relating to the passing of time. As a general rule, SARS is time-barred from raising an assessment in relation to a tax period as follows:

Tax administration: SARS’ constitutional obligations and taxpayers’ rights

Author: Andries Myburgh (Tax Director at ENSafrica). Given recent media coverage of the various Constitutional Court challenges involving government institutions and the Presidency; the perceived power struggle between the Commissioner for the South African Revenue Service (“SARS”) and the Minister of Finance; as well as SARS’ continued pressure to collect revenue in difficult economic times that see corporate taxpayers endure declining revenues and increasing costs; it is useful to remind taxpayers and their shareholders of their constitutional rights and SARS’ constitutional obligations when it performs its functions in administering various taxation legislation. This topic is very complex and, accordingly, what follows is a very broad overview of these issues. Taxpayers and their shareholders are encouraged to obtain specialised legal advice or assistance when confronted with potential investigations or audits by SARS.