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.

Extent of tax fraud unknown – SARS

Author: Amanda Visser (IOL). The South African Revenue Service (SARS) still does not know the full extent of tax evasion, despite its work probing foreign bank accounts held by South African residents. It has been a year since SARS confirmed some account holders had been using their offshore accounts to evade their tax obligations, both locally and internationally. SARS received the damming information through international exchange of information agreements with foreign financial institutions.

Deductability of business trade losses

Where an accident or other mishap results in a taxpayer incurring an involuntary loss, a question can arise as to whether that loss is deductible for income tax purposes in terms of the general deduction formula laid down in section 11(a) of the Income Tax Act  of 1962 (the Act) as having been incurred in the production of income. In Port Elizabeth Electric Tramway Co Ltd v CIR [1936] 8 SATC 13, Watermeyer J expressed the underlying principle by saying that – “all expenses attached to the performance of a business operation bona fide performed for the purpose of earning income are deductible whether such expenses are necessary for its performance or attached to it by chance or are bona fide incurred for the more efficient performance of such operation provided they are so closely connected with it that they may be regarded as part of the cost of performing it.”

Asset-for-share transactions

Section 42 of the Income Tax Act of 1962 (the Act) provides for tax roll-over relief in respect of asset-for-share transactions as defined. Such a transaction generally entails the disposal by a person of an asset to a company, and the issue of new shares by that company to the person, as consideration. One of the requirements is that the nature of the asset must be retained. In other words, if the person held the asset as trading stock, the company must acquire it as trading stock, and if the person held it as a capital asset, the company must acquire it as a capital asset. If the person held the asset as a capital asset, the company may acquire it as trading stock if the person (where the person is a company) and the company do not form part of the same group of companies.

Unilateral extension of prescription in certain specific tax matters

Author: Carmen Gers and Chris de Bruyn (ENSafrica). Section 99 of the Tax Administration Act, 28 of 2011 (“Tax Admin Act”), which regulates prescription in relation to tax assessments, provides that a three-year prescription period applies where the South African Revenue Service (“SARS”) has had a previous opportunity to assess a taxpayer (e.g. income tax) and a five-year prescription period applies in the case of self-assessment (e.g. value added tax and employees’ tax). In an ENSafrica article dated 19 August 2015, we addressed the proposed unilateral extension of prescription by SARS as was provided for in the draft Tax Administration Laws Amendment Bill (“Draft Bill”), a copy of which can be found here. 

Exemption from Security Transfer Tax for collateral

Authors: Magda Snyckers and Kelle Gagné (ENSafrica). For years, the South African securities lending industry has been lobbying for an exemption from securities transfer tax (“STT”) for the outright transfer of listed equity securities as collateral. On 8 January 2016, the Taxation Laws Amendment Act 25 of 2015 was promulgated, which includes the long-awaited introduction to the Securities Transfer Tax Act 25 of 2007 (the “STT Act”) of such an exemption. This is very good news for the South African securities lending market and others, but parties will need to clear a few hurdles before availing themselves of the exemption.