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MARCH 2013 – ISSUE 162
Exit charge on ceasing to be resident
Vesting of dividend rights in exempt
Tax liability and recovery
Voluntary disclosure programme
SARS and business rescue
. Share issue not for cash
Professional membership fees
Interpretation notes, media releases
Transferring a business to a Trust
2172. Share re-purchases
(Published March 2013)
Judgment was handed down on 16 November 2012 by the Tax Court in the case of A Ltd v
Commissioner for the South African Revenue Service
. The facts were as follows:
A Ltd was a company listed on the JSE. An employee share incentive scheme was being
implemented at the time (2000-2001) in terms of which shares in A Ltd would have had to be
delivered to employees in future. In order to hedge against price increases, a wholly-owned
subsidiary, ALS, was set up to acquire and hold shares in A Ltd. ALS subsequently acquired
A Ltd shares in the open market through an interest-free loan from another wholly-owned
subsidiary of A Ltd. ALS was not authorised to own more than 10% of A Ltd shares. ALS
transferred the A Ltd shares to the employee share incentive trust in 2003.
A Ltd had substantial amounts of surplus cash, and would have even more if A Ltd were to
sell off a subsidiary, PTS. It was proposed during 2001-2002 that, unless better investments
could be found, PTS should be sold and a 'repurchase' of A Ltd shares be implemented as this
would be good for A Ltd’s headline earnings per share.
It was understood that ALS would continue to be used to buy A Ltd shares. ALS then bought
A Ltd shares in 2003. In order for ALS not to exceed the 10% limit, A Ltd bought back some
of its own shares from ALS in 2004 and they were cancelled. ALS bought more A Ltd shares
in 2004 and shortly thereafter A Ltd bought back more of its own shares from ALS.
Some A Ltd shares held by ALS was also disposed of by ALS to third parties in respect of
other transactions. There were also further purchases by ALS of A Ltd shares in late 2004
All A Ltd shares held by ALS were sold back to A Ltd by the beginning of 2006 and
cancelled. This was done in respect of a particular transaction that required a third party to
acquire 100% of the issued shares of A Ltd.
In respect of each repurchase of A Ltd shares by A Ltd from ALS, the consideration payable
in respect of the repurchase constituting a dividend, exemption from secondary tax on
companies (STC) was claimed by A Ltd in terms of section 64B(5)(f
) of the Income Tax Act,
No 58 of 1962 (the Act). The section provides exemption in respect of dividends declared to
group companies. If A Ltd directly bought back its own shares in the open market, and not
through ALS, no exemption would have been available and A Ltd would have been liable for
The Commissioner issued an assessment for STC to A Ltd in respect of the repurchases that
took place during 2004 and 2006. The Commissioner’s case was that the exemptions were
claimed pursuant to a transaction, operation or scheme contemplated in section 103(1) of the
Act (as it read at the time) in order to avoid paying STC.
In respect of the application of section 103, the court noted that the following had to be
Transaction: a transaction, operation or scheme was engaged in;
Effect: the effect is avoidance or postponement of a tax liability;
Abnormality: the transaction was entered into or carried out in a manner which would not
normally be employed for bona fide
business purposes other than obtaining a tax benefit, or
created rights or obligations that would not normally be created between persons dealing at
arm’s length under a transaction of the nature of the transaction in question; and
Purpose: the transaction was entered into or carried out solely or mainly for the purpose of
In respect of the 'transaction' requirement, the court noted that the onus is on the
Commissioner to establish this. In this case there were several transactions, but the
Commissioner had to establish that they were steps in a single scheme of transactions or a
unitary scheme. The court said that there must be sufficient unity between the earlier steps
and the later steps so that it can be said that there is a unitary scheme, keeping in mind the
'ultimate objective'. The court found that, on the objective facts, there was no such unitary
scheme. This was so because ALS had initially been established for hedging purposes in
respect of the employee share incentive scheme and not in respect of selling the shares to A
Also, even though the repurchase programme envisaged that ALS would purchase A Ltd
shares, it was not contemplated that the shares would be on-sold to A Ltd and cancelled. This
was only done once ALS neared its 10% limit. Also, the last batch of A Ltd shares were only
sold to A Ltd and cancelled to accommodate the transaction with the third party.
The court noted that as a prerequisite or jurisdictional requirement for applying section 103 of
the Act, the Commissioner must be satisfied that the various requirements are met, including
the 'transaction' or 'scheme' requirement. The Commissioner must "stand and fall by his
reasons for exercising the power", such as the reasons for being satisfied that the required
elements were present. If the Commissioner contends in his statement of grounds of
assessment that he was satisfied that there was a particular scheme, he cannot later at the
hearing stage argue that he was satisfied that there was some other alternative scheme. In this
case the Commissioner had always contended that he was satisfied that there was a scheme
and that the scheme was the intentional interposition of ALS so that ALS could buy the
shares in A Ltd and then A Ltd could buy those shares from ALS, a group company, and
In other words, the Commissioner saw the scheme as consisting of two steps, being the
purchase of A Ltd shares by ALS and the subsequent purchase by A Ltd of those shares, and
those two steps constituted one scheme. The Commissioner could not at the hearing stage
accept that the first step may have been commercially justifiable, and proceed to attack only
the second step, because that had never been his case. The Commissioner could not now
argue that he was satisfied that there was a scheme that was different from the scheme that it
The court noted that failure to meet the 'transaction' requirement is sufficient cause for
section 103 of the Act not to be applicable, but in any event also considered the other
In respect of establishing the 'effect' requirement relating to the avoidance of a tax liability,
the onus is on the Commissioner – the Commissioner must prove that the 'scheme' had the
'effect' of avoiding STC. The court noted that A Ltd was under no obligation to buy its own
shares and it would only do so if it made good commercial sense to repurchase its own
shares. Also, the question had to be asked whether, if A Ltd had to directly purchase the
shares in the open market and pay STC, it would have done so despite having to pay STC.
The Commissioner did not show that that was the case.
In respect of the 'abnormality' requirement, the court noted that the onus is on the
Commissioner. Abnormality has to be established objectively and comparisons may be made
with persons in similar positions engaging in similar transactions, keeping in mind that what
is abnormal as between unrelated parties may be normal as between parties with an existing
special relationship. In this case it was established, partly by expert witnesses, that it is quite
common for companies to hold treasury shares and to repurchase those shares.
In respect of the 'purpose' requirement, the court noted that the onus is on the taxpayer and
that the subjective purpose of the parties is a question of fact. The purpose must at least be
the dominant purpose over any other purpose. On the evidence the sole or main purpose for
entering into the transactions was not to obtain a tax benefit. The purpose was to make an
investment into A Ltd’s own shares by holding them in treasury and not to sell them
immediately to A Ltd and to cancel them. The sale of the shares to A Ltd only happened in
circumstances that were not foreseen, such as accommodating the transaction with the third
Accordingly the taxpayer was successful and the appeal was upheld.
Cliffe Dekker Hofmeyr
ITA: Section 103(1)
2173. Vesting of dividend rights in exempt body
(Published March 2013)
In a Binding Private Ruling issued on 25 October 2012 (BPR 125), SARS was asked to rule
primarily on the application of paragraph 80(1) read with paragraph 63 of the Eighth
Schedule to the Income Tax Act, No 58 of 1962 (the Act).
A resident discretionary trust (Trust) holds 100% of the equity shares in a resident private
company (Company). One of the beneficiaries of the trust is recognised as a traditional
community under section 2 of the Traditional Leadership and Governance Framework Act,
No 41 of 2003 and is exempt from normal tax under section 10(1)(t
)(vii) of the Act. It was
proposed that the trustees of the trust will, in the exercise of their discretion, distribute
dividend rights in respect of the shares held in the Company to the traditional community.
Essentially, paragraph 80(1) of the Eighth Schedule to the Act provides that where a capital
gain is determined in respect of the vesting by a trust of an asset in a trust beneficiary (other
than the Government, a provincial administration, organisation, person or club contemplated
in paragraph 62(a
) to (e
)) who is a resident, that gain: •
must be disregarded for the purpose of calculating the aggregate capital gain or
aggregate capital loss of the trust; and
must be taken into account for the purpose of calculating the aggregate capital gain or
aggregate capital loss of the beneficiary to whom that asset was so disposed of.
It will be noted that paragraph 80 is peremptory in that it provides that any capital gain must
be disregarded by the trust and must
be taken into account by the resident beneficiary to
whom that asset was disposed. Paragraph 80(1) thus recognises the conduit principle and
determines that the gain which arises flows through the trust and is taken into account in the
Any capital gain arising on the vesting of an asset by a trust in the Government, a provincial
administration, organisation, person or club contemplated in paragraph 62(a
) to (e
) cannot be
attributed to such bodies under paragraph 80(1) since they are specifically excluded from its
ambit. As a consequence, capital gains arising from a vesting in such bodies remain in the
The traditional community, although constituting a body exempt from tax under
)(vii) of the Act, does not fall within the ambit of the bodies contemplated in
) to (e
). As a result, any capital gain arising from the distribution of the
dividend rights must be taken into account in determining the aggregate capital gain or loss of
the traditional community and must be disregarded by the Trust.
However, the enquiry does not end there. Paragraph 63 of the Eighth Schedule provides that a
person must disregard any capital gain or loss in respect of the disposal of an asset where any
amount constituting gross income of whatever nature would be exempt from tax in terms of
section 10 of the Act were it to be received by or to accrue to that person. It is not entirely
clear whether paragraph 63 applies only to disposals by the exempt body or whether, for
instance, it also applies to a disposal by the trustees of a trust by way of the vesting of an
Applying the provisions of paragraph 80(1) read with paragraph 63 of the Eighth Schedule,
SARS confirmed in BPR 125 that the vesting of the dividend rights by the Trust in the
traditional community will not be subject to capital gains tax in the hands of the Trust, in
terms of paragraph 80(1) of the Eighth Schedule. Furthermore, in terms of paragraph 63 of
the Eighth Schedule, any capital gains arising from the vesting of the dividend rights will not
give rise to any capital gains tax liability in the hands of the traditional community, given that
its receipts and accruals are exempt from normal tax under section 10(1)(t
)(vii). In other
words, it is implicit in the ruling that paragraph 63 also applies to capital gains arising
pursuant to the attribution thereof in accordance with paragraph 80(1) of the Eighth Schedule
to the Act and is not limited to disposals by the exempt body.
SARS also confirmed that, as the traditional community will be regarded as the 'beneficial
owner' of any dividends declared by the Company, the Company will not be required to
withhold dividends tax from any dividends paid to the Trust, provided that the Trust has by
the date determined by the Company, or by the date of payment of the dividend, submitted a
declaration to the Company that the dividend amount is exempt from dividends tax under
) as well as a written undertaking to inform the Company should the traditional
community cease to be the beneficial owner of the dividend.
BPR125 serves as a useful illustration of the interplay between paragraph 80(1) and
paragraph 63 of the Eighth Schedule to the Act. Although paragraph 80(1) is peremptory and
provides that any capital must be taken into account by the beneficiary, in circumstances
where the beneficiary is exempt from tax in terms of section 10 of the Act, no capital gains
tax will be payable by either the trust or the beneficiary.
It should be appreciated that the statutory conduit principle as contained in paragraph 80(1)
gives way to the special attribution rules contained in paragraphs 68 (attribution of capital
gain to spouse), 69 (attribution of capital gain to parent of minor child), 71 (attribution of
capital gain subject to conditional vesting) and 72 (attribution of capital gain vesting in a
person who is not a resident) of the Eighth Schedule which, if applicable, will override
Cliffe Dekker Hofmeyr
ITA: Sections 10(1) and 64F(g)
Eighth schedule: Paragraphs 62; 63; 68 69; 71; 72 and 80
2174. SARS and business rescue
(Published March 2013)
An important judgment was handed down in the Western Cape High Court on 31 October
2012. This was in the matter of CSARS v Mark Beginsel NO and Others
. Readers will
no doubt be aware of SARS' statutory preference legislated in Section 99 of the Insolvency
Act, No 24 of 1936 (the Insolvency Act). The fact that SARS is a preferred creditor in a
winding up has often gutted the estate leaving pennies for the concurrent creditors.
Accordingly, it was with interest that the legal community waited to see what SARS' position
would be where a company sought business rescue in terms of section 128 of the Companies
Act, No 71 of 2008 (the Companies Act). In this matter that came before Fourie J, the
business rescue practitioners had sought an extension for the submission of their proposed
business rescue plan, but at the meeting of creditors SARS had insisted that it should be
ranked as a preferent creditor and that the business rescue practitioners should accordingly
take into account SARS' attitude based on the additional weight it would carry as a creditor.
The business rescue practitioners refused to do this saying that they had taken senior
counsel's advice to the effect that the classification of creditors in the Insolvency Act was not
applicable to Chapter 6 of the Companies Act, which contains no statutory preferences such
as are found in section 96 to section 102 of the Insolvency Act.
SARS applied to Court for an order declaring unlawful and invalid the decision taken at the
meeting of creditors to approve the business rescue plan. Moreover, it sought to interdict the
business rescue practitioners from distributing any monies of the company pursuant to the
business rescue plan. Following from this the Court was asked to declare that the business
rescue practitioners must put the company into liquidation.
The legal issue really turned on the interpretation of section 145(4)(a
) and (b
) of the
Companies Act, which stipulates that in respect of any decision, secured or unsecured
creditors would have a voting interest equal to the value of their claim in the company, and
that a concurrent creditor who would be subordinated in a liquidation has a voting interest
independently and expertly appraised equal to the amount which they could reasonably
SARS' argument was that its status as a preferent creditor under section 99 of the Insolvency
Act meant that its claims would rank ahead of ordinary concurrent creditors under
section 103 of the Insolvency Act. As such it is an unsecured creditor in section 145 and had
a voting interest at the creditors meeting equal to the value of its claim against the company.
SARS' argument was that ordinary concurrent creditors under section 103 are included in the
class of concurrent creditors who would be subordinated in a liquidation. Essentially SARS
was looking to be considered to be a preferent unsecured creditor under section 145(4)(a
the Companies Act, and to have a voting interest equal to the value of its claim. The
remainder of the non-preferent concurrent creditors, would have been disenfranchised
concurrent creditors in terms of the provisions of section 145(4)(b
). In such an event the vote
of SARS would have carried the day and the business rescue plan would have been rejected
at the meeting, contrary to the wishes of the majority of the company's creditors.
The judge's view was that SARS' construction was not only contrary to the ordinary
grammatical meaning of the words, but also led to an illogical result that failed to balance the
rights and interests of the relevant stakeholders. The judge's view was that no statutory
preferences were created in Chapter 6 of the Companies Act, and if the intention of the
legislature had been to confer such a preference on SARS in business rescue proceedings, it
would have made such intention clear. No trace of such an intention could be found in the
Act. On the reading of the judge, and having regard to the purpose of business rescue
proceedings, only one conclusion was justified, namely that SARS is not by virtue of its
preferent status in section 99 of the Insolvency Act a preferent creditor for the purposes of
business rescue proceedings. The judge referred to Mars' Law of Insolvency and to
Henochsberg on the Companies Act, concerning the notion of a preferent creditor whose
claim is not secured, but who ranks above the claims of concurrent creditors. These are those
who have the statutory preferences in section 96 to section 102 of the Insolvency Act. The
judge considered at length the argument put forward by Henochsberg which was the same
interpretation as that put forward by SARS. The judge noted that Henochsberg accepted that
this interpretation that a concurrent creditor who would be subordinated in a liquidation in
terms of section 145(4)(b
) of the Companies Act would be grossly unfair to the concurrent
creditors. Fourie J said that in his mind the ordinary meaning of the concept of subordination
meant that a creditor's claim that was subject to subordination or back ranking agreement,
was what is being considered in sub-paragraph (b
). The judge said that in his view
section 144(2) of the Companies Act did not lend any support for the interpretation contended
Accordingly, SARS would enjoy no greater voting interest than the other concurrent creditors
of the company with the result that there is no basis on which to impeach the voting
procedure that had been followed by the business rescue practitioners.
Cliffe Dekker Hofmeyr
Insolvency Act: Sections 96 and 103
Companies Act: Sections 144 and 145
2175. Share issue not for cash
(Published March 2013)
The Companies Act No. 71 of 2008 (the Companies Act) provides the possibility for a
company to issue shares where the consideration for the shares will not be received
immediately. This will be limited to certain situations, namely where the consideration will
be in the form of a negotiable instrument, or in the form of an agreement for future services,
future benefits or future payment by the subscribing party. At the time that these shares are
issued, the consideration in respect of those shares will remain outstanding. The company
will also be required to immediately issue shares in these circumstances, but the shares are
required to be transferred to a third party to be held in trust for later transfer thereof to the
subscribing party in accordance with a trust agreement.
Should a company issue shares in these circumstances, i.e. where the shares are held in trust,
and should the applicable trust deed not provide otherwise, the Companies Act provides a
suspend the voting and appraisal rights attaching to the shares until the shares are no
suspend the pre-emptive rights attaching to the shares held in trust until, and to the
extent that, the instrument is negotiable or the subscribing party has fulfilled its
limit the subscribing party’s entitlement to the benefit of any dividends payable in
respect of the shares held in trust until, and to the extent that, the instrument is
negotiable or the subscribing party has fulfilled its obligations under the agreement.
The key question is then who is liable for the dividends tax in respect of dividends declared
On review of the wording of relevant sections in the Companies Act, it is submitted that
dividends would need to be paid either to the subscribing party (notwithstanding that the
subscriber may not have fulfilled all his obligations) or the third party qua
in a fiduciary capacity) in relation to the relevant shares. This is so because limitations of
rights under the default position (mentioned above) do not absolve the company from
distributing dividends on such shares in the interim.
Under the default position in the Companies Act, the company is only obliged to pay the
dividend to the subscribing party ‘to the extent that’ the instrument has become negotiable or
the subscribing party has fulfilled its obligations under the agreement. It seems clear that
should the company distribute a dividend in respect of the shares held in trust and the
instrument is partly negotiable or the subscribing party has partly fulfilled its obligations
under the agreement, the dividends are payable to the subscribing party notwithstanding that
the shares have not yet been transferred to the subscribing party by the third party. The third
party is not obliged to transfer the shares to the subscribing party until the instrument is fully
negotiable or the subscribing party has fulfilled all its obligations under the agreement,
although it ‘may’ do so to the extent that the instrument has become negotiable or the
subscribing party has fulfilled its obligations under the agreement. It follows that to the extent
that the instrument is not negotiable or the subscribing party has not fulfilled its obligations
under the agreement, the dividend is payable to the third party holding the shares in trust qua
shareholder. It does not seem to us that the default position has the effect of requiring the
company to only distribute a dividend in respect of the share to the extent that the instrument
is negotiable or the subscribing party has fulfilled its obligations under the agreement.
Should the instrument be partly negotiable, or the subscribing party has fulfilled part of its
obligations under the agreement, the subscribing party is accordingly entitled to payment of
the dividend. The subscribing party will be regarded as the “beneficial owner” of the
dividends payable or creditable to it for dividends tax purposes as it is the subscribing party
who by operation of law is ‘entitled to the benefit of the dividend attaching (the) share’ –
albeit only in respect of part of the dividend distributed in respect of the shares held in trust.
It is not a requirement that the beneficial owner be the owner of the relevant shares, merely
that it be entitled to the benefit of the dividend attaching to the share. On the basis that it is
the subscribing party that is the beneficial owner of the dividends distributed in respect of the
relevant shares, it is open to the subscribing party to claim exemption from the dividends
tax or to be taxed at a reduced rate of dividends tax if it meets the relevant requirements for
By contrast, it is submitted that dividend distributions made in respect of shares held in trust
where the instrument is not yet negotiable by the company or the subscribing party has not
yet fulfilled its obligations under the agreement, are payable to the third party qua
shareholder for the future benefit of the subscribing party. On the basis that the dividends
payable in respect of shares held in trust must be paid to the third party holding those shares
in trust to the extent that the instrument is not negotiable or the subscribing party has not
fulfilled its obligations under the agreement, it is submitted that the third party qua
shareholder would be ‘entitled to the benefit of the dividend attaching to the share’ as
contemplated in the definition of ‘beneficial owner’ and accordingly be the ‘beneficial
owner’ of the dividends distributed in relation to the shares held in trust. It follows that
dividends tax will be payable by the third party in respect of dividends payable to it and it is
the third party qua
‘beneficial owner’ that would need to claim exemption or the benefit of a
A further issue arises where the third party qua
shareholder in respect of the shares held in
trust has derived dividend income in respect of the shares and has not distributed the dividend
income to the subscribing party, but the shares are now required to be returned to the
company for cancellation as the instrument is dishonoured or the subscribing party has not
fulfilled its obligations under the agreement. It would seem to us that absent anything to the
contrary in the trust agreement, the dividend income should similarly be returned to the
company, probably on the basis that to distribute the dividend income to the subscribing party
(or any other party for that matter) in these circumstances would amount to unjustified
Ernst & Young
Companies Act: Sections 40(5); 40(6)
ITA: Section 64E; 64F; 64D and 64G
2176. Sports agents
(Published March 2013)
A sports agent by nature is a mediator or ‘go-between’ between the player, and in most
instances, a sports club. In general, the agent provides a service, for example, the recruitment
of a player, who will enter into a legal relationship with a club. Often a club will pay a sports
agent a recruitment fee, which will normally include a signing-on fee that has to be paid over
by the sports agent to the player. In this scenario, the question arises whether such signing-on
fee is subject to employees’ tax (PAYE) and if so, where the obligation to withhold PAYE
The correct withholding of PAYE is an important consideration in any business. One of the
challenges in ensuring that one’s PAYE obligations are met, is the wide application of the
definition of “remuneration” in the Fourth Schedule to the Income Tax Act No. 58 of 1962
(the Act). “Remuneration” is defined as follows:
“means any amount of income which is paid or is payable to any person by way of any
salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, pension,
superannuation allowance, retiring allowance or stipend, whether in cash or otherwise and
whether or not in respect of services rendered, .”
Signing-on fees by their nature are usually paid as an “enticement” to a player to contract
with a club. We are of the opinion that the signing-on fee will be regarded as remuneration as
defined above and will be taxable at the player’s marginal rate of tax. Since “remuneration”
as defined in the Fourth Schedule to the Act will then be paid over by the sports agent to the
player, could it be said that the agent is liable to withhold PAYE? It seems that this is not the
case when one considers the definition of an “employer” as set out in the Fourth Schedule to
“means any person (excluding any person not acting as a principal), . who pays or is liable
to pay to any person any amount by way of remuneration .
The Oxford English Dictionary defines a “principal” as “a person who is the chief actor in .
” or “a person for whom another acts as agent or deputy
”. In our view, in the
scenario set out above the sports agent is not acting as a principal in relation to the payment
of the signing-on fee and is therefore explicitly excluded from the definition of an
“employer” as defined in the Fourth Schedule to the Act.
The sports club will, however, fall within the ambit of the definition, and as an employer, will
therefore be liable to deduct or withhold employees’ tax in accordance with paragraph 2(1) of
the Fourth Schedule to the Act, from the signing-on fee and any other subsequent
remuneration paid to the player. It is therefore important that this signing on fee is separated
from the agent’s commission. The agent’s commission should not be subject to PAYE
because an agent is typically carrying on a trade independently from the sports club and, as
such, the commission paid to the agent is excluded from remuneration as defined. There are
also other liabilities flowing from being regarded as an “employer” as defined in the Act,
such as the obligation to make contributions to the Unemployment Insurance Fund and to
Therefore, the sports club, as employer, remains liable to withhold employees’ tax from the
signing-on fee. Should the club fail to do so, the club’s only defence would be available in
terms of paragraph 5(2) of the Fourth Schedule to the Act. This paragraph provides that
where an employer has failed to deduct or withhold PAYE and the Commissioner is satisfied
that the failure was not due to an intent to postpone payment of the tax or to evade the
employer’s obligations, the Commissioner may, if he is satisfied that there is a reasonable
prospect of ultimately recovering the tax from the employee, absolve the employer from his
It is therefore important that when clubs sign on new players, the signing-on fee is
contractually separated from the agent’s fee and that the obligation to withhold PAYE is
Edward Nathan Sonnenbergs
ITA: Paragraphs 2(1) and 5(2) of the Fourth schedule
Definition of remuneration in the Fourth schedule
2177. Transferring a business to a Trust
(Published March 2013)
The decision of the Supreme Court of Appeal in Raath v Nel
 (5) SA 273 (SCA)
illustrates a hard truth that transactions that are entered into have consequences that need to
be understood before committing to agreements.
So, for example, it is hazardous to counsel a person to form a trust and to shift assets into the
trust without considering the consequences of doing so. And, as the decision in Raath v Nel
shows, a step of this kind can be particularly hazardous where the assets that an entrepreneur
transfers into the trust are shares in the company which he uses as the business structure to
carry on his trade. For the consequence of doing so is that beneficial ownership of the
business then passes out of the hands of the individual founder of the business and into the
hands of the trust by virtue of its shareholding.
The transfer of personal assets into a trust is not a mere illusion
It may be tempting to think that forming a company or trust to carry on a business is just
sleight-of hand, that the documents with signatures and official stamps are just legal fairy-
floss, and that, in reality, everything will carry on as before. Farlam JA warned of this
misconception in Nieuwoudt NO v Vrystaat Mielies (Edms) Bpk
 (3) SA 486 (SCA)
when (giving the judgment of the court) he referred to the trust there in issue as being –
‘typical of a newer type of trust where someone, probably for estate planning purposes or to
escape the constraints imposed by corporate law, forms a trust while everything else remains
The truth of the matter is that, if the parties truly intend that ‘everything shall remain as
before’, then the trust is a sham (for there will have been no genuine intent on the part of the
founder to divest himself of the assets) and will be treated by the law as such. On the other
hand, if the trust is genuine, then it is not the case that ‘everything shall remain as before’
– if the founder has transferred assets to the trust, then they are no longer his assets, and any
gains or losses in respect of the assets accrue to the trust.
High Court regarded transfer of assets into a trust as “artificial”
When Raath v Nel
was being heard in the High Court, the judge himself fell into the trap of
regarding the formation of the trust and the transfer of assets as being “artificial” and
therefore to be disregarded. His judgment was overturned by the Supreme Court of Appeal
‘The trial judge regarded as artificial the approach that the loss to the trust is not in reality
that of the respondent. He found that the business and the trust were in reality built up by the
respondent for his old age and for posterity and that he had lawful control over the trust. The
fact that no dividends had been declared and paid out . had no relevance when the bigger
The decision in Raath v Nel
The facts in Raath v Nel
were that Nel was a successful businessman and the driving force
behind his numerous successful business ventures. On professional advice and with a view to
reducing estate duty on his death he sold all his assets, including his shares and loan account
in a company of which he was the sole shareholder, to a discretionary family trust in which
he was one of three trustees. He was not a capital beneficiary of the trust but was a potential
Nel was, however, in effective control of the trust in that he had the right to remove a trustee
and appoint another in the latter’s place.
As a result of a failed surgical procedure which saw him hospitalised for a lengthy period, he
neglected the business and its profits declined. Nel sued the anaesthetist in the surgical team
for the loss he had allegedly suffered in his personal capacity from those declining profits.
At issue in the litigation was whether Nel had suffered a loss in his personal capacity or
whether the loss had been suffered by the trust which held the shares in the company which
In reversing the decision of the High Court, the Supreme Court of Appeal said (at para  of
the judgment) that although a trust is not a legal persona
in its own right, “the separateness of
Given that the business was now owned by the company whose shares were held by the trust,
and given that Nel’s reduced managerial input into the business had impacted negatively on
the company’s profits, the question was whether Nel had personally suffered any loss.
The court held (at para ) that Nel had adduced no evidence of any loss suffered by him in
his personal capacity; that the court below had erred in upholding his claim for damages in
the absence of proof that he had personally suffered any loss as from the date that the trust
had been established, and held (at para ) that Nel was entitled to damages for loss of
earnings in his personal capacity only for the period prior to the formation of the trust.
Although the decision in Raath v Nel
was not concerned with the tax implications of what
had occurred, the judgment holds an implicit tax planning lesson, for it is clear that any losses
suffered by the trust could not, for tax purposes, have been claimed by Nel in his personal
2178. Exit charge on ceasing to be resident
(Published March 2013)
There has been considerable debate in tax publications concerning a recent decision in the
The Minister’s statement
On 9 May 2012, the Minister of Finance issued a public statement in response to a judgment
of the Supreme Court of Appeal in the matter of Commissioner for the South African Revenue
Service v Tradehold Ltd
 73 SATC 1848.
The crux of the statement was that persons who are resident in the Republic should be liable
to pay tax on the gains that accumulate in respect of assets held by them, and that taxpayers
who cease to be resident in the Republic are deemed to have disposed of their assets, except
those with a close connection with the Republic, on the day prior to ceasing to be a resident
(the so-called “exit charge”). However, the Supreme Court of Appeal had found that the
deemed disposal was subject to the provisions of the double tax agreement between South
Africa and Luxembourg (DTA), and this disturbed the balance that the law intended.
“National Treasury and SARS are studying the judgment and, if necessary, I will propose
amendments to further clarify that a DTA does not apply to deemed or actual disposals while
a taxpayer is resident in South Africa. Measures such as the immediate termination of a
taxpayer’s year of assessment on the day before becoming non-resident, as is the practice in
Canada, are being explored. In order to maintain stability in the tax system, I will propose
that any amendment take effect from 8 May 2012.”
The question is, did the SCA really upset the stability of the tax system, or was there already
a problem with the balance that SARS could not overcome?
How it all began
The saga started on 2 July 2002. Tradehold Ltd, a SA incorporated company, moved its place
of effective management from the Republic to Luxembourg. It retained an office in the
Republic and one of the directors continued to operate on its behalf from this office. The
effect was that Tradehold Limited (under the law as then promulgated) was a resident of the
Republic under the domestic rules, by reason of its incorporation, and a resident of
Luxembourg under Luxembourg law and in terms of the DTA, by reason of its place of
effective management. The Income Tax Act No. 58 of 1962 (the Act) at that time provided a
primary trigger for the exit charge in this circumstance. The exit charge became payable in
a controlled foreign company ceasing to be a controlled foreign company, or
a person who is a resident ceasing to be regarded as a resident by reason of the
application of a valid double taxation agreement.
The resident was deemed to have disposed of its assets (subject to limited exceptions) on the
day prior to the date on which the event occurred. Tradehold Limited, having become a
resident of Luxembourg by reason of the DTA, was deemed to have disposed of all of its
assets on 1 July 2002, while it was still a resident, with the exception of immovable property
in the Republic and assets attributable to a permanent establishment in the Republic.
SARS did not levy the exit charge as of 1 July 2002 (the date of the deemed disposal). Its
only reason for not imposing the tax must have been that it conceded that the office in the
Republic constituted a permanent establishment and that the assets of Tradehold Ltd were
indeed attributable to that permanent establishment.
Closing the office
On 29 January 2003, the resident director left South Africa and Tradehold Ltd ceased to have
an office in the Republic. The Act at the time contained a provision that operated as a
secondary trigger to catch the assets that were excluded from the primary trigger. This
“.an asset of a person who is not a resident, which asset . ceases to be an asset of that
person’s permanent establishment in the Republic otherwise than by way of a disposal
contemplated in paragraph 11…”
Tradehold Ltd’s assets ceased to be an asset of a permanent establishment in the Republic
when the director left the Republic. However, Tradehold Ltd still qualified as a resident under
the law as then promulgated, by reason of its SA incorporation. Since it was not “a person
who is not a resident” at that time, no exit charge could be imposed.
Herein lay SARS’ problem. The secondary trigger event for the exit charge, where the assets
ceased to have a close connection to the Republic, applied only in the case of a person who is
not a resident. Unlike the primary trigger event, which extended to include the situation of a
resident being treated as a person who is not a resident in terms of a DTA, this secondary
Had the extension been in place, the DTA between SA and Luxembourg would have given
SARS the right to tax the deemed disposal. However, since no tax was imposed under the
domestic law, no right to tax could be imported via the DTA.
Tradehold Ltd therefore escaped taxation at this point owing to a lacuna – an omission in the
Dual residence ceased
Tradehold Ltd continued to hold dual residence until amending legislation was promulgated
In terms of the amendment, it was no longer possible for any person to enjoy dual residence if
such person was regarded as exclusively resident in a country with which SA has a DTA. If
the person is exclusively a resident of another state in terms of the DTA, that person is not
tax-resident in the Republic in terms of the Act.
Tradehold Ltd was exclusively a resident of Luxembourg under the DTA and therefore lost
its SA tax-residence the moment the amendment came into effect. SARS therefore sought to
levy an exit charge on the basis that Tradehold Ltd was deemed to have disposed of its assets
on the day prior to ceasing to be a resident.
Tradehold Ltd claimed immunity from taxation in respect of the capital gain arising on the
deemed disposal. It claimed that, with effect from 2 July 2002, it was a resident of
Luxembourg. At 21 February 2003, it had no permanent establishment in the Republic.
Therefore, in terms of the DTA, any capital gain on the alienation of movable assets was
SARS contended that the deemed disposal was not an alienation as contemplated in the DTA
and that the DTA did not preclude it from taxing the capital gain arising from a notional
The SCA decision
The SCA found that the DTA did indeed extend to events that were deemed to be disposals
under the domestic law, and that SARS did not have a right to tax the capital gain.
It is evident that the perceived balance referred to by the Minister was lacking at the time the
relevant events took place. There was inconsistent identification of the persons liable to the
exit charge if the primary trigger and the secondary trigger are compared.
It may therefore be concluded that the decision of the SCA did not disturb the stability of the
tax system: rather, it exposed the imbalance that existed at that time.
The stability was in place at 8 May 2012
If the media release is examined in the light of the law as promulgated at 8 May 2012, it is
plain that the stability to which the Minister referred was in place at 8 May 2012.
A company can no longer have dual residence where the competing jurisdiction is a country
Further, where a company ceases to be a resident, it is deemed to have disposed of its assets
on the day prior to ceasing to be a resident (i.e. at a time when it is a resident of the Republic
only and subject to tax in the Republic). It cannot, in those circumstances, claim immunity
under the DTA, as it is not entitled to immunity on the date of the deemed disposal.
Is the law really broken and in need of a fix?
A rational examination of the reasons for SARS’ lack of success in the SCA and of the law as
currently promulgated clearly establishes that there was a lacuna at the time the events
leading to the Tradehold Ltd dispute occurred, but that the subsequent amendments that took
effect on 21 February 2003 had effectively addressed the position by removing the possibility
of dual residence status where there is a DTA.
The present exit charge legislation has been repealed and replaced with new legislation with
retroactive effect to 8 May 2012 by means of a new section 9H of the Act. One of its
provisions is that, in addition to the person being deemed to have disposed of its assets on the
day prior to ceasing to be a resident, the person’s year of assessment is also deemed to have
terminated on that day. It is difficult to see how this additional fiction relating to the year of
assessment affects or improves the existing stability.
The proposed new provisions, which are significantly more voluminous than the existing
provisions, cannot paper over the fact that the existing law is quite adequate and does not
ITA: Section 9H
2179. Tax liability and recovery
(Published March 2013)
We analyse below the manner in which the Tax Administration Act No. 28 of 2011 (TAA)
will apply to the recovery of tax by the South African Revenue Service (SARS) from a
1. Tax Administration Act
The relevant provisions of the TAA to the recovery of tax are as follows:
1.1 Chapter 10 of the TAA deals with tax liability and payment; and
1.2 Chapter 11 of the TAA deals with recovery of tax.
2. Tax liability and payment in relation to a company
2.1 Chapter 10 of the TAA sets out which persons are liable to tax, and the capacity in which
they may be liable for tax debts. A distinction is made between a person who is
originally chargeable to tax and the person's representative, a withholding agent, and a
2.2. Specifically, section 151 of the TAA defines a "taxpayer”, for the purposes of the TAA,
2.2.5. a person who is the subject of a request to provide assistance under an
2.3. In certain circumstances (set out in section 161 of the TAA) a senior SARS official may
require security from a taxpayer to safeguard the collection of tax by SARS. However, it
does not appear that section 161 of the TAA is applicable to the current enquiry.
2.4. Section 154(1) of the TAA sets out the liability of a representative taxpayer and states
2.4.1. the income to which the representative taxpayer is entitled;
2.4.2. moneys to which the representative taxpayer is entitled or has the management
2.4.3. transactions concluded by the representative taxpayer; and
2.4.4. anything else done by the representative taxpayer, in such capacity as a
representative taxpayer, such person is:
2.4.5. subject to the duties, responsibilities and liabilities of the taxpayer represented;
2.4.6. entitled to any abatement, deduction, exemption, right to set off a loss, and
other items that could be claimed by the person represented; and
2.4.7. liable for the amount of tax specified by a tax Act.
2.5. Section 155(1) governs the personal liability of a representative taxpayer and states that a
representative taxpayer will be personally liable for tax payable in the representative
taxpayer’s representative capacity, if, while it remains unpaid:
2.5.1. the representative taxpayer alienates, charges or disposes of amounts in respect of
2.5.2. the representative taxpayer disposes of or parts with funds or moneys, which are
in the representative taxpayer’s possession or come to the representative taxpayer
after the tax is payable, if the tax could legally have been paid from or out of the
2.6. A "representative taxpayer" is defined in section 153(1)(a
) of the TAA, for the purposes
of the TAA, as a person who is responsible for paying the tax liability of another person
as an agent, other than as a withholding agent, and includes a person who is a
representative taxpayer in terms of the Income Tax Act No. 58 of 1962 ( the Act).
2.7. As from 1 October 2012, a "representative taxpayer" is defined in section 1 of the Act as
a natural person who resides in the Republic and, in respect of the income of a company,
2.8. Therefore, for the purposes of the TAA, a public officer of a company is a representative
taxpayer and is thus liable for the amount of tax specified by a tax Act in relation to the
company of which that person is a public officer, within the parameters of sections 154
2.9. In terms of section 156 of the TAA, "withholding agent" means a person who must,
under a tax Act, withhold an amount of tax and pay it to SARS.
2.10. Section 157(1) of the TAA states that a withholding agent is personally liable for an
2.10.1. withheld and not paid to SARS; or
2.10.2. which should have been withheld under a tax Act but was not so withheld.
Responsible third party
2.11. A "responsible third party" is defined in section 158 of the TAA as a person who
becomes otherwise liable for the tax liability of another person, other than as a
representative taxpayer or as a withholding agent, whether in a personal or
2.12. In terms of section 159 of the TAA, a third party is personally liable to the extent
2.13. Part D of Chapter 11 of the TAA provides that the following persons constitute liable
2.13.1. a third party appointed to satisfy tax debts;
2.13.5. a person assisting in dissipation of assets.
Third party appointed to satisfy tax debts
2.14. In terms of section 179(1) of the Act, a senior SARS official may by notice to a person
who holds or owes or will hold or owe any money, including a pension, salary, wage or
other remuneration, for or to a taxpayer, require the person to pay the money to SARS
in satisfaction of the taxpayer’s tax debt.
2.15. A person receiving the notice must pay the money in accordance with the notice and, if
the person parts with the money contrary to the notice, section 179(3) stipulates that
such person is personally liable for the money.
2.16. A person is personally liable in terms of section 180 of the TAA for any tax debt of the
taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay
2.16.1. the person controls or is regularly involved in the management of the overall
2.16.2. a senior SARS official is satisfied that the person is or was negligent or
fraudulent in respect of the payment of the tax debts of the taxpayer.
2.17. Where a company is wound up other than by means of an involuntary liquidation
without having satisfied its tax debt, including its liability as a responsible third party,
withholding agent, or a representative taxpayer, employer or vendor, section 181 of the
2.18. Section 181(2) of the TAA states that the persons who are shareholders of the company
within one year prior to its winding up are jointly and severally liable to pay the unpaid
2.18.1. they receive assets of the company in their capacity as shareholders within
2.18.2. the tax debt existed at the time of the receipt of the assets or would have existed
had the company complied with its obligations under a tax Act.
2.19. However, in terms of section 181(3) of the TAA, the liability of the shareholders is
secondary to the liability of the company.
2.20. Section 181(4) of the TAA states that persons who are liable for the tax of a company
under section 181 may avail themselves of any rights against SARS as would have been
2.21. In terms of section 181(5) of the TAA, section 181 does not apply in respect of a
‘‘listed company’’ within the meaning of the Act, or a shareholder of such a listed
2.22. A "listed company" is defined in section 1 of the Act to mean a company where its
shares or depository receipts in respect of its shares are listed on:
2.22.1. an exchange as defined in section 1 of the Securities Services Act, 2004 (Act
No. 36 of 2004), and licensed under section 10 of that Act; or
2.22.2. a stock exchange in a country other than the Republic which has been
recognised by the Minister as contemplated in paragraph (c) of the definition
of "recognised exchange" in paragraph 1 of the Eighth Schedule to the Act.
2.23. In terms of section 181(1), a "transferee" is a person who receives an asset from a
taxpayer who is a connected person in relation to the transferee without consideration
or for consideration below the fair market value of the asset.
2.24. Such a transferee is liable for the tax debt of the taxpayer (section 181(1)), but only in
relation to an asset received by the transferee within one year before SARS notifies the
transferee of liability under section 181 (section 181(3)).
2.25. Section 182(2) stipulates that a transferee is liable for the tax debt of a taxpayer to the
2.25.1. the tax debt that existed at the time of the receipt of the asset or would have
existed had the transferor complied with the transferor’s obligations under a
2.25.2. the fair market value of the asset at the time of the transfer, reduced by the
fair market value of any consideration paid, at the time of payment.
Person assisting in dissipation of assets
2.26. Section 183 provides that, if a person knowingly assists in dissipating a taxpayer’s
assets in order to obstruct the collection of a tax debt of the taxpayer, such person is
jointly and severally liable with the taxpayer for the tax debt to the extent that the
person’s assistance reduces the assets available to pay the taxpayer’s tax debt.
3. Recovery of tax
3.1. In terms of section 169(1) of the TAA, an amount of tax due or payable in terms of a
tax Act is a tax debt due to SARS for the benefit of the National Revenue Fund.
3.2. Section 169(2) of the TAA states that a tax debt due to SARS is recoverable by SARS
under Chapter 11, and sets out the persons from whom SARS may recover such
3.2.1. in the case of a representative taxpayer who is not personally liable under section
155 of the TAA, any assets belonging to the person represented which are in the
representative taxpayer’s possession or under his or her management or control;
3.2.2. in any other case, any assets of the taxpayer.
3.3. SARS is regarded as the creditor for the purposes of a tax debt due, in terms of section
3.4. Section 171 of the TAA prevents proceedings for recovery of a tax debt from being
initiated after the expiration of 15 years from the date of the assessment of tax.
3.5. In terms of section 184(1) of the TAA, SARS has the same powers of recovery against
the assets of a person referred to in Chapter 11 (i.e. a responsible third party) as SARS
has against the assets of the taxpayer, and that person has the same rights and remedies
as the taxpayer has against such powers of recovery.
3.6. SARS must provide a responsible third party with an opportunity to make
3.6.1. before the responsible third party is held liable for the tax debt of the taxpayer
in terms of section 180, 181, 182 or 183 of the TAA, if this will not place the
3.6.2. as soon as practical after the responsible third party is held liable for the tax
debt of the taxpayer in terms of section 180, 181, 182 or 183 of the TAA.
Application for civil judgment for recovery of tax
3.7. In terms of section 172(1) of the TAA, if a person fails to pay tax when it is payable,
SARS may, after giving the person at least 10 business days’ notice, file with the clerk or
registrar of a competent court a certified statement setting out the amount of tax payable
3.8. SARS is not required to give the taxpayer prior notice if SARS is satisfied that giving
notice would prejudice the collection of the tax (section 172(3)).
3.9. Section 173 of the Act permits the certified statement to be filed with the clerk of the
Magistrate’s Court that has jurisdiction over the taxpayer named in the statement.
3.10. In terms of section 174 of the TAA, a certified statement filed under section 172 of the
TAA must be treated as a civil judgment lawfully given in the relevant court in favour
of SARS for a liquid debt for the amount specified in the statement.
Institution of sequestration, liquidation or winding-up proceedings
3.11. SARS is granted authority to institute proceedings for the sequestration, liquidation or
winding-up of a person for a tax debt, in terms of section 177 of the TAA.
3.12. Section 177(2) permits SARS to institute such proceedings whether or not the person is
present in the Republic or has assets in the Republic.
3.13. If the tax debt is subject to an objection or appeal under Chapter 9 of the TAA, or a
further appeal against a decision by the tax court under section 129 of the TAA, section
177(3) of the TAA stipulates that the proceedings may only be instituted with leave of
the court before which the proceedings are brought.
3.14. In terms of section 178 of the TAA, a proceeding referred to in section 177 of the TAA
may be instituted in any competent court and that court may grant an order that SARS
requests, whether or not the taxpayer is registered, resident or domiciled, or has a place
of effective management or a place of business, in the Republic.
Collection of tax debt from third parties
3.15. As noted above, section 159 of the TAA states that a third party is personally liable to
the extent described in Part D of Chapter 11, which Part sets out those persons who
3.16. Section 184 of the TAA deals with the recovery of tax debts from these responsible
third parties and grants SARS the same powers of recovery against the assets of a
person referred to in Part D of Chapter 11 of the TAA as SARS has against the assets of
the taxpayer. Section 184 also grants the responsible third party the same rights and
remedies as the taxpayer against such powers of recovery by SARS.
3.17. A senior SARS official may, in accordance with section 197, authorise the permanent
"write off" of an amount of a tax debt, to the extent that the tax debt is irrecoverable at
law as referred to in section 198 of the TAA, or if the debt is "compromised" in terms
3.18. In terms of section 198 of the TAA, a tax debt is "irrecoverable at law" if:
3.18.1. it cannot be recovered by action and judgment of a court; or
3.18.2. it is owed by a "debtor" that is in liquidation or sequestration and it represents
the balance outstanding after notice is given by the liquidator or trustee that no
further dividend is to be paid or a final dividend has been paid to the creditors
3.19. Section 198(2) states that a tax debt is not irrecoverable at law if SARS has not first
explored action against or recovery from the "assets" of the persons who may be liable
for the debt under Part D of Chapter 11.
4. Commencement date
4.1. In terms of Government Gazette Notice No. 51 contained in Government Gazette No.
35687 dated 14 September 2012, the TAA commenced on 1 October 2012 save for
4.2. None of the excluded provisions fall within Chapters 10 or 11 of the TAA.
Edward Nathan Sonnenbergs
Tax Administration Act: Chapters 10 and 11
Income Tax Act
Securities Services Act
2180. Voluntary disclosure programme
(Published March 2013)
In addition to the administrative non-compliance penalties, the Tax Administration Act No.
28 of 2011 (the TAA) imposes understatement penalties; the TAA does however provide
taxpayers with a voluntary disclosure programme (VDP) which can provide relief from
penalties in certain circumstances. These penalties have replaced SARS’ previous open-
ended discretion to impose ‘additional tax’ of up to 200%. This new penalty may only be
imposed where there is prejudice to the fiscus as a result of the taxpayer’s conduct in
reporting, i.e. if there is a shortfall between the correct amount of tax that should have been
reported, and the amount reported by the taxpayer. Further, if this shortfall exists, it must
is guilty of a default in rendering the return;
filed a return but omitted an item from that return; or
filed a return in which an incorrect statement was made.
The penalty is calculated by means of a table, found in section 223 of the TAA, and set out
The penalty amount is effectively calculated based on the type of behaviour or the degree of
culpability involved. Should a taxpayer fall into more than one category (e.g. ‘no reasonable
grounds for tax position taken’ and
‘gross negligence’) the highest applicable penalty
percentage will be used (‘gross negligence’ in the example used).
The first point for SARS would be to determine the applicable behaviour per the table
(Column 2). A quick look at each of the behaviours:
Substantial understatement -
A prejudice to SARS or the fiscus that exceeds the greater of
5% of the tax properly charged or refundable, or R1 million.
It is interesting to note that the penalty imposed on the understatement of provisional tax in
paragraph 20 of the Fourth Schedule to the Income Tax Act No 58 of 1962 (the Act) has not
yet been repealed, but is now simply set at 20% ( previously ‘additional tax’ of up to 20%
was payable at SARS’s discretion). A taxpayer could therefore now face a 20% penalty for
the understatement of provisional tax, as well as an additional penalty of up to 50% for
understatement on their final return (if guilty of one of the offences mentioned above - e.g.
Reasonable care not taken in completing return –
This term is not defined in the TAA,
therefore the ordinary meaning applies, i.e. the degree of care that a reasonable person in the
same circumstances would take to fulfil their tax obligations.
No reasonable grounds for the tax position -
Understatement due to a taxpayer’s
interpretation of the application of a tax act without a reasonably arguable position. The
purpose here is not to levy a penalty where SARS disagrees with the taxpayer’s position, but
rather to ascertain whether that taxpayer has assumed a position unreasonably.
- Similar to the test for reasonable care, this in an objective test also based
on what a reasonable person would foresee as conduct creating a high risk of tax shortfall,
Intentional tax evasion –
This is the most severe penalty for understatement, and could exist
where a taxpayer makes a false statement in a return or even where a return is not filed.
Practically, it may be difficult to distinguish from an act of gross negligence.
Voluntary Disclosure Programme
The most talked about portion of this chapter is the VDP, which establishes a permanent
framework for voluntary disclosure and applies to all taxes included in the TAA. A defaulting
taxpayer will be granted relief under this section, provided certain requirements are met. The
relief will not be extended to interest, penalties imposed for late returns or late payments of
tax, but will include understatement penalties. SARS will also not pursue criminal
prosecution should relief be granted. A person will not qualify for VDP relief if it will result
in a refund being payable. The availability of relief for taxpayer is dependent upon the
After notification of an audit or investigation -
A person in this position may not qualify
for the VDP, unless a senior SARS official directs otherwise.
No-name applications -
Oddly there is provision for an anonymous application for relief,
which involves SARS issuing a non-binding private ruling on the applicant’s eligibility. The
application need only contain sufficient information for the ruling to be issued. Therefore,
should the confidential application not be successful, that person need not bother applying for
Underlying default -
A default must exist which led to the taxpayer not being assessed for,
or not paying, the correct amount of tax or receiving an incorrect refund.
Should a person qualify for relief, an agreement will be concluded between the qualifying
person and the senior SARS official, detailing (amongst others) the amount of tax and
understatement penalty payable. Upon conclusion of this agreement, an assessment will be
issued. Understandably, no right of objection or appeal lies against this assessment. Lastly, if
a material factor was not disclosed, relief may be withdrawn and criminal prosecution
pursued. Objection and appeal may be made against a decision to withdraw relief.
While the relief provided in the TAA may not be as beneficial as previous programmes, it
affords potential relief to those defaulting taxpayers who may have previously missed out.
Ernst & Young
Tax Administration Act: Section 223
2181. Canadian ruling
(Published March 2013)
On 18 October 2012, after a lengthy battle, the decision in Canada’s first transfer pricing
case, Queen V GlaxoSmithKline Inc
., was released. The Supreme Court of Canada (SCC)
handed a defeat to the Canada Revenue Agency (CRA) ruling that it was appropriate for the
Canadian subsidiary of GlaxoSmithKline to pay more for the pharmaceutical ingredient than
a generic drug maker would pay due to the terms in its license agreement with
The transfer pricing case involved the determination of the price paid by a Canadian
subsidiary of GlaxoSmithKline, Glaxo Canada, to a related non-resident company for an
active pharmaceutical ingredient, Randitine. This is a key ingredient used in the manufacture
of a brand-name prescription drug, Zantac, which Glaxo Canada manufacturers and sells as
their primary business. In terms of a license agreement requiring Glaxo Canada to purchase
the ingredient from a specific related party, Glaxo Canada was paying a price five times in
excess of the price generally charged by generic manufacturers.
Reasonable or not
Due to the fact that the price paid by Glaxo Canada to the related subsidiary was significantly
higher than the amount charged in the Canadian generic market, the CRA reassessed Glaxo
Canada by increasing its taxable income on the basis that the amount it had paid for the
purchase of Randitine was “not reasonable in the circumstances” and did not reflect an arm’s
length consideration for transfer pricing purposes.
Glaxo Canada’s position was that the price paid was reasonable in the circumstances if
viewed in conjunction with the license agreement and its primary business to sell Zantac. In
order to market and sell Zantac, Glaxo Canada was, in terms of the license agreement with
their UK parent company, required to purchase Randitine from its related party company.
Purchasing the Randitine drug from a generic manufacturer, at the lower price, would have
resulted in Glaxo Canada losing their right to sell Zantac and a host of other patented and
trademarked products belonging to the Glaxo Group.
The case was first heard in the Tax Court of Canada (TCC), where the position of the CRA
was affirmed and it was decided that in establishing the “reasonableness” of the amount paid,
the license agreement was irrelevant as “one must look merely at the transaction in issue and
not the surrounding circumstances, other transactions or other realities”.
On appeal to the Federal Court of Appeal (FCA), the basis of the reassessments by the CRA
was rejected. Further, the FCA concluded that in determining the arm’s length transfer price,
it was necessary to interpret the words “reasonable in the circumstances” in accordance with
the reasonable business person test. The relevant circumstances in the GlaxoSmithKline case,
according to the FCA, included in the business reality that in order to continue their business
of selling the Zantac drug, Glaxo Canada was bound, in terms of a license agreement to
purchase Randitine from the related party supplier at the stipulated price.
The decision of the TCC was not overturned by the FCA, but instead, the matter was then
returned to the TCC for redetermination, in the light of the FCA’s interpretation of the
“reasonableness” of the circumstances.
Due to the CRA having appealed this ruling, the case was referred to the Canada Supreme
Court of Appeal where it was heard in January 2012.
The final decision
The decision in the case was finally released on 18 October 2012. In a unanimous decision,
the Supreme Court held that factors such as license agreements should be considered when
determining an arm’s length price. The court considered the price paid on the basis that Glaxo
Canada was buying Randitine for the purposes of selling Zantac. SCC Justice Marshall
Rothstein wrote on behalf of the bench, “Considering the license and supply agreements
together offers a realistic picture of the profits of Glaxo Canada… It cannot be irrelevant that
Glaxo Canada’s function was primarily as a secondary manufacturer and marketer. It did not
originate new products and the intellectual property rights associated with them. Nor did it
undertake the investment and risk involved with originating new products. Nor did it have the
other risks and investment costs which Glaxo Group undertook under the license agreement.
The prices paid by Glaxo Canada to their related party constituted a payment for a bundle of
at least some rights and benefits under the license agreement and product under the supply
In terms of this decision, it appears that in establishing an arm’s length price, one must
interpret the words “reasonableness of the circumstances” widely and establish a price
reflecting the overall business reality of the transaction.
It must however be noted that despite the SCC supporting the position of GlaxoSmithKline in
relation to the interpretation of the “reasonableness” of the circumstances, the SCC declined
GlaxoSmithKline’s request to determine whether the actual price paid to the related party
manufacturer for Randitine was fair. This issue has been referred back to the TCC for
ITA: Section 31
VALUE -ADDED TAX
2182. Professional membership fees
(Published March 2013)
The issue of professional membership fees and the deductibility of input tax by an employer,
that settle these fees on an employee’s behalf, has always been a contentious issue.
SAICA recently informed its members that a VAT ruling pertaining to the deductibility of
input tax on its membership fees will not be renewed and that there would be no amendment
to the Value-Added Tax Act, No 89 of 1991 (the VAT Act) to address the incongruity. The
ruling will be withdrawn with effect from 1 January 2013.
The failure by SARS to renew the VAT Ruling, coupled with no corresponding amendment
to the VAT Act does not necessarily mean that input tax may not be deducted in relation to
professional fees. It does however now becomes solely an interpretation issue, which
inevitably will result in more disputes with SARS.
The deductibility of input tax on professional membership fees goes beyond SAICA and
would affect any other payment made by an employer to a professional body on behalf of the
employee, for example, payments made by legal firms to the various Law Societies.
As a basic principle, an input tax deduction is granted to a vendor where goods or services
have been acquired wholly for the purpose of consumption, use or supply in the course of
making taxable supplies. Where a vendor has acquired goods or services partly in the course
of making taxable supplies, it would be limited to claiming input tax only to the extent that
There appears to be an anomaly under the VAT Act, where a sole practitioner can enjoy the
benefit of claiming an input tax deduction as opposed to an incorporated entity, which, as the
employer, pays the professional membership fees on behalf of its employees. As a result of
this anomaly and its potential impact from a VAT perspective, SAICA obtained a ruling from
SARS under section 72 of the VAT Act seeking an interim measure on the recoverability of
VAT on professional membership fees by other business forms while SARS considered
SAICA's request that the VAT Act be amended to clarify the position.
In practice, SARS generally allows for input tax to be claimed by an employer to the extent
that its employee is reimbursed for the expenditure incurred in relation to professional
membership fees, provided a valid tax invoice in the name of employer has been issued and
such obligation is contained in the employment contract of the employee. This practice is in
line with a similar approach followed by the New Zealand tax authorities relating to
professional membership fees. However, the withdrawal of the SAICA ruling exposes an
apparent differentiation between sole practitioners who practice for their own account and
other business forms that pay the professional membership fees on behalf of their employees.
It is understandable that, from a sole practitioner's point of view, the payment of the relevant
professional membership fees can be argued to be services acquired directly in the course and
furtherance of his enterprise. In the case of an employer, which is an incorporated entity, the
question may be asked as to which party (i.e. the employer or employee) is the real or actual
recipient of the supply. Furthermore, is there any difference between business related
expenditure reimbursed by an employer such as travel and mobile phone and the
reimbursement of professional fees which, by its very nature, is ultimately for the benefit of
the employer and directly related to the employer's enterprise? The test may boil down to
whether or not a taxable fringe benefit arises for the employee, it being argued that in the
absence of a fringe benefit, there is no private or domestic element to the expense.
Employers paying professional membership fees on behalf of employees are required to
review their current VAT policies for compliance in light of recent events. As stated above,
the withdrawal of the SAICA ruling does not mean that there will be an automatic denial of
input tax by SARS, however, it may create an environment for renewed disputes on this
Cliffe Dekker Hofmeyr
VAT Act: Section 72
SARS AND NEWS
2183. Interpretation notes, media releases and other documents
Readers are reminded that the latest developments at SARS can be accessed on their website
Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI
Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees.
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
used as a basis for action without further research or specialist advice. The views of the
authors are not necessarily the views of SAICA.
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