Tag: tax

Source: Tech Financials

The judgment again serves as a cautionary tale where contracts are drafted without an understanding of the tax implications, which can make for a nasty surprise down the line.

On 21 May 2021, the Constitutional Court handed victory to SARS in a decision that may have sweeping ramifications for retailers who operate loyalty plans similar to the Clicks ClubCard loyalty programme.

What was at stake for Clicks and other retailers?
The matter of Clicks Retailers (Pty) Limited v Commissioner for the South African Revenue Service [2021] ZACC 11 involved the application of section 24C of the Income Tax Act No. 58 of 1962 to its loyalty programme.

Section 24C allows taxpayers to defer paying tax on income if it accrues in terms of a contract and that income will also be used to finance future expenditure. The taxpayer may then, in terms of section 24C, claim a deduction in respect of such future expenditure, provided the income and the obligation to incur the future expenditure arise from the same contract.

In this case, Clicks sought to utilise this provision on the basis that its ClubCard loyalty programme creates an obligation to incur future expenditure when cardholders earn loyalty points by making purchases at Clicks stores. The loyalty points awarded translate to a cost that Clicks will incur on the merchandise provided to customers upon redemption of cashback vouchers. In other words, when Clicks makes a sale for which it receives income, an obligation is created at the same time to incur a cost at a future date.

Clicks return 2% of the value of all qualifying purchases to customers and its inability to deduct this cost will have a significant impact on its cash flow. The import of the judgment, however, extends well beyond the interests of Clicks. The court acknowledged that other retailers such as Pick ‘n Pay, Dischem, Ster Kinekor and Exclusive Books, to name a few, will also be impacted by the court’s decision.

The dispute
SARS maintained that Clicks is not eligible for the section 24C deduction, as the income it receives and the obligation to incur the future expenditure arise from separate contracts.

Clicks succeeded in the Tax Court, which concluded that the income-earning contract and that which gives rise to the obligation (the ClubCard contract), are inextricably linked. SARS appealed to the Supreme Court of Appeal (“SCA”). It is important to note that Clicks’ appeal was heard shortly after the SCA handed down judgment in Commissioner, South African Revenue Service v Big G Restaurants (Pty) Ltd [2018] ZASCA 179; 2019 (3) SA 90 (SCA) (“Big G”), which dealt with the same issue.

In Big G, the SCA rejected the notion that section 24C applies where the contracts are “inextricably linked” – the income and the obligation must emanate from the same contract. The SCA, therefore, set aside the Tax Court’s decision. But Big G took the matter to the Constitutional Court, where the interpretation of section 24C was widened, albeit slightly. The Constitutional Court confirmed section 24C may apply where there is more than one contract, provided they are so inextricably linked that they satisfy the requirement of “sameness”.

Big G lost the appeal, but it gave Clicks another bite at the cherry. Clicks filed its appeal to the Constitutional Court, which accepted that there is significant factual overlap and an inextricable link between the ClubCard contract that imposes the obligation to incur a future expenditure and the contract of sale. However, it is not sufficient for the two contracts to be inextricably linked; the link must be of such a nature that they give rise to a “sameness”.

In the present matter, the Constitutional Court found that the link between the two contracts do not render either dependent on the other for its existence; they operate together but they do not meet the requirement of contractual sameness. The upshot is that section 24C does not apply to Click’s ClubCard loyalty programme and the retailer incorrectly claimed these deductions.

Analysis
While the matter does not involve a constitutional question, the Constitutional Court accepted, as with Big G, that Clicks should be granted leave to engage its jurisdiction on the basis that the matter involved an arguable point of law which is of general public importance. The court held that this is evidenced by the divergent approaches taken by the Tax Court and the SCA, and the importance to the general public lies in the potential impact for other operators of such loyalty programmes.

The decision to entertain the matter must be welcomed, as it allowed the court to shed some light on the application of section 24C, by giving definition to the sameness test where two or more contracts are involved.

What does the judgment mean for other retailers?
Other entities that similarly sought to claim the section 24C allowance must carefully study the judgment against the operation of their own loyalty programmes. But with a model that is hardly unique, it is difficult to see how their fate would be any different and it is possible that they might inadvertently find themselves in a position of non-compliance.

The judgment again serves as a cautionary tale where contracts are drafted without an understanding of the tax implications, which can make for a nasty surprise down the line.

 

 

By Hanno Labuschagne for MyBroadband

The South African Revenue Service (SARS) has announced hundreds of vacancies for skilled workers across various fields as part of its plan to modernise its tax compliance systems with new and evolving technologies.

“SARS is preparing for a future where increasingly our work will be informed by data driven insights, self-learning computers, artificial intelligence and interconnectivity of people and devices,” the tax authority stated.

“Mindful of this, we are evolving our workforce to prepare for this exciting changed and changing world of work.”

“Whilst we continue to develop our own employees, we invite talented and passionate executives, who share our strong public service ethos and unmistakeable commitment to improving the material conditions and wellbeing of all South Africans,” SARS said.

These employees would assist in SARS’s mandate of ensuring optimal compliance with tax and customs legislation in South Africa.

Available positions
In addition to 200 South Africans who have recently graduated in the fields of Customs, Chartered Accountancy, Auditing and Legal, SARS is seeking 370 highly skilled leaders and specialists in specialised roles.

The latter includes Information and Technology specialists with the looking aptitudes:

  • Developers (C#, Java, Angular, Web, Data Warehouse [ETL/C#])
  • Database Administrators (SQL, Adabas)
  • Integration Designers
  • Websphere Application Server Specialists
  • SAP Specialists (GRC, FICA, HCM, SRM, Development & Integration)
  • IT Security Engineer
  • Software Engineers
  • Server Engineers (Wintel)

Other fields outside of IT in which vacancies are being offered include:

  • Data Management
  • Audit and Risk
  • Investigations and Auditing with specific focus on Tax Evasion and related matters
  • Legal Specialists and Consultants
  • Governance, Risk, and Compliance Specialists
  • Specialists in Trust Practice, Research and Analysis, Strategy and Advisory, Interpretive Tax Policy & Compliance

Massmart loses R1bn tax refund appeal

By Dineo Faku for IOL

Massmart has suffered yet another blow after the Supreme Court of Appeal ruled that the retailer could not claim nearly R1-billion worth of losses from the taxman for a share incentive scheme implemented 20 years ago for senior managers.

The Supreme Court of Appeal dismissed Massmart’s appeal of a court decision that gave the SA Revenue Service (Sars) a right to disallow R945 million in capital losses claimed by the group.

In his judgment, the appeal Judge Visvanathan Ponnan, said that the unpaid loans plainly constituted an asset in the hands of Massmart.

“There could thus be no loss to speak of. Instead, what Massmart purported to do was to account for the trust’s losses in its books,” Judge Ponnan said. “This despite the fact that at the outset they had received legal advice from Mr Lewis that they could not, by arrangement between them and the trust, change the incidence of capital gains or losses.”

The court action stems from the decision by Sars to block the capital losses claimed by Massmart after the company could not identify the asset disposed of which gave rise to the capital loss.

Massmart, the owners of Game, Makro and Builders Warehouse brands, approached the SCA after the Tax Court of South Africa dismissed the

company’s determination that it had suffered R954m capital losses during its 2007 to 2013 years of assessment by virtue of its dealings with the trust.

In 2000, Massmart resolved to adopt a share incentive scheme for its key management personnel, conducted through the Massmart Holdings Limited Employee Share Trust.

On June 12, 2000, the Trust Deed for the trust was adopted by Massmart, and the first trustees of the trust were an accountant, Mark Franklin, and Stephen Lewis, an attorney at Edward

Nathan and Friedland Incorporated.

Judge Ponnan said in his judgment that Massmart’s witnesses Franklin, former chief executive, Guy Hayward, the assistant to the share trust administrator, Sena Farquhar, had not helped the company’s case.

“Far from supporting Massmart’s case, the evidence of the three witnesses appears to have bolstered Sars’s contention that the notion that the so-called right constituted an asset, is illusory and an ex post facto reconstruction to establish a basis by Massmart for a claim for capital gains,” said Judge Ponnan.

For instance, during his testimony, when asked what was the basis upon which capital losses were claimed previously by Massmart before the appeal, Hayward said: “I have, M’Lord, I have no recollection, I’m not clear on that … I do not know that personally.”

While Franklin accepted that the funds that Massmart had advanced to the trust were recorded as loans, he testified, however, that there was never any intention that the loans would be repaid.

He could also not explain why the loans were recorded as unpaid loans in the financial statements of the trust and the balances were carried forward to each succeeding year.

Franklin had said it was for accounting purposes that funds advanced to the trust were described as loans because there was never any intention that it should be repaid.

“Well, it could have been described otherwise, but it was not a loan in the sense that a loan means that the trust was required to repay it, because the trust had no funds. “So it would never have been able to repay it,” Franklin said. “So in that respect the term loan is probably misleading.”

 

New tax rules you should know about

By Jean du Toit for IOL

The President has given effect to the 2020 tax proposals by signing three tax Acts into law. On 15 January 2021, the President gave his assent to the Rates and Monetary Amounts and Amendment of Revenue Laws Act No. 22 of 2020 (“Rates Act”), the Taxation Laws Amendment Act No. 23 of 2020 (“TLAA”) and the Tax Administration Laws Amendment Act No. 24 of 2020 (“TALAA”). These Acts were promulgated on 20 January 2021.

The Rates Act gives effect to changes in tax rates and certain monetary thresholds, whereas the TLAA and the TALAA contain more profound technical and administrative changes. Highlighted below are 10 key changes taxpayers need to know.

1.Withdrawal of retirement funds upon emigration

From 1 March 2021, taxpayers will no longer be able to access their retirement benefits upon completion of the emigration process through the South African Reserve Bank, commonly referred to as “financial emigration”. After this date, taxpayers will only be able to access their retirement benefits if they can prove they have been non-resident for tax purposes for an uninterrupted period of three years. Importantly, taxpayers can still access their retirement benefits under the old dispensation if they file their financial emigration application on or before 28 February 2021. If you miss this deadline, your retirement benefits will be locked in for a period of at least three years

2.Anti-avoidance rules bolstered for trusts

The anti-avoidance rules aimed at curbing tax-free transfers of wealth to trusts have been strengthened to prevent persisting loopholes. The amendment is directed at structures where individuals subscribe for preference shares with no or a low rate of return in a company owned by a trust connected to the individual. Ongoing changes to these rules again bring into question the thinking that trust structures are tax efficient.

3.Reimbursing employees for business travel expenses

Employees are not subject to tax on an amount paid by their employer as an advance or reimbursement in respect of meals and incidental costs where the employee is obliged to spend a night away from home for business purposes, provided it does not exceed the amount published in the Government Gazette. The TLAA includes an amendment which extends the treatment to expenses incurred on meals and other incidental costs while the employee is away on a day trip. It is important to note that this will only apply if the employer’s policies expressly make provision for and allows such reimbursement.

4.Relief for expats confirmed

Due to the travel restrictions under the Covid-19 pandemic, the days requirement for the foreign employment exemption has been reduced from 183 days in aggregate to 117 days. The relaxation only applies to the aggregate number of days and the requirement that more than 60 of the days spent outside South Africa must have been consecutive remains applicable. This amendment is not a permanent fixture and will only apply to any 12-month period for the years of assessment ending from 29 February 2020 to 28 February 2021.

5.Employer provided bursaries

The Income Tax Act makes provision for the exemption of bona fide bursaries or scholarships granted by employers to employees or their relatives. Historically, employees used this exemption as a mechanism to structure their remuneration package to reduce their tax liability. The exemption will no longer apply where the employee’s remuneration package is subject to an element of salary sacrifice; that is where any portion of their remuneration is reduced or forfeited as a result of the grant of such a bursary or scholarship.

6.Tax treatment of doubtful debts

The doubtful debt allowance provision has been amended to bring parity between taxpayers that apply IFRS 9 and those who do not. Where the taxpayer does not apply IFRS 9, the amount of the allowance is calculated after taking into account any security that is available in respect of that debt.

7.Roll-over amounts claimable under the ETI

The Employment Tax Incentive Act has been amended to encourage tax compliance. The amendment determines that excess ETI claims of employers that are non-compliant from a tax perspective will no longer be rolled over to the end of the PAYE reconciliation period.

8.Estimated assessments

The terms under which Sars may issue an assessment based on an estimate has been expanded. Sars may now issue an estimated assessment where the taxpayer fails to respond to a request from Sars for relevant material. The amendment also bars the taxpayer from lodging an objection against the estimated assessment until the taxpayer responds to the request for material.

9. Sars can withhold your refund if you are under criminal investigation

In terms of the Tax Administration Act, Sars is entitled to withhold refunds owed to taxpayers in certain circumstances. The TALAA expands these provisions to determine that if you are subject to a criminal investigation in terms of the Tax Administration Act, Sars is entitled to withhold any refund it owes you, pending the outcome of the investigation.

10.Criminal sanctions for minor tax offences

Previously, a taxpayer would only be guilty of a criminal offence for non-compliance under the Tax Administration Act if they “wilfully” failed to comply with their tax obligations. With the new amendments, non-compliance will constitute a criminal offence where it is as a result of the taxpayer’s negligence. In other words, intent is no longer required; where you are non-compliant as a result of ignorance of your obligations, you may be found guilty of a criminal offence. These offences are subject to a fine or imprisonment of up to two years.

Final comments

Taxpayers need to speak to their advisors to understand these changes and special heed must be paid to the administrative changes that are now law. The most important change that applies to all taxpayers is the one that criminalises negligent non-compliance. This and other administrative changes mean that taxpayers will be held to a higher standard, which serves as a cue for everyone to take ownership of their tax affairs.

 

By Moira Kloppers for Sakeliga

A new Sakeliga poll shows that lockdown and corruption is pushing businesses’ willingness to pay tax off a cliff.

  • 95% of respondents in a Sakeliga poll this week said that lockdown decreased their willingness to pay tax
  • Nine out of 10 indicated an inclination to delay tax payments for as long as legally possible
  • Six out of 10 would even consider illegally withholding tax if encouraged to do so and if it could end lockdown quicker

Piet le Roux, Sakeliga CEO says that a new normal in tax willingness is rapidly taking hold. “The new normal for tax willingness is going to be much lower than before. We recommend that government and analysts compensate for this trend in their estimations of future fiscal deficits. Businesses are becoming unusually motivated to decrease their tax payments.”

Le Roux says that, from participants’ comments and the state of the country, evidently lockdown, corruption, mismanagement, and generally harmful government policies have created a perfect storm.

“A senior executive at one of South Africa’s iconic companies recently put it to me that he considers paying tax in South Africa a possible violation of the American Foreign Corrupt Practices Act, since the money largely funds harm, mismanagement and corruption. While this interpretation is probably, legally speaking, incorrect, it is morally striking. This moral dilemma is weighing with increasing burden on businesspeople in South Africa: they consider it their duty to serve and fund the common good, yet they increasingly view tax as detrimental to society because of how it funds mismanagement, corruption, and harmful policies,” says Le Roux.

Further highlights from the poll include:

  • 84% said government handled the Covid-19 outbreak badly, 14% were ambivalent, and 2% said government handled it well
  • 61% of businesses suffered big financial losses, 29% significant, with only 10% seeing their income unaffected or increased
  • 94% scored the fairness of government’s Covid-19 relief measures as either “Very bad” (78%) or “Bad” (16%)
  • 883 people participated in the self-selecting poll, conducted among more than 40 000 individuals in Sakeliga’s membership and network
  • Most participants responded via an email link, and around 10% contributed through links accessed on social media

 

SA to miss tax target by over R300bn

By Lameez Omarjee for Fin24

SA will miss its original tax revenue target by over R300-billion this year, said Finance Minister Tito Mboweni.

During the tabling of the special adjustment budget on Wednesday, the minister explained that the country is already behind its 2020/21 tax revenue target by R35.3 billion. As a result, government has revised down the tax revenue target from R1.43 trillion to R1.12 trillion.

National Treasury recorded a R63.3 billion revenue shortfall in the 2019/20 tax year.

“We expect to miss our tax target for this year by over R300 billion,” Mboweni said.

While Mboweni did not announce any tax hikes to make up the shortfall, he said that tax measures of R40 billion would be needed over the next four years. Tax proposals will be announced in the 2021 budget.

Furthermore Treasury will work to find spending adjustments of R230 billion over the next two years.

He also touted the idea of zero-based budgeting. “This means that we will try to reduce all expenditure that we thought we can no longer afford. After all, we are not as rich as we were ten years ago,” Mboweni said.

Analysts had expected the budget to reveal a significant shortfall as a result of the lockdown which restricted economic activity and by extension tax revenue collections.

To cushion the blows of the lockdown on consumers and businesses, government implemented a R500 billion stimulus package, which included R70 billion in tax relief measures. These entailed deferrals on some tax payments such as excise duties, carbon tax and employee taxes. Government also opted to postpone tax proposals for corporate tax hikes and SARS was directed to fast track VAT refunds. Donations to the Solidarity Fund, set up to support the vulnerable in society, were also declared tax deductible.

A ban on cigarette and alcohol sales also had negative implications for excise duty collections. Back in April SARS Commissioner Edward Kieswetter said these restrictions saw a loss of R1.5 billion in excise duties. The minister has also been outspoken about his opposition to the ban on these items.

Bernard Sacks, tax partner at Mazars, noted that certain sectors of the economy had still not been able to restart operations, while some others are operating to a limited extent.

“The difficulties faced by Minister Mboweni are now immeasurably greater. Ways must be found to fund the steep rise in healthcare spending… Social grant spending will show steep increases as the unemployment rate soars even higher,” Sacks said.

By Jasmine Stone for 2oceansvibe

The South African Revenue Services (SARS) will start issuing auto-assessments from 1 August.

On May 5, SARS announced new tax filing seasons and a much more heavy-handed approach to companies who are not submitting their EMP501s and IRP5s timeously.

There will be a renewed focus to ensure that all employers are fully compliant in terms of their filing and payment obligations. In order to achieve higher compliance, SARS will interface with the National Population Register, the Companies Registrar, and the Deeds Office.

SARS has put in place a three-phased approach:

  • Phase 1 – April 15 to May 31 2020 – Employer and third-party filing
  • Phase 2 –June 1 to August 31 2020 – Taxpayers to update their files (Bank Acc, addresses etc) / SARS follow up with non-compliant Employers/Third-party data providers / Auto Assessment of certain taxpayers and possible early filing for some taxpayers
  • Phase 3 – September 1 to January 31 2021 – Tax filing for the remainder

Due dates for the submission of IRP5s and all third-party data (Bank interest certificates, Pension certificates, Medical certificates) is May 31, 2020. SARS has said that third-party data providers who remain wilfully non-compliant will be criminally charged during the period of June 1, 2020 to August 31, 2020.

In the two days prior to lockdown, SARS sent a number of notices warning employers who had filed their previous IRP5’s late, of criminal prosecution.

During the period up to August 31, SARS will auto-assess taxpayers who only have one IRP5. The taxpayers will have an opportunity to accept this auto-assessment, and if not accepted, will be required to submit their returns later.

It seems that SARS will allow certain taxpayers to file their returns before September 1, but only if their employers and third-party data providers are tax compliant. The wording used by SARS is, “individual taxpayers who are required to file but have not been auto-assessed may file early via on-line facilities if their employers & other third-party data providers are fully compliant (which includes no PAYE debt without a proper and secure deferment arrangement)”.

For all other taxpayers, SARS has delayed tax season to only open on September 1, whereas in previous years, it opened on the July 1. SARS will notify taxpayers to whom phase three filing applies.

It seems as though SARS strategy is to allow employees of tax-compliant companies to file early whilst employees of non-tax compliant employers will be required to wait until September 1 before they can file. This seems particularly harsh as this will probably hurt the hardest hit industries the most. This will also be a blow to taxpayers who were counting on submitting their tax returns as soon as possible in order to get their tax refunds.

Tax season deadlines for non-provisional taxpayers will be November 16, 2020 and provisional taxpayers will be January 31, 2021.

The pressure is on employers to ensure that all their returns are submitted and deferred payment arrangements are put in place if they are not able to pay.

The 2020 Budget in a nutshell

By Alec Hogg for BizNews

Finance Minister Tito Mboweni delivered his Budget speech this afternoon.

The highlights are as follows:

  • No tax increases in the coming fiscal year beyond a modest rise in the fuel levy (25c a litre) and the usual increases in booze and smokes (4.4% to 7.5%). Electronic cigarettes (vapes) will be taxed from 2021.
  • There is fractional relief on personal income tax with the R12bn impact of fiscal drag being offered through a R14bn effective drop in inflation-adjusted tax rates. This net benefit of R2bn is to be funded through a carbon tax (R1.75bn) and a plastic bag levy (R250m) which is increased to 25c.
  • The annual contribution to tax-free savings accounts has been increased by R3,000 to R36,000 from March 1.
  • In a blow for tax planning and a mushrooming sector, Section 12I tax incentive relating to industrial policy projects will not be renewed beyond March 2020.

Loopholes and tax incentives for companies have been targeted in various ways:

  • Net interest expenses will be restricted to 30% of earnings after January 2021 in a specific measure to combat tax avoidance by multinationals.
  • Sunset clauses are being adopted on incentives dealing with airport and port assets, rolling stock and loans for residential units.
  • There will be no extension of tax benefits beyond the six Special Economic Zones already approved.
  • More than 18m people now receive social security payments. Their grants will increase by between R20 and R80 per month in the year ahead. A change in the way social security is administered has saved R1bn a year.

Big tax hikes loom

Source: MyBroadband

Finance Minister Tito Mboweni will deliver the 2020 National Budget on 26 February, and both Absa and Efficient Group chief economist Dawie Roodt predict significant tax increases this year.

Speaking to ENCA, Roodt said the state’s debt has reached such high levels that it is now in deep financial trouble.

He said the rate at which the government is borrowing money is increasing much faster than the rate at which the economy is growing.

According to Roodt, South Africa has reached a point where it is extremely difficult to turn the situation around.

To improve the country’s financial situation, the government will either have to cut spending or increase taxes.

With the government’s unwillingness to cut the public sector payroll or state spending, the only other option is to increase taxes.

Roodt said this means that tax hikes are not a possibility, but a certainty. The only question is which taxes will be increased.

Predicted tax increases

While Absa and Roodt agree that South Africans should brace themselves for tax increases this year, they differ on which taxes will be increased.

Roodt said he is sure things like the fuel levy and sin taxes – a tax on items such as alcohol and tobacco – will be increased, but this is a small part of total tax revenue.

He explained that there are only two main taxes which will make a real difference – personal income tax and value-added tax (VAT).

Roodt predicted that, in addition to various indirect taxes, there will be an increase in personal income tax rather than VAT.

Absa, in comparison, predicted that the government will increase the VAT rate by one percentage point to 16%.

The bank agreed with Roodt that the government is likely to lift indirect taxes in an effort to earn more revenue.

This year’s budget will be harsh

Economist Mike Schussler said the government is currently spending R25 billion more than its tax revenue every month.

The situation deteriorated rapidly over the past two years, declining from a R15-billion deficit to a R25-billion deficit.

“This year’s budget is going to be harsh,” said Schussler. “Other years were tough, but this year will be ‘eina’.”

Expat tax is coming

By Pedro Gonçalves for International Investment

South Africans working abroad will face higher taxes as they will only be exempt from paying tax on the first R1m they earn elsewhere, under the amendments to the Income Tax Act which are due to come into effect from March.

The country’s Treasury said that additional tax measures were under consideration to raise an extra R10-billion in fiscal 2021. “Given the fiscal position we find ourselves in, all tax options need to be on the table,” said Chris Axelson, chief director for economic tax analysis in the Treasury.”

Under the changes, the totality of an expat’s income earned abroad would be subject to tax in South Africa.

The expat exemption only relates to South Africans who are tax resident, so the obvious answer would be to cease tax residency of South Africa”
“What this means is that, if they remain tax resident, they will be taxed fully on any allowances and benefits, as if they were just a normal employee working in South Africa,” Jean du Toit, editor of “Expatriate Tax – South African Citizens Working Abroad and Foreigners in South Africa”, told local news outlet Fin24.

One of the unforeseen consequences from what has been dubbed the ‘expat tax’ could be that South Africans abroad may simply decide to sever their ties with South Africa and cease their tax residency.

“Unfortunately, the solutions for the expat in relation to this amendment are now becoming very limited. The expat exemption only relates to South Africans who are tax resident, so the obvious answer would be to cease tax residency of South Africa,” du Toit added.

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