The Taxation Laws Amendment Act introduced a new section into the Income Tax Act which deals with value mismatches involving the transfer of assets in exchange for the issue of shares. Essentially, the section applies where the value of the asset given in consideration for the shares issued is different from what it would have been had the transaction been between independent persons acting at arm's length.
The South African Revenue Service recently published Binding Private Ruling 310, which deals with the tax treatment of customer loyalty programmes. The applicant was a local company supplying goods and services in the course of trade, which had – in order to enhance its business – proposed to implement a customer loyalty programme through which participating customers could benefit.
The focus of a recent Supreme Court of Appeal case was not the merits of the dispute between the parties, but rather the correctness of the procedure that the taxpayer had followed in its appeal to the Tax Court. The Supreme Court of Appeal held that determining whether the Tax Court's decision was appealable was contingent on whether the decision was one contemplated in the Tax Administration Act.
The South African Revenue Service (SARS) recently published a binding private ruling on the application of Paragraph 38(1) of the Eighth Schedule to the Income Tax Act to the distribution of shares by a trust to beneficiaries in the context of an employee share scheme. Although SARS stated that Paragraph 38(1) was not applicable to the trust's distribution of shares, the matter is complicated by the interaction between Section 8C of the act and the rules contained in the Eighth Schedule.
The Tax Court recently considered whether the South African Revenue Service was correct to levy an understatement penalty on a taxpayer that had incorrectly claimed the deductible allowance of enhancement income provided for by the Income Tax Act. The taxpayer submitted that the understatement had arisen as a result of a bona fide inadvertent error, as contemplated in Section 222(1) of the Tax Administration Act, and that it therefore did not have to pay a penalty.
The High Court (Gauteng Division, Pretoria) recently found that the South African Revenue Service (SARS) erred in its finding that the applicant had failed to pay certain amounts of value added tax and incorrectly levied penalties and interest. On the facts, it appeared that the applicant had made payment as required, and that SARS had incorrectly allocated the amount paid. As such, the court granted an order to the effect that SARS must pay interest on the amounts paid by the applicant under protest.
The South African Revenue Service (SARS) recently issued a binding private ruling regarding the donations-related tax consequences of a proposed transaction which would introduce a black economic empowerment (BEE) shareholder into a group of companies in order to benefit all of the entities within the group in respect of their BEE scorecard ratings and increase the profitability of the applicant.
Following the recent release of the first Draft Taxation Laws Amendment Bill 2016 and its explanatory memorandum, the proposed amendments applicable to trusts and employee share schemes have received significant attention. However, another proposed amendment with potentially far-reaching consequences has received little attention, but could result in a taxpayer paying tax at one rate one day and another the next, as determined by the minister of finance.
In today's tough economic climate, it is common for companies to consider alternative funding arrangements to fund their activities, which minimises cash-flow obligations to third parties in the short term, while also ensuring compliance with relevant tax legislation. One option to consider is the creation of a loan account by a debtor in favour of a creditor. The Tax Court recently had to address this issue and, specifically, the consequences of Section 22(3) of the Value Added Tax Act.
A taxpayer that is aggrieved by an assessment or decision of the South African Revenue Service may object to the assessment or decision, but must do so within 30 business days of the date of the assessment. This period may be extended by no more than 21 business days, unless 'exceptional circumstances' caused the delay. The South Gauteng Tax Court recently considered the meaning of this term.
In Commissioner for SARS v Sunflower Distributors CC the High Court recently decided whether a provisional preservation order granted in favour of the South African Revenue Service (SARS) should be made final. The judgment provides some comfort to taxpayers facing such an application by SARS, since it shows that the court will not easily grant such an order and that SARS must provide full disclosure of all the relevant facts.
In 2015 the Davis Tax Committee released its first report on estate duty for public comment. The committee was tasked with considering the use of trusts as vehicles employed by taxpayers to divest themselves of their assets during their lifetime, thereby saving estate duty on their death. Its report contained a number of disconcerting recommendations with regard to the taxation of trusts.
Having been the subject of various discussion papers since 2011, the introduction of a carbon tax in South Africa is becoming a reality with the release of a draft carbon tax bill earlier this month. It has been clear since at least 2013 that South Africa would opt for a carbon tax in order to price carbon, as opposed to an emissions-trading scheme. The draft bill sets out the mechanics of the carbon tax.
The South African Revenue Service (SARS) recently released a binding private ruling dealing with the merger of two controlled foreign companies (CFCs) for purposes of Section 9D of the Income Tax Act, which provides relief from any exit charge that could arise as a result of one of the merging parties ceasing to be a CFC. SARS ruled that the proposed transaction would constitute an amalgamation transaction, thus triggering relief.
The Supreme Court of Appeal (SCA) recently ruled in a case concerning the determination of the valuation date value of shares for the purposes of calculating the capital gain or loss that arose on their disposal. The SCA accepted the South African Revenue Service's claim that the forecast amounts used in the taxpayer's valuation of the shares were unreasonably optimistic.
The South African Revenue Service recently released a binding private ruling which considered the meaning of 'controlled group company' and 'equity share' in terms of Section 12J of the Income Tax Act. The ruling concerned an approved venture capital company in terms of Section 12J which proposed to incorporate a new company with two other resident companies.
The provisions of various tax laws allow for rollover relief where a share block company disposes of its property to a shareholder which has rights over that property. A recent ruling by the South African Revenue Service clearly illustrates the application of these provisions, and clarifies that they apply to undivided interests in sectional title units owned by share block companies.
The South African Revenue Service recently ruled on a case in which an applicant (a natural person) held 100% of the equity shares in a resident operating company. The operating company in turn owned 100% of the shares in a dormant resident company (the co-applicant). The parties wished to introduce a black-owned company as a shareholder in the operating company in order to improve its Black Economic Empowerment (BEE) credentials.
In order to introduce the legislative amendments required to implement the tax proposals announced in the 2015 National Budget, the National Treasury recently published a new bill for public comment. One proposal relates to greater tax transparency and the automatic exchange of information between tax administrations in various jurisdictions in order to counter cross-border tax evasion.
Section 42 of the Income Tax Act provides for tax rollover relief in respect of asset-for-share transactions. Such a transaction generally occurs when a party disposes of an asset to a company, which then issues new shares to the party in return. To prevent abuse, Section 42(5) contains an anti-avoidance provision. The recently released draft Taxation Laws Amendment Bill proposes the clarification of this provision.
The Tax Court recently issued its ruling in ABC (Pty) Ltd v Commissioner for South African Revenue Service. Although the case concerned secondary tax on companies, which has been replaced by dividends tax, it is interesting to examine how the court dealt with the interpretation of an exemption provision.
The Tax Court has delivered its judgment in a matter concerning, among other things, an application by the South African Revenue Service to amend its statement of grounds of assessment. Rule 13 of the previous rules of the Tax Court and Rule 35 of the new rules allow parties to amend their pleadings on application. However, the issue is the extent to which the courts will allow for such amendments.
In AB (Pty) Ltd v The Commissioner for the South African Revenue Service, the Tax Court ruled that the South African Revenue Service (SARS) failed to provide sufficient evidence to support the penalty that it had imposed on a value added tax vendor. As the penalty was a discretionary decision, the court held that it was allowed to re-hear the entire matter, and the onus was on SARS to lead evidence afresh.
The draft Taxation Laws Amendment Bill 2014, which the National Treasury and the Revenue Service released earlier this year, proposed changes to the secondary transfer pricing adjustment mechanism. Following criticisms raised by interested parties, the Treasury and the Revenue Service have released a response document to the comments received from the public, as well as a final bill.
The South African Revenue Service has released a briefing note on the draft regulations for VAT vendor registration. It contains amendments meant to ease the compliance burden of prospective VAT vendors by widening the acceptable range of income and allowing for activities that only make taxable supplies after a period of time.
In a recent decision the Supreme Court of Appeal emphasised that, for the sake of fairness and proper court procedure, the South African Revenue Service must clearly state the grounds on which any assessments against a taxpayer are based, and make clear to the taxpayer what it is disputing, so that the taxpayer knows what is required from it to discharge the burden of proof.
The South African Revenue Service recently released a binding class ruling (BCR 44) dealing with the tax consequences of the repurchase of certain non-redeemable, non-participating preference shares. The applicant was a public company which issued preference shares to certain persons. It decided to repurchase the shares at their current market value. The purchase price would be less than the issue price.
The Western Cape High Court recently decided a dispute regarding legal professional privilege between three companies in a group of companies and the South African Revenue Service. The court confirmed that the rationale for privilege is that the confidentiality that it bestows is necessary for the proper functioning of the legal system, and that fee notes are not by their nature subject to legal professional privilege.
Under the Income Tax Act, a foreign dividend will be tax exempt to the extent that it is paid in respect of a listed share and does not constitute a distribution of an asset in specie. The issue that arises in these circumstances is whether the preferred securities constitute listed shares and whether the South African investors would be able to rely on the foreign dividend exemption in respect of dividends paid on them.
The South African Revenue Service (SARS) recently released Binding Private Ruling 149, which dealt with the disposal by a local company of foreign assets in exchange for shares in a foreign company. SARS had to rule whether a transaction fell within the definition of an 'asset-for-share transaction', as defined in Section 42 of the Income Tax Act, and thus qualified for rollover relief.
The South African Revenue Service recently published Binding Private Ruling 148, which dealt with whether the dividends tax rate applicable to dividends paid on shares held by a local branch of a foreign company can be reduced by a relevant double tax agreement. The applicant in this case was a South African company that was part of a global group headquartered in Japan.
The South African Revenue Service recently released an interpretation note on the interaction between the definitions of 'group of companies' in the Income Tax Act. The definitions are of particular importance with regard to the tax implications of the transfer of assets between group companies. The wording of the definitions and their interaction are complex; therefore, it may be worthwhile revisiting the legislation for clarity.
The Tax Court recently considered a case brought by the commissioner for the South African Revenue Service against A Ltd, which had been involved in repurchasing its own shares through a wholly owned subsidiary. The court had to decide whether A Ltd had done so in order to avoid paying the secondary tax on companies.
Chapter 16 of the Tax Administration Act makes provision for understatement penalties, which essentially replace the 'additional tax' provisions. Taxpayers should beware that any non-compliance subject to an understatement penalty may be subject not only to a fixed-amount administrative non-compliance penalty, but potentially also to a percentage-based administrative non-compliance penalty.
South Africa's transfer pricing and thin capitalisation regime has undergone some extensive changes over the past two years. It is expected that the South African Revenue Service will take a more aggressive stance in respect of transfer pricing, especially given the fact that the new provisions are wide and geared towards eliminating undue tax benefits.
The general purpose of Section 23K of the Income Tax Act is to disallow interest deductions for debt used in certain reorganisation transactions. One of the targeted transactions is where a taxpayer has indirectly obtained interest deductions for debt used to purchase shares. Generally, interest paid on debt used to purchase shares is not deductible, as shares produce exempt dividend income.