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APRIL 2013 – ISSUE 163 CONTENTS

ANTI-AVOIDANCE 2184. NWK judgment analysed 2185. Accepted practice

INDIVIDUALS 2190. Entertainers and sports persons

CAPITAL GAINS TAX 2186. Meaning of primary residence

INTERNATIONAL TAX 2191. Meaning of ordinarily resident

COMPANIES 2187. Section 8E and 8EA

TAX ADMINISTRATION 2192. Penalties 2193. Criminal offences 2194. Third party appointments 2195. Prescription

DEDUCTIONS 2188. Manufacturers

VALUE-ADDED TAX 2196. Going concern and leased commercial property

GENERAL 2189. Government grants

SARS NEWS 2197. Interpretation notes, media releases

and other documents

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ANTI-AVOIDANCE 2184. NWK judgment analysed

(Published April 2013) Judgment in the case of Mariana Bosch and Ian McClelland v Commissioner for the South African Revenue Service (Case no A94/2012) was handed down on 20 November 2012 by a full bench of the Western Cape High Court. The main judgment was written by Davis J (Baartman J concurring) and a separate judgment was written by Waglay J. The matter was on appeal from the Tax Court. The appellants were employees of the Foschini group of companies and participants in an employee share incentive scheme run by that group. The appellants were assessed by SARS for income tax in respect of shares received in respect of the scheme. The type of scheme was what is referred to as a 'deferred delivery scheme'. In essence, employees were granted options to purchase shares, which they had to exercise within 21 days. Once the option was exercised, delivery and payment in respect of the shares were delayed and would take place in three tranches, each two years apart. Before delivery and payment, the employees could not dispose of or encumber the shares, were not entitled to dividends and could not vote the shares. The risks and benefits did not pass to the employees until delivery and payment. The scheme was subject to a stop loss provision, which provided that employees could sell their shares back to the employer if the share price fell below the consideration that was payable on delivery. Further, employees were also obliged to sell their shares back to the employer for the same consideration payable on delivery if they terminated their service for any reason other than sequestration, death, superannuation, or ill health. The effect of the scheme was that the provisions of section 8A of the Income Tax Act No. 58 of 1962 (the Act) were bypassed. Only gains arising within the 21 day option period would be caught by section 8A and be taxable as income in the hands of the employees, as opposed to the full gains over the longer periods until delivery and payment. One of the arguments raised by SARS was that the scheme was a simulated transaction and that there was no real unconditional sale at the time of exercise of the option, but that the parties actually intended that the sale be subject to the suspensive condition that the employees remain employed until the date of delivery and payment. This was evidenced by the fact that an obligation to sell the shares back to the employer arose where an employee’s

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employment is terminated. SARS relied on Commissioner for the South African Revenue Service v NWK Ltd [2011] 73 SATC 55. The court took the opportunity to analyse the NWK judgment. Davis J states that in the NWK case the court was faced with what was clearly a simulated transaction, illustrated by the facts. The parties had not created genuine rights and obligations but simulated a loan that was for a larger amount than it actually was, only to allow the taxpayer to get a tax benefit. Davis J further makes the following important remark:

"Beyond this finding, there is nothing in the careful judgment of Lewis JA which supports the argument that the reasoning as employed in NWK was intended to alter the settled principles developed over more than a century regarding the determination of a simulated transaction for the purposes of tax."

Davis J then goes on to say that the NWK judgment needs to be read within the context of previous decisions on simulation such as Commissioner for Customs and Excise v Randles, Brothers and Hudson Ltd [1941] AD 369, Zandberg v van Zyl [1910] AD 302 and Erf 3183/1 Ladysmith (Pty) Ltd v CIR [1996] 58 SATC 229. This is so to ensure that "the body of precedent is read coherently rather than NWK as being an unexplained rupture from more than a century of jurisprudence." Davis J interprets the test in respect of simulation as laid out in NWK as being that the commercial sense of a transaction needs to be examined. Where the form of a transaction attempts to present a commercial rationale, but there is no commercial rationale, and the sole purpose of the transaction is to avoid tax, then the approach taken as in NWK is justified. The court seems to suggest that there must firstly be an agreement that purports to have a commercial rationale and secondly, there must in fact be no commercial rationale, such as the one purported, but some other purpose such as tax avoidance (i.e. something other than what is purported), before it can be said that there is simulation. The fact that a transaction aims to achieve the avoidance of tax does not as such make it a simulated transaction. Davis J concludes the analysis of NWK by stating that, since there is no express declaration in the judgment that it departs from previous jurisprudence, it should be interpreted "to fit within a century of established principle, rather than constituting a dramatic rupture." On the evidence Davis J found that there had been no simulation. In a separate judgment, Waglay J differed from Davis J in his interpretation of the NWK case. Waglay J states that the NWK judgment does depart, and dramatically so, from the case law on simulated transactions.

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Waglay J interprets the NWK as laying down the rule: "any transaction which has at its aim tax avoidance will be regarded as a simulated transaction irrespective of the fact that the transaction is for all purposes a genuine transaction." Waglay J, however, is of the view that the NWK judgment does not constitute binding precedent that lower courts have to follow. For a judgment to form a binding precendent it must be "clear and unequivocal, it must be plain, unmistakable and explicit in its rejection of previous judgments which it seeks to reverse." The rejection of the previous judgments does not have to be express, but it must be clear from the reasoning. In the judge's view the NWK judgment does not provide any reasons as to why it departs from previous judgments. He also states that the problem is "compounded by the troubled equivalence in the judgment of the phrases 'tax avoidance' and 'tax evasion' two very distinct concepts." The judge notes that the NWK judgment cannot be authority for setting aside a transaction as simulated if the aim of that transaction is tax evasion

because tax evasion is a criminal offence and stands to be set aside automatically by virtue of the fact that it is unlawful.

If the NWK judgment is authority for setting aside a transaction as simulated where the aim of the transaction is tax avoidance

, then it goes against established law, which in principle allows transactions that avoid tax.

Waglay J therefore seems to suggest that the uncertainty and confusion in addition to the lack of reasons indicates that the judgment cannot be used as a precedent that is binding on the lower courts. SARS’s argument as to simulation was rejected. For this and other reasons the appeal was upheld. (Editorial comment: See also article 2185) Cliffe Dekker Hofmeyr ITA: Section 8A 2185. Accepted practice

(Published April 2013) Judgment was handed down in the important case of Bosch and McClelland v Commissioner for the South African Revenue Service on 20 November 2012 by a full bench of the Western Cape High Court (Editorial comment: See also article 2184).

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Davis J (Baartman J concurring) wrote the main judgment while Waglay J wrote a separate judgment. The court was confronted with the question of whether a sale coupled with a resale provision, in the context of an employee share incentive scheme, was simulated. SARS relied on the decision in the case of Commissioner for the South African Revenue Service v NWK Ltd [2011] 73 SATC 55 to argue that the sale and resale structure was in reality a conditional sale. SARS argued that there was no commercial purposes or reason for structuring the transaction as a sale coupled with a resale provision, as opposed to a conditional sale, other than to avoid tax (in this case to avoid the application of section 8A of the Income Tax Act to the full gain in respect of the scheme shares). The decision in the NWK case was handed down by Lewis JA on 1 December 2010 and has since been the cause of much debate and confusion as to its impact and what the current position is regarding simulation and the structuring of transactions in tax efficient ways. The root of the debate and confusion is that Lewis JA has seemingly replaced the trite principles and practice regarding simulation and avoidance with a new rule. In addition, there is uncertainty as to what exactly the new rule is. Also, if there is a new rule, does the departure from the established legal principles undermine the rule of law? The most pertinent issues concerning the NWK judgment have been pointed out by Eddie Broomberg in his paper entitled 'On NWK and Founders Hill', a paper to which both Davis J and Waglay J refer in their judgments. He notes that "the bedrock common law principle that applies in South Africa is more than familiar: A transaction will not be regarded as simulated if the parties genuinely intended that their contract will have effect in accordance with its tenor, and that rule applies even if the transaction is devised solely for the purpose of avoiding tax…

." This rule had been established by our courts in a string of cases such as Zandberg v van Zyl [1910] AD 302, Commissioner of Customs and Excise v Randles, Brothers and Hudson Ltd [1941] AD 369, Erf 3183/1 Ladysmith (Pty) Ltd and another v CIR [1996] 58 SATC 229 and CIR v Conhage (Pty) Ltd [1999] 61 SATC 391.

Broomberg also notes that this conforms to SARS’s own established practice and application of the legal principles as is evident from Practice Note 5, dating from 1987, which states that "A taxpayer who has carried out a legitimate tax avoidance scheme, i.e. who has arranged his affairs so as to minimise his tax liability, in a manner which does not involve fraud,

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dishonesty, misrepresentation or other actions designed to mislead the Commissioner, will have met his duties and obligations under the Act…." Broomberg suggests that it is difficult to determine what exactly the new rule is because, on reading the NWK judgment, a clear distinction is not always drawn between the terms 'evasion' and 'avoidance'. He further suggests that the new rule laid down by Lewis JA is: "If the purpose of the transaction is only to allow the avoidance of tax then the transaction will be regarded as simulated." Davis J seems to disagree that a new rule was established by the Supreme Court of Appeal (SCA), even though that has been the popular interpretation of the NWK judgment. He states that: "Broomberg thus views NWK as a new and unjustified rule which replaces the previous jurisprudence. In my view, without an express declaration to that effect, NWK should be interpreted to fit within a century of established principle, rather than constituting a dramatic rupture." The reason given by Davis J for the view that NWK has not "replaced previous jurisprudence" is that Lewis JA does not expressly state that she is departing from established principles. It would seem as if Davis J sees the principle established in the NWK judgment as being that the lack of commercial rationale coupled with the purpose of tax avoidance can be an indicator of simulation. For there to be simulation, there must be some underlying understanding between the parties that differs from the purported agreement, and that underlying understanding may very well be the avoidance of tax. Waglay J differs from Davis J on the point of whether NWK established a new rule, and agrees with Broomberg’s suggestion that there has been a fundamental departure from established law practice. Waglay J interprets NWK as laying down the rule that: "any transaction which has as its aim tax avoidance will be regarded as a simulated transaction irrespective of the fact that the transaction is for all purposes a genuine transaction." Waglay J then picks up on the issue of the rule of law also identified by Broomberg. Waglay J’s point is essentially that a judgment such as NWK that is the cause for so much confusion, uncertainty and debate, cannot stand as binding precedent. This is specifically so where there is an established body of law and the judgment in question appears to depart from that body of law, but does not demonstrate clearly that there is such a departure nor provides reasons as to why the established law is no longer appropriate. The implication is that the NWK judgment is simply too vague or unclear to be followed by the courts.

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It is interesting to note that Waglay J also specifically mentions, as does Broomberg, that if the new rule establishes that any transaction that has as its aim the avoidance of tax (as opposed to evasion) is a simulated transaction, then it "goes against the accepted practice in our income tax law which permits transactions aimed at tax avoidance." It is anticipated that the case will go on appeal to the Supreme Court of Appeal and it will be interesting to see whether that court will agree with Davis J’s approach of reading NWK as being consistent with established law. Cliffe Dekker Hofmeyr ITA: Section 8A SARS Practice Note 5 CAPITAL GAINS TAX 2186. Meaning of primary residence

(Published April 2013) The term 'primary residence' is defined in paragraph 44 of the Eighth Schedule to the Income Tax Act No. 58 of 1961 (the Act). The reason this definition has captured the minds of many is due to the exclusion on the gain or loss made on disposal of one’s primary residence, provided the gain does not exceed R2 million or the proceeds from the sale of the property do not exceed R2 million. To qualify as a primary residence, and receive the benefit of the exclusion, a residence must be one in which a natural person or a special trust holds an interest. But, in addition

• ordinarily reside or have resided in the residence as his or her main residence; and

, the natural person or a beneficiary of the special trust or spouse of the person or beneficiary must:

• use or have used the residence mainly for domestic purposes. In order for property to qualify as a primary residence, the residence must meet both of the latter requirements or face disqualification as a primary residence. The definition also makes it clear that a company, ordinary trust or close corporation owning a residence, will not qualify for the primary residence exclusion. The SARS Guide to the Disposal of a Residence from a Company or Trust, 1 October 2010 to 31 December 2012 (the Guide), provides that the term 'mainly for domestic purposes' implies a purely quantitative standard of more than 50% of the residence being used for domestic purposes. This may be measured on a floor-area or time basis. This interpretation was given

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by Botha JA in SBI v Lourens Erasmus (Eiendoms) Bpk [1966] 28 SATC 233 at 245 (see page 15 of the Guide). Aside from the above definition in the Act and the two requirements that need to be met, the 'primary residence' definition has not been interpreted by South African courts. In order to provide some clarity in this regard, we look to the recent Australian case of Commissioner of State Revenue v Burdinat [2012] WASC 359. The case discussed comes on appeal from the State Administrative Tribunal of Western Australia and relates to the principal place of residence (PPR) land tax exemption under section 21 of the Australian Land Tax Assessment Act, 2002 (the LTAA), being similar to the South African primary residence rebate. The facts are briefly that a retired couple (the Burdinats), who had lived in their Bicton home for 25 years, took an extended holiday from early June to early September 2011, to a warmer part of the country, where they lived in a caravan on their own Broome Vacation Village site. While they were away they let their house in Bicton, fully furnished, mainly for security reasons. Shortly after their return, they were issued with a land tax assessment, which effectively provided that the Vacation Village site and not their Bicton residence, was granted the PPR land tax exemption. The question the Supreme Court of Western Australia was required to answer, was whether the Bicton property was the Burdinats' primary residence. The reason for this question was that according to the LTAA, private property is exempted from land tax, if at midnight on 30 June in the preceding year, the property was owned by husband and wife, where at least one of them used it as a primary residence. Thus, given that the couple were away over the crucial date of 30 June, the tax assessment was issued. This case is helpful in that, the court examined a multitude of analogous cases in determining the meaning of primary residence, specifically in the light of absences from the residence in question. Various judgments provided that where a place has been determined to be the primary residence, the taxpayer is not 'less resident' because he leaves from time to time for business and pleasure. In other words, where the place of abode has been established, physical presence or absence from it does not change its status. It would require a change of intention by the taxpayer to change the status. The duration of residency alone does not determine permanence. On a broad view of the facts, the Court dismissed the appeal by the Commissioner against the review decision in favour of the Burdinats, finding that their primary residence was the house in Bicton. Despite the taxpayers having been away from their residence on that crucial date namely, 30 June, the Court was not persuaded that the grounds for appeal had been made out by the Commissioner.

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Thus, for South African taxpayers it is encouraging to note from the Australian example, that the primary residence definition must be applied specifically to each case, taking all circumstances into account. It is also positive that where a primary residence has been established, absences from the residence for business or recreation will not result in the residence losing its status and exemption as primary residence. Cliffe Dekker Hofmeyr ITA: Paragraph 44 of the 8th schedule SARS Guide: Disposal of a residence from a company or trust COMPANIES 2187. Section 8E and 8EA

(Published April 2013) In the 2012 Taxation Laws Amendment Bill, which was first made available for comment on 13 March 2012, the long-awaited proposed amendments to sections 8E and 8EA of the Income Tax Act No. 58 of 1962 were published. Following discussions with the general public a revised draft of the Bill was issued on 25 October 2012, which now contains the final proposed amendments. In terms of the new proposals both sections will apply to dividends and foreign dividends received or accrued during years of assessment commencing or after 1 January 2013. However, the implementation of the sections will be extended to 1 April 2013 to give taxpayers a final opportunity to get their affairs in order. In terms of section 8E, any dividend or foreign dividend received by or accrued to a person during any year of assessment in respect of a share must be deemed, in relation to that person, to be an amount of income accrued to that person if that share constitutes a hybrid equity instrument at any time during that year of assessment. This is not an unknown concept to South African taxpayers, as hybrid equity instruments have been in existence for a number of years. Section 8EA, however, is the new addition to the already complicated South African tax legislation, and provides that any dividend or foreign dividend received by or accrued to a person during any year of assessment in respect of a share must be deemed in relation to that person to be an amount of income received by or accrued to that person if that share constitutes a third-party backed share at any time during that year of assessment. A ‘third-party backed share’ means any preference share in respect of which an enforcement right is exercisable or an enforcement obligation is enforceable as a result of any amount of any specified dividend, foreign dividend, return of capital or foreign return of capital attributable to that share not being received by or accruing to the person holding that share. A preference

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share for purposes of sections 8E and 8EA means a share other than an equity share or an equity share if the amount of any dividend (or foreign dividend) in respect of such share is based on or determined with reference to a specified rate of interest or the time value of money. This means that the original proposal, in terms of which these sections would have applied to any share, has been removed. However, because both sections 8E and 8EA apply to any dividends (and foreign dividends) declared after 1 January 2013 (as opposed to shares issued after 1 January 2013), it still has the effect that every share structure on which dividends will be declared during years of assessment commencing on or after 1 January 2013, must be scrutinised to determine whether such shares will be subject to the application of sections 8E and 8EA. Following various discussions on the interpretation of these sections, it has become evident that a number of share funding structures will fall within the provisions, and it is therefore recommended that appropriate advice is sought as soon as possible to ensure that steps are taken to implement the necessary amendments prior to 1 April 2013. Regrettably, the drafters of these sections have not been able to simplify the wording of these sections, despite the alignment of the definitions in the latest draft. As a result the sections remain quite difficult to interpret, let alone to apply to share structures. Accordingly and to ease the pains of tax laws, we have prepared a simplified diagram to help taxpayers to work their way through the application of these sections. By following the two links below we provide two diagrams, one for section 8E and another for section 8EA, which could be followed to determine whether an existing share falls within any of the these provisions. Editorial comment: The diagrams referred to above are attached to this newsletter. Download Section 8E and Section 8EA diagrams. Edward Nathan Sonnenbergs ITA: Sections 8E and 8EA DEDUCTIONS 2188. Manufacturers

(Published April 2013) Investors are often pleasantly surprised to hear about the generous tax allowances available to South African taxpayers involved in the business of manufacture or a process similar to

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manufacture. In this article, we will briefly touch on some of the more relevant deductions and allowances in this regard. Based on case law, for a process to be one of “manufacture”, it has to produce an article essentially different from the article as it existed before under-going the process. A process of manufacture, or a process similar to manufacture, is further clarified in Practice Note 42 issued by the South African Revenue Service (“SARS”) by way of 127 examples provided. A process of manufacture for tax purposes would, for example, include anything from shoe repairing and baking bread to the construction of buildings and roads. However, certain processes are specifically excluded from constituting “manufacturing”, such as vacuum packing, storage freezing facilities and the erection of transmission line towers on site. This Practice Note was issued in 1995 and one wonders if it is not time for SARS to update the publication with recent technology and new manufacturing processes developed during the past 17 years. The Practice Note does not, for example, cater for processes such as water bottling, purification, etc. Nevertheless, taxpayers conducting manufacturing processes can qualify for allowances of up to 40% (40% in the first year, and 20% for each of the next 3 years) in respect of certain qualifying equipment, and 10% (each year for 10 years) in respect of buildings or improvements used in a process of manufacture. These allowances may even be available to lessors who rent out such equipment or buildings to persons involved in a process of manufacture or a process similar to manufacture. It is not always clear whether an expense incurred by a manufacturer is of an income or capital nature. The principal test is whether the expense is regarded as part of the manufacturer’s income-earning operations (in which case, it will be revenue in nature) or enhancing the manufacturer’s income earning structure (in which case, it will be capital in nature). • In the New State Areas Ltd v Commissioner for Inland Revenue [1946] 14 SATC 155

case, it was held that sewers constructed on a taxpayer’s property formed part of the taxpayer’s income-producing structure (capital in nature) but that sewers constructed beyond the perimeter of the taxpayer’s land did not form part of its income-producing structure and therefore represented expenditure of a revenue nature.

• Manufacturers should therefore always first determine whether an expense which may appear to be capital in nature on face value, could not potentially be claimed as a revenue expense. This was the case in Palabora Mining Co Ltd v SIR [1973] 35 SATC 158, where the taxpayer constructed a dam for the Phalabora Water Board to

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secure a water supply for the start-up of its plant. The court held that the taxpayer’s loss in respect of the construction of the dam was of a revenue nature as the sole purpose of the expense was to accelerate the earning of the taxpayer’s profits and was closely linked to the taxpayer’s income-earning profits.

• It often happens that tax deductible expenditure, such as repairs and maintenance, is capitalised to the cost of equipment for accounting purposes. These expenses may comprise tax deductible expenditure that should be claimed during the year in which the expense is incurred. However, these expenses should be excluded from the costs of the assets on which tax allowances are claimed.

• Manufacturers typically receive income in advance to finance expenditure in respect of bigger projects. In this situation, section 24C of the Income Tax Act provides for an allowance (to be claimed against such income), which is based on the taxpayer’s future expenditure with regard to a contract. Although this allowance needs to be added back in the taxpayer’s following year of assessment, it provides significant cash flow relief as the taxpayer is effectively only taxed on the gross margin of a contract during the year in which the advance income is received.

• Where income is recorded for accounting purposes but is subject to certification, it is important to note that such income will only accrue for tax purposes where there is unconditional entitlement to such income i.e. upon certification. It is also worthwhile to note that accounting income in respect of retentions may be excluded for tax purposes on the basis that the income has not yet accrued to the taxpayer.

The above brief overview of potential tax deductions and allowances available to taxpayers operating in the manufacturing industry highlights the fact that it is important that taxpayers in this sector ensure that they make full use of the tax relief available. Deloitte ITA: Sections 11(a), 12C, 13 and 24C SARS Practice Note 42 GENERAL

2189. Government grants (Published April 2013)

It is with relief that we welcome the amendments to the income tax treatment of government grants, contained in the Taxation Laws Amendment Act No. 22 of 2012 (the TLAA). This is due to the fact that the existing income tax treatment applied to government grants has always been a “grey” area of tax legislation for both taxpayers and tax advisors alike. This

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uncertainty in applying the existing tax legislation arises for a number of different reasons but some of the more pertinent concerns are set out below. Existing legislation Firstly, normal tax principles should apply in determining whether a government grant received by the taxpayer falls to be included in gross income or not. This consideration usually turns on the purpose for which the government grant has been received, i.e. a grant received to fund trading activities will usually be revenue in nature and hence needs to be included in gross income, whereas a grant received to fund the acquisition of capital assets will usually be capital in nature and is not to be included in gross income. As simple as this may seem on initial reflection, the determination of whether a grant is capital or revenue in nature is in itself an extremely subjective matter that is dependent on numerous factors, some of which may not be available at the time of making the tax decision. This can result in decisions being made incorrectly based on inaccurate information. Secondly, the exemptions that are currently contained in the Income Tax Act No. 58 of 1962 (the Act) essentially fall into two main categories, namely: • Those that exempt government grants that are specifically listed in the Act, for

example, section 10(1)(zH) currently exempts, amongst others, any amounts received in terms of the Small/Medium Enterprise Development Programme or the Critical Infrastructure Programme, and

• Those that exempt government grants that are approved by the Minister via notice in a Gazette. For example, section 10(1)(y) currently exempts various programmes that are approved by the Minister under the national budget process, but does not actually list any of these programmes in the Act as these are intended to be identified by notice in a Gazette. The challenge that arises with these types of government grants is twofold, namely inconsistency in the application of the objectives that need to be considered when determining which programmes are to be approved and a significant delay in formalising and communicating these decisions via notice in the Gazette, thereby creating significant uncertainty in the period leading up to the relevant notice.

Lastly, the current interpretation of the anti-double-dipping rules that appear in section 23(n) of the Act is confusing at best and results in some anomalies in the actual application thereof. These anti-avoidance rules are intended to prevent taxpayers from using tax-free government grants to obtain a future tax benefit in the form of a deduction or allowance for expenditure that was essentially funded with this tax-free grant. However, these anti-double-dipping rules currently only apply to certain tax-free grants and not to others, a strange result which begs the question as to how to treat deductions or allowances arising from tax-free grants that are not specifically addressed in section 23(n).

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Revised legislation There is no doubt that the concerns and anomalies discussed above were the reasons for the introduction of a new uniform set of rules that are to be applied when analysing the tax treatment of government grants received during all years of assessment commencing on or after 1 January 2013. In summary, the revised legislation applies as follows: • An expanded list of exempt government grants, which will be published and updated

annually, will be introduced through the Eleventh Schedule to the Act. The list approach will provide upfront certainty to taxpayers in determining whether a grant to which they become entitled qualifies for tax relief or not. In addition to the list of tax-free grants, the Minister will still retain the power to exempt grants by way of notice in a Gazette. The purpose of this Ministerial authority will be to provide exemption for certain grants devised between the annual budget periods.

• The need to determine whether a grant appearing on the above list falls to be included in gross income or not, will be eliminated as the revised legislation simply states that all such grants are now exempt from normal tax.

• A new set of anti-double dipping rules will also apply from this same effective date which will provide improved certainty as to how to prevent a deduction or allowance in respect of expenditure or assets funded by tax-free grants. In simple terms, the tax cost of the asset or the value of deductible expenditure will be reduced to the extent that this asset or expense has been funded by a tax-free grant, a policy which would appear to be sound in the application of tax principles.

The revised legislation came into operation on 1 January 2013 and applies to years of assessment commencing on or after that date. It should also be noted that the discussion above only deals with the previous and new tax implications of government grants and normal tax principles will need to be applied to any other types of grants received by a taxpayer. Ernst & Young ITA: Sections 10(1)(y), 10(1)(zH), 12P and 23(n)

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INDIVIDUALS 2190. Entertainers and sports persons

(Published April 2013) Tax issues in the sports industry have generally lagged behind other industries (such as say the mining, manufacturing or insurance industries) because of the paucity of the quantum of litigation, academic scholarship and legislative action devoted to it. However, there has recently been a growing body of statutory law and administrative guidance which suggests the existence of a separately identifiable body of tax law dedicated to the sports industry. Topics range from the tax treatment of image rights, the tax treatment of player transfers, the tax treatment of sports academies to the tax treatment of foreign sportspersons or foreign entertainers compared to other foreign taxpayers when they travel to South Africa to render services. This article considers the tax treatment of non-resident entertainers and sportspersons. This topic is of interest not only to the sports industry but to any South African resident that hires foreign entertainers such as actors, comedians, magicians, dancers or radio or TV personalities who perform services in South Africa. A specific question is whether there is any obligation on a South African resident who hires a retired sportsperson to provide commentary or expert analysis on a sports match to withhold taxes. It is assumed that the retired sportsperson has by virtue of his entertaining commentary become something of a TV personality. Accordingly, the crisp issue is whether he is covered by this provision and the South African resident consequently has an obligation to apply the special tax provisions for entertainers or sportspersons. It should be said that definitive views on questions of this nature are always fact dependent and hence it cannot be said conclusively that the views in this article will necessarily apply to other situations. For example, this article does not deal with the question whether the foreign person is an employee or an independent contractor. The special provision for entertainers or sportspersons With convenience and mobility of travel and relatively open borders it is quite common for entertainers or sportspersons to live in one tax jurisdiction and to earn income in another jurisdiction. South Africa, like most countries, has firm statutory authority for imposing taxes on such non-resident entertainers or sportspersons. The scheme for imposing such taxes is contained

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in sections 47A–47K of the Income Tax Act No. 58 of 1962 (the Act). Instead of determining the income of such persons and computing tax thereon at the applicable rates of tax, these provisions lay down a flat rate of tax of 15% to be applied to all amounts received by the non-resident entertainer or sportsperson for activities exercised in South Africa. Under the provisions of section 47D any South African resident who is liable to pay these amounts to the non-resident entertainer or sportsperson is obliged to withhold tax at the rate of 15%. Once it is determined that the non-resident person is an entertainer or sportsperson then the mechanics of these provisions are relatively easy to work out. The difficulty often arises at the initial analysis, that is, whether the non-resident person is performing services as an entertainer or sportsperson at all. When deciding an issue governed by the text of a statute, the careful lawyer trusts neither memory nor paraphrase but examines the very words of the statute. In this regard an entertainer or sportsperson is defined as follows: ‘An “entertainer or sportsperson” includes any person who for reward –

i. performs any activity as a theatre, motion picture, radio or television artiste or a musician;

ii. takes part in any type of sport; or iii. takes part in any other activity which is usually regarded as of an entertainment

character.’ In order to properly interpret this definition one needs to apply certainly commonly accepted rules of statutory interpretation in order to determine what it is that the text conveys. Interpretation Rule #1 The word “includes” ordinarily introduces examples not an exhaustive list. In normal English usage, if a group “consists of” or “comprises” 30 entertainers, it contains precisely that number. If it “includes” 30 entertainers there may well be hundreds of other persons from all walks of life as well. That is, the word includes does not ordinarily introduce an exhaustive list, while comprise ordinarily does. Thus, the “entertainer or sportsperson” definition should be read as including but is not limited to the categories in (i), (ii) and (iii). Therefore, in order to understand the definition of entertainer or sportsperson the following words need to be analysed: • entertainer; • sportsperson; • artiste;

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• musician; • takes part in any type of sport; and • a person who takes part in any other activity which is usually regarded as of an

entertainment character.

Interpretation Rule #2 Where general words follow a list of two or more things the general words apply only to persons or things of the same general kind or class specifically mentioned. The eiusdem generis principle of statutory interpretation applies when a drafter has tacked on a catchall phrase (such as category (iii) ‘a person who takes part in any other activity which is usually regarded as of an entertainment character’) at the end of an enumeration of specifics (‘entertainer’, ‘artiste’ and ‘musician’). The principle implies the addition of ‘similar’ after ‘other’ so that the catchall phrase will read ‘a person who takes part in any other [similar] activity which is usually regarded as of an entertainment character.’ The rationale for this principle is that when the specific terms all belong to an obvious and readily identifiable genus, one presumes that the drafter has that category in mind for the entire passage. Conversely, if the catchall phrase is given its broadest application, it will be overly broad and render the prior specific words superfluous. The meaning of “entertainer” Interpreters of legal texts should not be required to divine arcane nuances or to discover hidden meanings in statutory text. Words employed in a statute are to be given their plain, obvious and common sense meaning. Most common English words such as entertainer have a number of dictionary definitions. • “A person whose job is amusing or interesting people, for example, by singing, telling

jokes or dancing” - Oxford Advanced Learner’s Dictionary (6th ed., 2003); and • “A person, such as a singer, dancer, or comedian, whose job is to entertain others” -

Oxford Dictionary of English (2nd ed., 2003). • “A person who entertains; a professional provider of amusement or entertainment” -

Shorter Oxford Dictionary (6th ed., 2007); and • “One who gives amusing performances professionally” - English Dictionary for South

Africa (Pharos, 2011)

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With the wording in the title (“entertainer”) and in the text (“an entertainer includes any person who performs . . . as [an] . . . artiste”), the Act seems to assume a strong connection and partial equivalence between entertainer and artiste. This connection also exists in the dictionary descriptions, but there are also differences as we will see from the definition of “artiste”. The meaning of “artiste” The following dictionaries have the following meanings for the word “artiste”: • “An artist, especially an actor, singer, dancer, or other public performer” - Random

House Webster’s Unabridged Dictionary (2d ed., Random House, New York, 1999); • “A public performer who appeals to the aesthetic faculties, as a professional singer,

dancer, etc.; also one who makes a ‘fine art’ of his employment, as an artistic cook, hairdresser, etc.” - Oxford English Dictionary (2nd ed., 1989);

• “Professional performer, especially a singer or dancer” - Concise Oxford Dictionary (9th ed., Clarendon Press, Oxford, 1995);

• “A professional entertainer such as a singer, a dancer or an actor” - Oxford Advanced Learner’s Dictionary (6th ed., 2003); and

• “A professional entertainer, especially a singer or dancer: cabaret artistes. Origin: early 19th cent.: from French (see Artist)” - Oxford Dictionary of English (2nd ed., 2003).

• “A person who practices one of the performing arts, an artiste, a performing artist, a professional singer, dancer, actor, etc.” - Shorter Oxford English Dictionary (6th ed., 2007); and

• “A person who performs in a theatre, circus, etc.” - English Dictionary for South Africa (Pharos, 2011)

The difference between the word “artist” and “artiste” is quite interesting. The term ‘artist’ has a broader meaning, according to most of the dictionaries, and covers those who create works of art, such as painters and sculptors. The word “artiste” appears to be restricted to the performing arts. The word “entertainer” seems to cover the lighter versions of the performing arts, while the word “artiste” seems to cover the more serious expressions of performing arts, such as classical dance, music, theatre and opera. While the dictionary explanations are very informative, it is also necessary to consider applicable case law so that one arrives at a complete definition of the words “entertainer” and “artiste”.

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The decision in Canada in Cheek v The Queen (2002 DTC 1283 (Tax Court of Canada)) that was reached on 31 January 2002 is very interesting and particularly relevant. Under discussion was whether a “radio broadcaster” of baseball games would fall under Article XVI (Artistes and Athletes) of the 1980 Canada– United States Income Tax Convention. The radio broadcaster in question, Thomas Cheek, had been the commentator of the Toronto Blue Jays at home and away games since 1977, together with a partner commentator. The parties agreed that Thomas Cheek was resident in the United States, was not an employee and – surprisingly – did not have a fixed base in Canada that would have made him taxable under Article XIV (Independent Personal Services). The only question that remained before the court was whether “the voice of the Blue Jays” was a “radio artiste”, who had to fall under Article XVI of the treaty. In a baseball game of three hours, only 16-18 minutes are actual “motion”, the rest is “down time”. The challenge facing the broadcaster is to hold the attention of the radio audience, even when there is no activity on the field. He needs to know a lot about statistics; players, coaches and any other prominent persons connected with the game, and is expected to fill the gaps with colourful commentary about anything happening. The court stated that professional sports in itself is entertaining, but doubted whether the broadcaster could be seen as an entertainer, that is, as a “radio artiste”, such as for example the late Bing Crosby. The baseball fan who turns on the radio to hear a particular baseball game wants to know how the players are performing on the field. The broadcaster may be able to hold the attention of the fan with his “down time” commentary but he is not the reason why the fan turns on the radio. Therefore the court decided that Thomas Cheek was not a radio artiste, although he was a very skilful and experienced radio journalist. The meaning of “takes part in any type of sport” The activities of a sportsperson do not include only the appearance in a sports event but also, for example, advertising or interviews that are directly or indirectly related to such an appearance. Merely reporting or commenting on a sports event in which the reporter does not himself participate is not an activity of a person as an entertainer or sportsperson. Thus, the fee that a former sportsperson would earn for offering comments during the broadcast of a sports event in which he does not participate would not be covered by the withholding tax since the sportsperson is not taking part in any sport. The meaning of “takes part in any other [similar] activity which is usually regarded as of an entertainment character” The “euisdem generis” principle asserts that a general or generic phrase at the end of a list (“any other activity”) is limited to the same type of things that are found in the specific list (entertainer, artiste, and musician). Since these words entail some sort of creative effort, that

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is, a performance, it follows that the catchall phrase should be limited to similar activities, artistic, musical or sporting performances which are entertaining (i.e. bring pleasure, diversion and amusement). Dick Molenaar, an authoritative writer on this issue, compiled two lists of persons, “artistes” and “non-artistes” which provides a very useful distinction between these two terms. This list serves as a useful guide for the purpose of interpreting this requirement. Activities usually regarded as of an entertainment character i.e. performing entertainers or artistes

Activities not usually regarded as of an entertainment character i.e. usually creative but not performing entertainers or artistes

Acrobats Actors (theatre, television, radio) Circus artistes Comedians Conductors Disc jockeys (DJs) Fakirs Magicians Masters of ceremony (MCs) Musicians Packaging artists Puppet theatre players Quizmasters and participants Radio play actors Ring masters in circus Sex performers (peep and live shows) Singers TV and radio "artistes" Video jockeys (VJs) Writers reading from their work

Actors, musicians, etc. appearing in commercials Anchormen (radio, television) Architects Auctioneers Authors Booking agents Cameramen Choreographers Composers Crew (film, television, radio, live show) Cutters Dead artistes (entitled to part of performance fee) Designers (stage, light, fashion) Directors (theatre, television, radio) Discoverers Engineers (sound, light, video) Fashion designers Funeral orators Impresarios Interviewers (television, radio, live) Interview guests (idem) Inventors Journalists Managers

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Models in commercials Models in fashion shows Painters Photographers Piano tuners Politicians Producers Radio personalities (e.g. Disc jockeys, News readers) Rehearsals by any artiste, conductor, etc. Reporters Restaurateurs Sculptors Sound technicians Speakers at conferences Stage builders Teachers of music, theatre, dance, etc. Technical personnel TV and radio personalities (e.g. Anchor personnel, weather persons, talk show hosts) Tour accountants Tour managers Writers

On the basis of the foregoing it is concluded that a retired or non-retired sportsperson that provides TV commentary or expert analysis on a sports match is, regardless of how entertaining he might be, not an entertainer for the purpose of the Act. Edward Nathan Sonnenbergs ITA: Sections 47A–47K INTERNATIONAL TAX 2191. Meaning of ordinarily resident

(Published April 2013) The concept of 'ordinarily resident' is not defined in South African tax law. One therefore has to look to cases like Cohen v CIR [1946] 13 SATC 362 and CIR v Kuttel [1992] 54 SATC 298 for guidance. In the Cohen case Schreiner JA held that "... ordinary residence would be

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the country to which [a man] would naturally and as a matter of course return from his wanderings". In the Kuttel case, Goldstone JA found that "a person is 'ordinarily resident' where he has his usual or principal residence, that is, what may be described as his real home". [The SARS approach to 'ordinarily resident' is found in Interpretation Note 3 of 4 February 2002.] The purpose of this article is not to revisit the residence principles found in South African precedent. It is rather to alert South African taxpayers to recent developments in the UK with regard to the meaning of 'ordinarily resident' and what it really takes to sever the ties that bind. The recent UK Supreme Court case of R (Davies and another) v HMRC; R (Gaines-Cooper) v HMRC [2011] UKSC 47 undertook an authoritative analysis of the issue of residence in the UK for tax purposes. The question in relation to both Davies and Gaines-Cooper was whether said taxpayers had become non-resident for UK tax purposes. Davies and James (the first appellants) had moved into furnished Brussels apartments during 2001 but retained their respective homes in Swansea where they frequently visited their families, albeit for relatively short periods. There also were UK visits to oversee their joint business interests and they retained their links to Swansea Rugby Football Club. The second appellant Gaines-Cooper testified that he in 1976 (at age 39) had acquired a domicile of choice in the Seychelles from where he led 'an international existence'. Despite such international existence he spent about three or four months each year in the UK where he had successively maintained substantial homes in Berkshire and in Oxfordshire. In respect of Davies and James the HMRC asserted that they had "... failed to establish the necessary distinct break with family and social ties in the UK." In Gaines-Cooper's case the Special Commissioners found, by looking at the overall position, that England remained the 'centre of gravity of [Gaines-Cooper's] life and interests'. In the end all three appellants were unsuccessful before the Supreme Court in challenging HMRC's view of them being tax-resident in the UK during the relevant years of assessment. The majority judgment of the Supreme Court (leading judgment by Lord Wilson) held that "... in order to become non-resident in the UK ... the ordinary law requires the UK resident to effect a distinct break in the pattern of his life in the UK. The requirement of distinct break mandates a multifactorial inquiry." The concept 'distinct break' was explained as: "The distinct break relates to the pattern of the taxpayer's life in the UK and no doubt it encompasses a substantial loosening of social and family ties ... 'severence' of such ties is too strong a word in this context." Following the judgment of the Supreme Court it was clear that

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someone claiming non-resident status in the UK for tax purposes needed to prove a 'substantial loosening of social and family ties' – however, it was not required that such ties be severed completely. The extent to which 'loosening' of social and family ties must happen to achieve non-resident status is evident from the UK case Lynette Dawn Yates v HMRC [2012] UKFTT 568 (TTC). Ms Yates was born in England in 1955. She married and lived in the UK with her husband. Because she suffered severely from Gaucher disease she moved to the southern coast of Spain in 2000. This was to benefit from the warm dry climate in that part of Spain. Her move to Spain was supported by a Professor Cox who had treated her since 1993. Having first rented a three-bedroom apartment Ms Yates soon purchased her own apartment during 2003. It is said that "Ms Yates was able to feel at home there". Due to UK business commitments her husband was not able to join her in Spain. Ms Yates therefore made quite lengthy trips to the UK and visited regularly when her father was diagnosed with cancer. She was in the UK over Christmas for the years 2003 – 2006. Under cross-examination she said she felt it was important to be with her family at Christmas. In 2008 she returned to live permanently in the UK since she felt her relationship with her husband was suffering from their separation. A CGT dispute arose and the question was whether Ms Yates had been 'ordinarily resident' in the UK during the relevant years? Ms Yates claimed that there was a distinct break in her pattern of life when she went to Spain in 2000. Judge Walters QC delivered the decision of the First-Tier Tribunal. He specifically applied the 'multifactorial inquiry' laid down by Lord Wilson (see above). Judge Walters held: "The inquiry required is 'essentially one of evaluation'. It looks to what the taxpayer actually does or does not do to alter his or her life's pattern. The taxpayer's intention is relevant to the inquiry but is not determinative. What is being examined is the quality of the taxpayer's absence from the UK". It was submitted before the First-Tier Tribunal that, since 2000, Ms Yates "home and settled life was in Spain and not in the UK". It was argued that her "...social life in the UK ceased and she continued her life in Spain as it was in the UK". Judge Walters found the opposite: "I was not persuaded that Ms Yates had created for herself a Spanish-based social life that in any way excluded or replaced her UK-based connections. I attach importance to her repeated return trips to the UK at Christmas (in the winter months) and the evidence of her close family ties ... the evidence from the phone bills of the telephone calls she made reinforced my impression that her most substantial social ties were with

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English people, whether in England or in Spain". The bottom-line: "For these reasons I find that the quality of Ms Yates's absence from the UK was not such as to support the conclusion that she had made a distinct break in the pattern of her life for the purpose of relinquishing her status as UK resident and ordinarily resident". In addition to scrutinising Ms Yates's social and family ties, the First-Tier Tribunal also considered the following factors under the 'multifactorial inquiry': • She remained on the local Kingston Hall electoral role in the UK. • Her mail came to the UK family home and was then on-sent to her in Spain. • She kept her UK bank accounts and credit cards – furthermore, they showed

substantial activity. • She continued receiving an UK disability living allowance – she never informed the

Department of Pensions of her move to Spain. • She used her UK dentist and came to the UK for medical treatment. • Certain personal belongings were left at the UK family home. The capital gains were accordingly held to be taxable in the UK. SARS's Interpretation Note 3 does not mention the concept of 'distinct break' as applied in the UK. It does state: "The purpose, nature and intention of the taxpayer's absence must be established to determine whether a taxpayer is still ordinarily resident." Where someone is ordinarily resident is a question of fact. In answering that question SARS could well take into account the various factors considered in Ms Yates's instance. Local high net worth individuals are sometimes advised 'to formally emigrate', both for Exchange Control and tax purposes. The aim is to achieve the expatriation of their wealth from South Africa and to become non-resident for South African tax purposes. Any South African taxpayer seeking to become non-resident should take note that the paper work (such as Exchange Control form M.P. 336(b)) is quite important. Even more important is that, having become non-resident, such taxpayer should live his or her life accordingly. To become 'non-resident' (wink wink) and to live as if nothing has changed could have significant tax risks. Cliffe Dekker Hofmeyr ITA: Section 1 Definition of resident SARS Interpretation Note 3

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TAX ADMINISTRATION 2192. Penalties

(Published April 2013) The Tax Administration Act No. 28 of 2011 (TAA) which (except for a few sections) came into effect on 1 October 2012, has introduced new rules governing reportable arrangements. Simplistically, a reportable arrangement is an arrangement that has been listed as such under section 35(2) of the TAA or one in respect of which a tax benefit is or will be or is assumed to be derived and which contains certain other elements which are set out in section 35 of the TAA. Similar to the repealed reportable arrangement provisions under the Income Tax Act No. 58 of 1962 (the Act), the TAA imposes a duty on participants, namely the promoter of the arrangement or a company or trust which derives or assumes that it will derive a tax benefit or financial benefit by virtue of the reportable arrangement, to disclose the pertinent details of the reportable arrangement to SARS in the prescribed manner and within a prescribed period. Some of the most substantive changes to the reportable arrangements provisions as introduced by the TAA relate to the penalties which may be imposed in the event of the failure by a participant to make disclosure to SARS as prescribed. Section 212 of the TAA states that for each month, but up to 12 months, that the participant fails to report the reportable arrangement, they will be liable for a penalty of R50 000, in the case of a participant (other than the promoter) or R100 000 in the case of the promoter. The amount of the above-mentioned penalty will be doubled, if the anticipated tax benefit for the participant by reason of the reportable arrangement exceeds R5 million. In addition, the penalty will be tripled if the anticipated tax benefit exceeds R10 million. Therefore a monthly penalty of R300 000 (for the promoter) and R150 000 (for other participants) may be imposed by SARS for each month that the participants fail to disclose the reportable arrangement. Should the failure persist for at least 12 months, the penalty that the participants would be liable for may be up to R1.8 million or R3.6 million for promoters. This is a drastic change, as under the “old” Income Tax Act reportable arrangement provisions (section 80S), the reportable arrangement penalty was a maximum of R1 million, which could be reduced by the Commissioner in certain circumstances.

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Under section 217 of the TAA, once a penalty assessment has been issued by SARS for the reportable arrangement penalty, the person aggrieved by such penalty assessment may submit a request for the remittance of the penalty. However, section 217 provides that SARS may only remit the penalty or a portion thereof up to R100 000 if satisfied that (1) reasonable grounds exist for the non-compliance and (2) the non-compliance has been remedied. Of importance in this regard, is that SARS’ powers of remission under section 217 are limited to the “first incidence” of non-compliance. It is not clear whether the “first incidence” refers to the first failure by a participant to disclose any reportable arrangement or if it refers to the first month of the failure by a participant to disclose a particular reportable arrangement.

Another possible avenue for the remission of the reportable arrangement penalty may be found in section 218 of the TAA. This section provides that when SARS receives a request for the remission of a penalty, it may remit the penalty if satisfied that one or more of the listed exceptional circumstances rendered the person on whom the penalty was imposed unable to comply with the relevant obligation under a tax Act is present. Therefore, should exceptional circumstances exist for an aggrieved person’s failure to disclose a reportable arrangement, SARS would have the power to remit the penalty, regardless of whether it is a “first incidence” or not. The exceptional circumstances are listed in section 218(2) of the TAA. What is not clear under section 218 is the extent of SARS’ power of remission under section 218. In particular, as no limits are imposed in section 218, would SARS be empowered to remit the whole amount of the penalty if the criteria set in this section are satisfied? One would hope that the answer to this question is in the affirmative as this would be a more favourable outcome for taxpayers. Edward Nathan Sonnenbergs Tax Administration Act: Sections 35(2), 212, 217 and 218 ITA: Section 80S 2193. Criminal offences

(Published April 2013) The Tax Administration Act No. 28 of 2011 (TAA) came into effect on 1 October 2012. The TAA makes provision for various criminal offences apart from the imposition of administrative non-compliance penalties and understatement penalties. These provisions are contained in Chapter 17 (section 234 to section 237) of the TAA.

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Some of the most pertinent criminal offences relating to taxpayers in respect of administrative issues are where the taxpayer 'wilfully and without just cause' fails or neglects to: • register in terms of a tax Act, such as for income tax or Value-added Tax (VAT) • notify SARS of a change in particulars; • submit a return or another document; • appoint a representative taxpayer and notify SARS of such appointment or change in

appointment; • retain records as required; or • issue a document to a person, as required under a tax Act, such as a VAT invoice.

In respect of other administrative interactions with SARS, it is a criminal offence not to: • supply SARS with information, documents or things, as required; • answer fully or truly any questions posed by a SARS official; • take an oath or make a solemn declaration, as required, such as at an official enquiry; • attend and give evidence; • comply with a directive or instruction issued by SARS; or • give assistance to SARS to conduct an audit or criminal investigation at the taxpayer’s

premises.

Under common law, fraud is defined as the intentional making of an unlawful misrepresentation that actually causes or potentially can cause another person to act to his or her detriment. Most cases of tax fraud would probably fall within the scope of this definition, however, the TAA provides specifically for certain fraud-like acts to constitute statutory crimes. These include the wilful submission of a false certificate or statement in respect of returns or financial statements or accounts. It also includes the wilful issue of an erroneous, incomplete or false document that is required to be issued under a tax Act (such as a VAT invoice). The crimes mentioned thus far carry a penalty of a fine or maximum imprisonment of two years. Staying in the realm of fraud, Chapter 17 also contains section 235, which specifically deals with tax evasion and obtaining undue refunds. The section is virtually the same as its predecessor, section 104 of the Income Tax Act No. 58 of 1962 (the Act). Section 235 of the TAA provides that it is a criminal offence for a person, with the intent to evade tax or assist another person to evade tax or obtain an undue refund, to:

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• make a false statement in a return or document, or sign a return or document containing such a false statement, without reasonable grounds for believing the statement to be true;

• give a false answer to a request for information from SARS; • prepare, maintain or authorise the preparation or maintenance of false books of

account or other records, or falsified or authorises the falsification of books of account or other records;

• make use of, or authorise the use of, fraud or contrivance; or • make any false statement for the purposes of obtaining any refund of or exemption

from tax.

The penalty in respect of such a crime is a fine or imprisonment of up to five years. Section 235(2) of the TAA contains a so-called 'reverse onus' (the same as section 104(2) of the Act). It essentially provides that where a person is accused of making a false statement (as discussed above), that person will be regarded as guilty unless that person can prove that there is a reasonable possibility that he or she was ignorant of the falseness of the statement and that the ignorance was not due to negligence on his or her part. This provision stands in direct contrast to section 35(3)(h) of the Constitution, which specifically guarantees an accused person to be presumed innocent as part of his or her right to a fair trial. It is alarming to note that SARS has decided to retain the reverse onus provision in the context of our Constitutional dispensation. This provision is sure not to go unchallenged in court. Cliffe Dekker Hofmeyr ITA: Section 104(2) TAA: Sections 234 – 237 Constitution of the Republic of South Africa: Section 35(3)(h)

2194. Third party appointments 6ember (Published April 2013)

On 14 October 2009, the Commissioner for SARS delivered a public address regarding the introduction of administrative penalties for the purpose of policing non-compliance. Referring to debt collection tools, the Commissioner stated: "The first tool we will use is the agent appointment..." Although the agent appointment mechanism was previously understood

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to be a 'last-resort' option, it is becoming clear that, going forward, SARS will increasingly apply same. Prior to the enactment of the Tax Administration Act No. 28 of 2011 (TAA), so-called 'agent appointments' were made under section 99 of the Income Tax Act No. 58 of 1961 (the Act), alternatively section 47 of the VAT Act No. 89 of 1991 (the VAT Act). Section 99, since repealed, provided that:

"The Commissioner may, if he thinks necessary, declare any person to be the agent of any other person, and the person so declared an agent shall be the agent for the purposes of this Act and may be required to make payment of any tax, interest or penalty due from any moneys, including pensions, salary, wages or any other remuneration, which may be held by him or due by him to the person whose agent he has been declared to be."

Section 179 of the TAA has now replaced section 99 of the Act as well as its equivalent in the VAT Act. Section 179 took effect on 1 October 2012 and deals with the obligations of a third party required by SARS to pay money to it in satisfaction of the taxpayer's tax debts. It provides that:

"A senior SARS official may by notice to a person who holds or owes or will hold or owe any money, including 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."

Section 179 no longer refers to the concept 'agent' – according to the SARS Guide on the TAA the term 'agent' was considered unnecessarily confusing. Section 179 simply states that SARS can require a third party to make payment to it in satisfaction of the taxpayer's tax debt. In practice the section 179 collection mechanism is activated through an electronic notice (titled "Assessed tax – Third Party Appointment") issued to the third party. The notice is accompanied by a statement (almost in spread-sheet format) reflecting, among other things, the indebted taxpayer's details, a start and end date, the amount due to SARS and the total amount required to be paid over to SARS by the third party. Section 179(1) reads "A senior SARS official may by notice..." From what we have seen there is nothing in the electronic "Third Party Appointment" notice to suggest that it had been considered and issued by a senior SARS official. The document merely indicates that it was issued on behalf of the Commissioner. The term "senior SARS official" is defined in section 1 of the TAA as a SARS official referred to in section 6(3). Section 6(3) provides that the powers and duties required to be exercised by a senior SARS official 'must be exercised' by either the Commissioner, a SARS official who has specific written authority from the Commissioner or a SARS official occupying a post designated by the Commissioner for this purpose. The SARS Guide on the TAA indicates that "only a senior SARS official who is

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authorised to do so by the Commissioner may perform one or more of the more serious powers or functions". The issuing of section 179 notice is listed as such. The question is whether an electronic "Third Party Appointment" notice as currently used by SARS really complies with the above-mentioned provisions of the TAA? For example, a third party appointee has no means of establishing whether a senior SARS has indeed acted in terms of section 179 taking into account that said notice nowhere refers to any senior SARS official whatsoever. The TAA has introduced significant changes compared to the previous section 99 of the Act/section 47 of the VAT Act agent appointment regimes. These include: • Under section 179 the third party appointee's obligation to pay money to SARS covers

money that it "holds or owes or will hold or owe for or to the taxpayer". The use of the future tense indicates that SARS could apply section 179 with regard to money not yet in the possession of the appointee, but which might be received in future. For example, a bank could potentially be notified under section 179 to pay over money from a fixed deposit coming to maturity. Section 179 can therefore operate prospectively.

• Under section 99 of the Act and section 47 of the VAT Act the appointed agent had to comply and could not disclose to the taxpayer that it was obliged to pay SARS the money it held – this was to prevent the taxpayer from moving funds having gotten wind of SARS's intentions. Section 179(3) is along the same lines. It provides that the third party "must pay the money in accordance with the notice". Should the third party part with the money contrary to the notice, the result is personal liability for the money that should have been paid to SARS.

• Where the third party is unable to comply with the notice, section 179(2) requires that the senior SARS official must be advised of the reasons for the inability. The senior SARS official "... may withdraw or amend the notice as is appropriate under the circumstances." It has already been indicated that the electronic notice used by SARS reflects no particulars relating to the senior SARS official that purportedly issued same. It merely gives details relating to a SARS contact centre (e.g. SARS Alberton). It will consequently be very difficult for a third party appointee to engage the responsible senior SARS official for purposes of section 179(2).

• The issue of "affordability" is covered in section 179(4). It provides that SARS may, on request by the person affected by the notice, amend the notice to extend the period over which the debt must be paid to SARS. This is to allow the taxpayer to pay his basic living expenses and those of his / her dependents. In the "Road show Questions and Answers" on the SARS website it is stated that a third party has no discretion to

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unilaterally determine what instalments are suitable. The taxpayer affected by a third party appointment should therefore contact SARS to discuss the payment arrangements. A third party appointee should therefore not become involved with 'affordability' issues when approached by a taxpayer whose money is subject to a section 179 notice. The third party appointee cannot resist the issue of a section 179 notice and section 179(4) only allows the taxpayer to approach SARS on the basis of 'affordability'. It is interesting to note that both the Australian Tax Office and the Canadian Revenue Agency have percentage limits on the amount of taxpayer money that may be attached via an agent appointment. These limits are between 25% and 30% of the moneys held by the third party. Unfortunately, the TAA does not specify anything in this regard.

The section 179 collection mechanism is sometimes referred to by SARS as a garnishee order (e.g. on the SARS website). A true garnishee order refers to the attachment of a debt owed to the taxpayer/debtor by a third party (who becomes known as the garnishee), and the debt is usually attached as a once-off arrangement. The debt is then paid by the third party, to the creditor in payment of the debtor’s obligation. The section 179 third party appointment differs from a true garnishee order in the following respects: • To obtain a garnishee order a court order is a prerequisite. A third party appointment

under section 179 requires no court order. • Where the garnishee is dissatisfied with the garnishee order being issued he could

approach the court for redress. A third party appointed under section 179 is legally obliged to transfer funds held in favour of the taxpayer to SARS, otherwise such agent could face personal liability for the outstanding amount (see above). Whereas the debtor can beforehand contest the issuing of a garnishee order this is impossible with regard to section 179 since the taxpayer will often be oblivious that SARS intends making a third party appointment.

• On application for a garnishee order, the court could examine the debtor's financial position and vary, or set-aside, the order accordingly. The section 179 third party appointment process does not provide for such an examination — effectively there is no audi alterem chance for the impacted taxpayer. There is only an ex post facto examination of affordability under section 179(4) of the TAA (see above).

• Lastly, section 37(1) of the Pension Fund Act No. 24 of 1956 provides that a pension fund benefit may not be liable for attachment, including attachment by garnishee order. Section 179 of the TAA specifically empowers SARS to require a third party appointee to pay to SARS "any money, including pension, salary, wage, or other remuneration".

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We understand that banks are being inundated with section 179 third party appointments. The expectation is that this collection mechanism could also be used increasingly in relation to insurers (policy proceeds), estate agents and conveyancing attorneys (proceeds from property transfers), the JSE (dividends receivable) and so on. Cliffe Dekker Hofmeyr TAA: Sections 6(3) and 179 Pension Funds Act: Section 31(1) 2195. Prescription

(Published April 2013) The coming into force of the Tax Administration Act (TAA) has brought the issue of prescription into sharp focus. There are two reasons why this is so: firstly, the standard prescription period of three years has been extended to five years for ‘self-assessments’, and secondly the assessment returns seem to require only limited disclosure and taxpayers are left wondering whether the limited disclosure affords them the prescription protection they need. The reason for the extension of the basic period of prescription from three to five years is to accommodate the system of self-assessment. In light of the fact that the bulk of current assessments are completed on a ‘self-assessment’ basis, SARS requires a longer period in which to interrogate and audit the assessment. Self-assessments require no thought process from an assessor; they are simply captured by the SARS computer system, and theoretically could run the course through to prescription without any intervention in the form of a revenue official applying his mind. Prior to the e-filing self-assessment era, all income tax returns were subject to an assessment of sorts by an assessor whose job it was to identify and query anything problematic. That no longer applies and SARS requires a longer period to enable them to run risk assessment programs or analytics on returns which should identify potentially contentious issues and leave them time to query and reassess where necessary. The TAA specifically defines a ‘self-assessment’, which on the face of it, gives rise to a surprising result since income tax returns would not constitute ‘self-assessments’ as defined, since self-assessments require a determination of the tax due whereas income tax returns, for companies and individuals, do not require any such determination. On that basis, these returns, not being self-assessments, would be subject to the three year rather than the five year prescription rules. Whether the three to five year prescription rule applies, the protection afforded by prescription is extremely important for all taxpayers and indeed for SARS too. Taxpayers,

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who have made full and complete disclosure, are entitled to know that at some point they are beyond the stress of a SARS audit, and SARS needs to ensure that its system highlights and red-flags for query and audit, all those returns which warrant such attention, prior to the prescription period expiring. In order for this system to work, it is clear that comprehensive and accurate disclosure on well-designed tax returns is critical. Oddly, the standard company tax return remains relatively abbreviated and one would expect in future, for example, a more comprehensive list of questions which would be required to be completed. The e-filing system does not require the submission of supporting schedules or even financial statements – these must simply be prepared and retained on file – so the taxpayer actually has limited opportunity for disclosure even should he wish to disclose more than the return demands. What happens, for example, when a taxpayer claims as a deduction an item which is not separately disclosed on the return, in a situation where the deductibility is somewhat debatable (as frequently happens in tax matters)? One option would be to retain an opinion on file supporting the claim, but that is not always practical. While the system of return disclosure remains in its current imperfect state, it is inevitable that disputes will arise with taxpayers claiming prescription on the one hand, while SARS on the other contests items on returns that have nominally prescribed. Some legal precedent on this question involving a dispute on an assessment in the e-filing era would be particularly helpful. Ernst & Young TAA: Section 1 Definition of ‘self-assessment’ VALUE -ADDED TAX

2196. Going concern and leased commercial property 2012 (Published April 2013)

Subject to various conditions being met, an enterprise (or part of it capable of separate operation), that is disposed of as a going concern to a registered vendor, may be subject to Value-Added Tax (VAT) at the zero rate. Where leased commercial property is being disposed of as a going concern, particular care must be taken by the person making the supply to ensure that the correct VAT rate is applied. For purposes of this article we will briefly discuss two scenarios: • The disposal of a commercial letting enterprise by a vendor (fixed property together

with lease agreements); and

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• The disposal of a commercial property by a vendor to its only tenant that will continue the letting enterprise.

The zero rating provisions for the disposal of an enterprise as a going concern are contained in section 11(1)(e) of the Value-Added Tax Act No. 89 of 1991 (the VAT Act), read with Interpretation Note 57 (IN57). Essentially, for a disposal to qualify for the zero rate of VAT, the following requirements must be met: • The parties must agree in writing that the enterprise is disposed of as a going concern. • The supplier and recipient must be registered vendors. • The supply must be of an enterprise or part of an enterprise capable of separate

operation. • The supplier and the recipient must, at the time of concluding the agreement, agree in

writing that the enterprise (or part thereof) will be an income earning activity on transfer.

• The assets necessary for the carrying on of the enterprise must be disposed of. • The supplier and the recipient must agree in writing that the consideration for the

supply is inclusive of tax at the rate of 0%. For purposes of discussing the two scenarios above, the focus will be on the transfer of assets necessary for the carrying on of the enterprise, in other words, what would be required to zero rate a transaction with reference to commercial letting enterprises. In terms of IN57, the view of the South African Revenue Service (SARS) is that the mere transfer of an asset is not enough to fall within the zero rating provisions of section 11(1)(e). More specifically, in relation to the disposal of a commercial letting enterprise, it is SARS' view that the fixed property must be disposed of, together with the lease agreement in order to fall within the zero rating provisions. The aforementioned disposals of commercial letting enterprises must also pass the additional test relating to the level of occupancy. SARS' view is that an occupancy level of at least 50% is required, which is consistent with the approach followed in other jurisdictions, such as New Zealand. The 50% occupancy level is however not set in stone, as one would need to consider the current market conditions in which the disposal is made. One may face a scenario, in an economic slowdown that occupancy rates of less than 50% may be acceptable – it should therefore not be a hindrance in applying the zero rate of VAT in such a scenario. In practice, it is not uncommon for a tenant (being the only tenant) to enter into an agreement for the purchase of commercial property from its current owner. SARS' view, in this scenario,

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is that this type of transaction does not constitute the disposal of a going concern for purposes of section 11(1)(e). In VAT Guide 409 for Fixed Property and Construction various income activities are listed that would not qualify as the transfer of an income earning activity – more specifically it is SARS' view that where a lease is extinguished where a commercial property is sold to a tenant, it does not constitute the sale of a going concern. In other words, it is SARS' view that not all the assets, that is fixed property including lease, have been transferred as part of the enterprise disposal. A slightly more complex situation arises where a lessee has entered into a sub-letting arrangement and intends to purchase the commercial property outright from the current owner. The lessee technically (but not in a legal sense) steps into the shoes of the owner upon the transfer of the commercial property and will continue the letting enterprise and make taxable supplies subject to VAT at the standard rate. Even though a commercial letting enterprise appears to continue unhindered where the lessee now becomes the outright owner, it is debatable whether the zero rating will apply to the disposal of the property. An argument that counts against zero rating this type of transaction is that the lease between the owner and the lessee terminates on disposal and that the sub-letting agreements, which the lessee has in place with its tenants, do not form part of the assets necessary for the carrying on of the lessor's enterprise. In such a scenario the standard rate would likely apply to the disposal and the recipient would be able to claim input tax where the property will be used in the course of making taxable supplies. As can be gleaned from above, when parties are concluding agreements for the transfer of a commercial letting enterprise as a going concern and applying the zero rating provisions, there are various factors that need to be taken into account from a VAT perspective. Cliffe Dekker Hofmeyr VAT Act: Section 11(1)(e) SARS VAT Guide 409 SARS Interpretation Note 57 SARS AND NEWS 2197. Interpretation notes, media releases and other documents Readers are reminded that the latest developments at SARS can be accessed on their website http://www.sars.gov.za

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Editor: Mr P Nel Editorial Panel: Mr KG Karro (Chairman), Dr BJ Croome, Mr MA Khan, Prof KI Mitchell, Prof L Olivier, Prof JJ Roeleveld, Prof PG Surtees. The Integritax 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. All rights reserved. No part of this Newsletter covered by copyright may be reproduced or copied in any form or by any means (including graphic, electronic or mechanical, photocopying, recording, recorded, taping or retrieval information systems) without written permission of the copyright holders.