By Danielle le Roux (DLA Cliffe Dekker Hofmeyr Tax Alert)
The matter ofXYZ CC v CSARS (case number 12860, 22 June 2012)was recently decided in the Tax Court.
The case principally revolved around the meaning of the term 'consultant' or 'consulting' with reference to a small business corporation (SBC) rendering a 'personal service' and thus not meeting the requirements for an SBC under section 12E of the Income Tax Act, No 58 of 1962 (Act). SARS accordingly refused to tax the Appellant as an SBC, thus denying it the benefit of special tax rates under section 12E.
The Appellant described its revenue as 'consultancy fees' and it was on this basis that SARS found the Appellant failed to comply with section 12E(4)(a)(iii) of the Act. Section 12E(4)(a)(iii) provides that a company or close corporation (CC) that earns more than 20% of its total receipts and accruals (other than those of a capital nature) from investment income plus personal services, does not comply with the definition of an SBC.
The term 'personal service' is defined under section 12E(4)(d) of the Act as including various professional services, as well asquasi-professional activities requiring a particular qualification, and in many cases, a licence, certificate or membership of a professional body. The latter may include 'consulting', 'management and 'broking'. The court had to decide on the meaning of the previously mentioned terms and whether these could be seen to describe any part of the Appellant's activities. Secondly, the court had to determine, if in fact the Appellant provided a 'personal service', whether the income from these, along with investment income, exceeded 20% ofthe Appellant’s total receipts and accruals. The second part to the latter question is whether these 'personal services' had been rendered by a member of the Appellant.
The court, being guided by legal interpretation principles, noted that the literal interpretation of the term 'consulting' or 'consult' was found in the Concise Oxford Dictionary to mean:a person who provides expert advice professionally.The Appellant did not hold any professional orquasi-professional qualifications, nor could the service it offered be described as advice offered by a professional person. It was on this basis that the court concluded that the Appellant was not providing a 'personal service'. This, coupled with the fact that the income received from any services that could possibly qualify as 'personal services' along with investment income did not exceed more than 5% of the receipts and accruals of the Appellant, meant that the Appellant did comply with the definition of a SBC.
The court ruled that SARS was compelled to tax the Appellant as an SBC in terms of section 12E of the Act. The court applied a literal interpretation of the term 'consulting' and used thecontra fiscumrule, which provides that a statute must be interpreted in favour of the Appellant, where the tax statute reveals ambiguity.