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Can SARS Gate-Crash A Taxpayer’s Party?

31 March 2012   (0 Comments)
Posted by: Author: Johan van der Walt
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Can SARS Gate-Crash A Taxpayer’s Party?

Tax   planning  structures  normally   involve  multiple  parties.Sometimes  the  individuals  and/or  legal entities involved are interconnected.The  tax benefits generated through such structures,almost without exception,  annoy  revenue  authorities.SARS,  in  setting  out  to  extract  the  tax it  believes to be owing, occasionally runs into a "little problem”. The individual  or  entity in the structure that should really be the "target taxpayer”:
• might not have any assets (e.g. it is a tax-neutral once-off Special Purpose Vehicle);
• might be inconveniently situated(e.g. it is located off-shore or in a tax haven);
• might have a tax-exempt tax profile (e.g. a long-term insurer's policy holder fund); or
• might have an assessed loss.

The attack on the structure will therefore be completely futile,alternatively, such an attack may yield no cash payment. In such cases, the temptation arises to "follow the money”. That is, SARS might try and pin the tax consequences on the individual or entity in the structure that does have a substantial balance sheet of the offending tax benefit.

This gives SARS extensive powers to re-characterise the whole transaction, or a step or part thereof (refer to Section 80H). But first SARS would have to properly navigate the complexity of Part IIA of the Act. Furthermore, there are certain notice requirements (Section 80J). Consequently, in practice,at tempts by SARS to re-characterise a transaction in terms of Sections 80A-L have, so far,been few and far between.Taxpayers are often made to sleep in the beds they make. In CIR v Sunnyside Centre (Pty) Ltd 1997(1) SA 68 (A), it was held that "when a scheme works, no tears are shed for the Commissioner.

That is because a taxpayer is entitled to order his (sic) affairs so as to pay the minimum of tax.When he arranges them so as to attract more than the minimum he has to grin and bear it”. Surely, what is good for the goose is good for the gander? SARS’ determination to "follow the money” by simply re-characterising taxpayer s 'contractual arrangements could in certain instances result from the drive for revenue collections.

Taxpayers should be aware that SARS' powers to re-characterise taxpayers' contractual arrangements are by no means unfettered, Should SARS attempt to willy-nilly re-characterise the rights and/or obligations flowing from a transaction because the true target taxpayer is a man of straw or inaccessible, such attempt should be resisted strenuously.SARS should first be put through its paces to show that re-characterisation of the transaction is warranted either:
•in terms of the principles laid down in South African case law;or
•under Sections 80 A-L of the Act.

Re-characterisation as a short-cut to the pot of gold at the end of the rainbow is simply not on.

Source: By Johan van der Walt (Tax breaks)


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