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FAQ - 28 August 2014

27 August 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1.       Frequency of audits

Q: A client of ours has been audited by SARS for income tax for the 2009-2011 tax years.  What transpired from that was only one issue, which is to such an extent an interpretation issue, that it is going ahead past ADR now (this matter was cleared up completely from 2012 onwards).  We recently received a Notification of Audit letter for the 2013 tax year on income tax, which makes it 4 out of 5 for the past 5 years.  Is this reasonable, taking into account that the client’s affairs are very much in order? This is a company connected to a high net worth individual, but still one cannot but strongly suspect an attempt to intimidate and/or victimise the taxpayer. Can this behaviour by the SARS be contested or does the Tax Administration Act ("TAA”) not protect a taxpayer in any way against unreasonable behaviour from the SARS such as this?

A: It should be kept in mind that the administration of a tax Act [per section 3(2) of the TAA], includes ascertaining whether a taxpayer has submitted correct returns or documents in compliance with a tax Act or whether SARS has full information regarding anything that may affect the taxpayer’s liability for tax. This is an annual obligation, hence it would be difficult in our view to fault SARS for attempting to annually carry out this mandate, notwithstanding that it is carried out in multiple successive years.

Historically, the basis of an income tax audit in section 74B of the Income Tax Act ("ITA”) merely gave a right to SARS to audit for the purposes of administrating the Act. When the TAA came into effect, it contained a new provision in section 40 that specifically dealt with selection, verification and audit; namely that an audit could be on any basis considered relevant for the proper administration of a tax Act, including on a random or risk based assessment basis. This wide justification for audit was specifically inserted (per the 2010 parliamentary presentation by SARS) to prevent any argument that the purpose of the audit should be merely for the administration of a tax Act as it was then defined in the ITA and also to prevent a compulsion on SARS to audit where matters were reported to them. SARS wanted to keep its rights and obligations to audit neutral from third party interference. 

As to whether the decision to audit in successive years would constitute a reviewable decision under the Promotion Of Administrative Justice Act 2000 ("PAJA”) is most probably also answerable in the negative after the SCA held in Corpclo 2290 cc t/a U-Care v The Registrar of Banks (755/11) [2012] ZASCA 156 (2 November 2012) that the decision to investigate (i.e. audit) whether a person is in compliance with the law as well as the investigation itself, does not constitute "administrative action” for the purposes of PAJA.

SARS have previously confirmed that most of their audits result either from their risk assessment system or are random. Though taxpayers may feel "victimised” or intimidated if selected for audit in successive years, this does seem to be most probably not the case. In our view this just represents the annual obligation on the taxpayer to justify the information submitted in its return on an annual basis and would not constitute unreasonable behaviour by SARS.

2.       The disposal of a member’s interest in a close corporation 

Q: A close corporation which was formed in 1999 and has a R60 million turnover and profit of R1 million is up for sale. Our 70 year old client has a 50% member’s interest in that close corporation. Is Capital Gains Tax (CGT) payable or will his member’s interest in the corporation be exempt from CGT? Does the same rule apply should he not sell his member’s interest, but rather the business as a going concern or will the close corporation the pay CGT at an inclusion rate of 66.6%? Please provide me with the relevant provisions, SARS interpretation note(s) and if possible case law.

My view is that if the client sells his member’s interest he should not be paying CGT up to a maximum of R1.8 mil in a lifetime.

A: The provision that you refer to is found in paragraph 57 of the Eighth Schedule.  SARS explains the requirements and application in paragraph 12.6 of their CGT guide.  

The paragraph does not provide an exemption, but allows the person to "disregard a capital gain determined in respect of the disposal of an entire direct interest in a company (which consists of at least 10 per cent of the equity of that company), to the extent that the interest relates to active business assets of the business, which qualifies as a small business, of that company, if that person at the time of that disposal held for his or her own benefit that active business asset, interest in the partnership, or interest in the company (as the case may be) for a continuous period of at least five years prior to that disposal and was substantially involved in the operations of the business of that small business during that period, and has attained the age of 55 years…”  

Subparagraph (3) provides that the sum of the amounts to be disregarded by a natural person as contemplated in subparagraph (2) may not exceed R1,8 million during that natural person’s lifetime.  

The sale of the business from the Close Corporation as a going concern will not qualify for the paragraph 57 exclusion. You are correct in stating that this will result in a capital gain in the close corporation.  

Please note that the ‘turnover’ is not relevant – the close corporation must be ‘small business’ which means "a business of which the market value of all its assets, as at the date of the disposal of the asset or interest contemplated in subparagraph (2), does not exceed R10 million.”


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