ABC Ltd v CSARS ITC 12984 (5 Sep 2014)
15 September 2014
Posted by: Author: Pieter Faber
Author: Pieter Faber (SAIT Technical
Executive: Tax Law & Policy)
This is an appeal to the Gauteng Income Tax Court by the
taxpayer, ABC Ltd, against the assessment to employees’ tax by SARS as well as
the levying of penalties and interest on the assessed amount. SARS raised
additional assessments for employees’ tax in respect of the company car scheme,
the travel allowances and the company cell phones for the March 2003 to
February 2008 periods against which the taxpayer objected. The objection was
disallowed whereupon the taxpayer filed an appeal against the disallowance of
the objection on the three matters as well as in respect of the interest and
The taxpayer is an employer who implemented an employee
motor vehicle benefit scheme from 1 March 2003. The scheme allowed staff to
elect one of two options, namely to receive a company vehicle the cost of which
would be ‘sacrificed’ from the total cost of employment or to receive a travel
allowance which would also be sacrificed from the total cost of employment. The
total cost of employment in respect of choosing either option therefore
remained the same.
In respect of the company vehicle option, the employer would
purchase a vehicle which would be registered under the employee’s name as owner
but the title holder remained the employer to manage traffic fines and
licensing. The structuring of the total
cost of employment was done by the employee by completing an allocation form that
indicated how the package was to be structured on an annual basis which was
then also included in the terms of employment. Every employee who elected to
participate in the company car scheme had a notional account whereby the amount
‘sacrificed’ from the total cost of employment was credited and any costs
incurred in respect of the vehicle such as insurance, fuel and interest was
debited. After every three months if there was a debit balance in the notional
account it was recovered from the employee and if there was a credit balance,
the employee could have requested that it be refunded to him or her. A notional
value for the vehicle was captured and was reduced by a specific amount on a
monthly basis. The employee was entitled to purchase the vehicle at a later
stage and was also compelled to purchase the vehicle on termination of
employment or to sell it to a third party at the lower of the vehicle’s optimal
value or the balance of the notional motor vehicle value account. One month’s
vehicle salary sacrificed was retained for three months after termination in
respect of running costs being charged late in respect of the vehicle. The
taxpayer submitted that the total cost of employment, including the sacrificed
amounts, did not accrue to the employees as these amounts were contingent on
the employees electing the various benefits.
SARS contested that submission on the basis that the
‘sacrifice’ was not a genuine diminution of the remuneration package. It
further contended that the divestment in favour of the scheme was not an
antecedent divestment as required and therefore still accrued to the employee.
SARS based this submission on the fact that the employee was still entitled to
a ‘refund’ of any credit balance in the notional account and that the amount
accrued to him or her once he became unconditionally entitled thereto and that
the exercise of the option to sacrifice thereafter did not affect such accrual.
Had an antecedent divestment occurred, the employee would have forfeited the
balance. SARS further contended that the pension contribution deduction in
section 11(k) was based on remuneration and that the employer used the
pre-sacrificed amount to calculate the pension contributions.
As pertains the travel allowances, the amount sacrificed
would be elected by the employee subject to a maximum limit of 25 per cent of
the total cost of employment. SARS contended that the amounts awarded had made
no reference to business use which they contended was a requirement in section
8(1)(b)(ii) and that the employer merely allowed employees to structure allowances subject to
the maximum 25 per cent of total cost threshold. SARS submitted that depending on the
employees grade, the election was automatic and even excessive as evidenced by
an employee who received an allowance of R680 000 in a specific year.
The employer also provided employees the use of company cell
phones. These phones were subject to agreed billing limits between the employer
and the employee as well as agreed upon business use. The private usage of the
cell phones was not taxed by the employer. SARS submitted that no taxable
benefit was raised in respect of the private use of the cell phones as required
under the Seventh Schedule as the use of an asset for too little or no
consideration constitutes a taxable benefit in terms of par 2(b) read with par
6 of the Seventh Schedule. SARS furthermore contended that the method of
estimating the cost of the calls was also not justified or reasonable. The
taxpayer did not dispute the facts or law as submitted by SARS.
The taxpayer submitted that the penalties and interest
levied on the matters in the appeal, as dismissed, should be remitted as it had
no ill intent but rather misinterpreted the law.
On the first matter, the court agreed with SARS that the
employee had remained entitled to the amount of the sacrifice and that such
amount accrued to the employee. The amount sacrificed for the company car
scheme did therefore accrue to the employee as remuneration. On the second
matter of the travel allowances, the court held that the taxpayer did not
discharge the onus in proving that the basis of the assessment by SARS was in
fact or law incorrect. The appeal on this ground was therefore also dismissed.
On the third matter of the cell phone benefit the matter was conceded by the
taxpayer during argument.
As to the matter of the penalty and interest, the court
dismissed the appeal on the basis that paragraph 6(1) of the Fourth Schedule is
peremptory and therefore SARS was compelled to impose the penalty. It
furthermore held that the reasons advanced by the taxpayer did not constitute
exceptional circumstances which were also the basis why the interest was not
remitted. The court dismissed the appeal on all grounds and awarded SARS the
cost of two counsel.
Please click here to view full judgement.