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FAQ - 10 February 2016

10 February 2016   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Is a cash prize won by a company considered exempt income?

Q: A company entered a competition and won R100 000 for its contribution to the education sector.  Would this income be treated as exempt?

A: The receipt of the amount is not exempt from normal tax - section 10 or section 12P of the Income Tax Act.  

It must be remembered that the taxpayer bears the burden of proof should the matter be disputed by SARS - in this instance if the view is taken that it is not gross income (because it is capital in nature).  SAIT cannot provide an opinion and will provide some guidance only.  

The tax consequences of a prize are not specifically dealt with in the Income tax Act.  As there is a receipt one must apply the principles of the definition of gross income to determine if it will have tax consequences.  Our courts have laid down the law in this regard.  According to Judge Smalberger (in CIR v Pick ‘n Pay Employee Share Purchase Trust) "... any receipts accruing to the Trust were not intended or worked for, but purely fortuitous in the sense of being an incidental by product.  They were therefore non-revenue. That makes them accruals of a capital nature falling outside the definition of "gross income" in the Income Tax Act, and therefore not subject to tax.”  Judge Southwood in CSARS v Wyner agreed with this and stated the principle as follows: "This means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were designedly sought for and worked for...”   

Please note that we accepted that the amount is not in respect of services rendered and therefore not gross income in terms of paragraph (c) of the Income Tax Act. 

The fact that company entered the competition may well not change the fortuitous nature of the award.  The cases of Stander v CIR and CSARS v Kotze are relevant to this – it discusses the nature of a testimonial or accolade receipt.  

2. Why has SARS considered my Objection to be invalid?

Q: A Notice of Objection was lodged in May 2015. We received a letter from SARS in July 2015 stating that our objection was invalid.

A second objection was then submitted at a SARS branch office.  We’ve submitted additional documents and a detailed letter requesting condonation with each of the objections. This letter explains the extremely exceptional circumstances of the objection. After the second objection was treated as invalid, we lodged a Notice of Appeal in September 2015.  When we followed up with SARS we were told that the Appeal was rejected.

What are we doing wrong?

A: It seems that in response to the first objection, with its accompanying request to condone the late submission thereof, SARS responded (under subrule 4 of rule 7) that they regard the objection as invalid.  They stated as the ground for the invalidity that the grounds "provided by the taxpayer are not exceptional”.  The current practice generally prevailing in this regard is set out is Interpretation Note 15 and reads as follows:


"An objection that is not lodged within the time limit of 30 business days is an invalid objection. Under section 104(4) a senior SARS official may extend the period for lodging an objection if satisfied that reasonable grounds exist for the delay in lodging the objection. The extension may be granted after the 30 business day period has elapsed or alternatively, taxpayers can request an extension before the expiry date of that period if aware that the deadline will not be met.  

The TA Act does not prescribe the manner in which the discretion to extend the period for lodging an objection under section 104(4) should be exercised. The senior SARS official’s decision must comply with the requirements for administrative justice which are contained in section 33 of the Constitution of the Republic of South Africa read with the Promotion of Administrative Justice Act.  In particular, the senior SARS official’s decision must be reasonable. Essentially, for a decision to be reasonable, the senior SARS official is required to consider all relevant matters.

For the purpose of considering an extension to the period for lodging an objection, the senior SARS official is required to consider all relevant matters. These would include –

  • the reasons for the delay;
  • the length of the delay;
  • the prospects of success on the merits; and
  • any other relevant factor, for example, SARS’s interest in the determination of the final tax liability in view of the broader public interest relating to budgeting and fiscal planning.
Despite these factors being relevant to the exercise of discretion, they are neither all-embracing nor individually decisive and each case must be considered on its own merits.”   


It is correct that the rules allow for the taxpayer to, within 20 days of delivery of the notice of invalidity, submit a new objection.  Rule 7(6) deals with the instance where the ‘second’ objection was not done within the 20 day period or also invalid.  

It is possible that it is SARS’s view that the ‘second’ objection also didn’t provide reasonable grounds (as required by section 104(4) of the Tax Administration Act.  The next step would then have been to object to the decision by SARS not to extend the period – see section 107(1).  This doesn’t appear to have been done.  

The comment by SARS that the "first NOO was made invalid in July 2015 as you failed to respond to SARS’ request for additional information dated June 2015. In terms of Rule 8(2) of the ADR rules, a taxpayer has 30 business days within which to respond to a request for supporting documents/information.”  You have not mentioned earlier that SARS required further information in their notice of invalidity.  If they did, they are correct that rule 8(2) applied.  You however indicate that the additional documents required were delivered.  This may well be academic as it seems that the dispute relates to the condonation of the late objection.  Once the objection is accepted as valid the taxpayer can submit the documents.  Alternatively they should have been resubmitted with the ‘second’ objection.  

With regard to the dispute itself - we have not perused the documents, but from your letter of condonation we see the following:

The actual dispute (other than that SARS didn’t condone the late objection) relates to a disposal of an asset.  It then continues to state that there is a new capital gain calculation, which seems to relate to the amount of proceeds.   From the facts it is not clear on what basis the view was made to reduce the proceeds.  It is clear that the disposal was not subject to a suspensive condition or that the proceeds were not quantified.  It may well not fall within paragraph 35(3)(c).  We submit that the grounds of the objection should have dealt with the reason why paragraph 35(3)(c) applies.  

You may want to refer to tax case number 13472 where paragraph 35(3)(c), amongst others, was also in issue.  If the amount to be repaid must be dealt with in terms of paragraph 3, the adjustment under paragraph 35(3)(c) is not possible.  

Disclaimer: Nothing in these queries and answers should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.  

 

 


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