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Juta Tax Law Review - March 2012

20 June 2012   (0 Comments)
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Juta Tax Law Review - March 2012

CASE LAW

 

SUPREME COURT OF APPEAL

 

TARIFF CLASSIFICATION UNDER THE CUSTOMS AND EXCISE ACT

 

CSARS v MultiChoice Africa [2011] ZASCA 41 (Judgment delivered by the Supreme Court of Appeal, Case No 218/10, 29 March 2011)

 

Tariff classification under the Customs and Excise Act must be implemented in accordance with the principles laid down in International Business Machines SA (Pty) Ltd v CCE 47 SATC 261

 

This decision of the Supreme Court of Appeal concerned the question of the appropriate tariff heading under which a certain model of digital satellite decoder should be classified for purposes of the Customs and Excise Act 91 of 1964. The court affirmed that the legal principles applicable to tariff classification were those laid down in International Business Machines SA (Pty) Ltd v CCE 47 SATC 261 and such classification involved a three-stage process, namely, interpretation, consideration of the nature and characteristics of the goods in question, and selection of the heading appropriate to such goods. The intention of the manufacturer or importer of goods and the way in which the goods were to be used were not relevant to tariff classification.

In the present matter, the classification turned on whether the decoder in issue had a principal or primary function. It was held that the court a quo had erred in answering this question in the negative, for it was clear that the decoder did indeed have a principal function, namely, the reception of a television signal. It was accordingly held that the decoder had been correctly classified by the Commissioner for the South African Revenue Service.

The court cited the decision in Venter v R 1907 TS 910 as authority for the proposition that a court may depart from the ordinary meaning of the plain words of the statute where, to give effect to those words, would lead to an absurdity so glaring that it could not have been contemplated by the legislature. It was held to be permissible for a court to interpret an enactment which is repugnant to the intention of this legislature in such a way as to give effect to that intention and make it compatible with other provisions, and that this principle applied equally to the Customs and Excise Act 91 of 1964. The court upheld the Commissioner's appeal and reinstated the latter's original determination.

 

THE INAPPROPRIATE GRANTING OF THE RIGHT TO APPEAL TO THE SUPREME COURT OF APPEAL

CSARS v Labat [2011] ZASCA 157 (Judgment delivered by the Supreme Court of Appeal, Case No 669/10, 28 September 2011)

Inappropriate granting by the High Court of the right to appeal to the Supreme Court of Appeal is to be discouraged

The Supreme Court of Appeal repeated its earlier criticism of the inappropriate granting by the High Court of the right to appeal to the Supreme Court of Appeal as this increases litigants' costs and results in a congestion of the Supreme Court of Appeal roll with cases that do not deserve that court's attention.

 

THE COURT HAS POWER TO DISMISS AN APPEAL WHERE THE JUDGMENT THAT IS SOUGHT WOULD HAVE NO PRACTICAL EFFECT

 

Clear Enterprises (Pty) Ltd v SARS [2011] ZASCA 164 (Judgment delivered by the Supreme Court of Appeal, Case No 757/10, 29 September 2011)

In terms of s 21A(1) of the Supreme Court Act the court has statutory power to decline to hear a matter in which the judgment that is sought will have no practical effect or result.

In this decision, the Supreme Court of Appeal ruled that, since the judgment sought in the appeal at hand would have no practical effect or result, s 21A(1) of the Supreme Court Act 59 of 1959 was applicable, in terms of which the court had the power to dismiss the appeal on this ground alone.

HIGH COURT

 

THE INTER-RELATIONSHIP BETWEEN THE INCOME TAX ACT AND SOUTH AFRICA'S INTERNATIONAL DOUBLE TAX AGREEMENTS

CSARS v Van Kets [2011] ZAWCHC 435 (Judgment delivered by the Cape High Court, Case No 13446/2011, 22 November 2011)

The interpretation of SARS's information-gathering powers in terms of s 74A and s 74B of the Income Tax Act must take account of South Africa's obligations under international tax agreements

The decision of the Western Cape High Court in CSARS v Van Kets [2011] ZAWCHC 435 concerned the interrelationship between s 74A and s 74B of the Income Tax Act 58 of 1962 and the provisions of South Africa's international tax agreements. These provisions empower SARS to demand that a person furnish information ‘for the purposes of the administration of this Act'.

In the present case, the Australian tax authorities had requested SARS to use these statutory powers to oblige a South African resident, Van Kets, to divulge information in his possession concerning one Saville, who was not a resident of the Republic but was resident in Australia and was a person of interest to the Australian fiscal authorities. Van Kets was a co-director with Saville in a certain foreign company and was thus a potential source of information about Saville's financial affairs.

The question was whether South Africa's Income Tax Act gave SARS the power to use its information-gathering powers so as to require a South African resident to give information concerning a non-resident who had no potential tax liability toward the South African fiscus.

The High Court answered this question in the affirmative on the basis that the provisions of South Africa's double tax agreement with Australia for the international exchange of information had the effect of broadening the scope of ss 74A and 74B of South Africa's Income Tax Act.

The court accordingly ordered Van Kets to disclose specified information to SARS for onward transmission to the Australian tax authorities.

THE DEDUCTIBILITY OF AUDIT FEES FOR PURPOSES OF INCOME TAX

Mobile Telephone Networks Holdings (Pty) Ltd v CSARS [2011] ZAGPJHC 181 (Judgment delivered by the South Gauteng High Court, Case No A5033/10 (Tax Court case No 12401), 8 July 2011)

In the circumstances of this case, it was held that 94% of the audit fees incurred by the taxpayer company were deductible in terms of s 11(a) of the Income Tax Act, and that the entire fee levied by an external professional firm for providing training to the taxpayer's staff on a new computerised accounting package was deductible.

This decision of the South Gauteng High Court concerned, firstly, the deductibility or otherwise, in terms of s 11(a) of the Income Tax Act 58 of 1962, of audit fees incurred by the taxpayer in a particular year of assessment and, secondly, whether professional fees charged by an outside professional firm for the training of the taxpayer's staff in respect of a new computerised accounting package were deductible in whole or in part in terms of s 11(a).

The audit fees in question had been incurred by the taxpayer in order to comply with its statutory obligations to have its accounts audited and were also incurred for the purposes of trading.

The court commented that the applicable legal principles (as laid down in Port Elizabeth Electric Tramway Co Ltd 1936 CPD 241) were clear and that it was the application of those principles to the facts of this matter that introduced complexities.

SARS argued that audit fees constituted an expense incurred after the earning of income, in that the audit verifies the expenditure after it has been incurred, and that the incurral of this expenditure does not advance the taxpayer's trade nor the production of income.

It was common cause that the taxpayer's business constituted ‘trading' as envisaged in s 1 of the Income Tax Act and that the work of the auditors extended beyond the verification of interest income and the receipt of dividends.

The court held that the expenditure in relation to the audit fees had been incurred to facilitate the carrying on of the taxpayer's trade, not only in a legally compliant manner but also to generate income. The court affirmed that a taxpayer is not required to demonstrate a direct causal link between expenditure and the production of income, but merely needs to show a close connection between the two. The court also affirmed the well-established principle that, in determining the causal connection between expenditure and income, regard must be had both to the purpose of the expenditure and to what it actually effects.

In this matter, SARS was not seeking to disallow the deductibility of the audit fees in their entirety but only a proportion. The court held that the grounds relied upon for SARS for such apportionment were factually and legally incorrect and that the apportionment made by the court a quo was also incorrect.

The court ruled that a fair apportionment would be to allow a deduction of 94% of the audit fee in question.

As far as the professional fee charged by the outside firm for the training of the taxpayer's staff on a new computerised accounting package was concerned, the court held that the taxpayer had discharged the onus of proving that the criteria for deductibility were satisfied, inter alia on the basis of the principle laid down in Joffe & Co Ltd v CIR 1946 AD that such expenditure was a necessary concomitant of the taxpayer's income-earning operations.

The court ordered that the deductibility of the quantum of the audit fees be remitted to the Commissioner to enable the latter to make new assessments for the relevant years of assessment on the basis that 94% of the audit fee was deductible. As regards the professional fee for the training of the taxpayer's staff on the computerised accounting package, the court ruled that such fees were deductible.

 

TAX COURT

AMNESTY UNDERT TAX AMNESTY LEGISLATION

CSARS v Saira Essa Productions CC [2010] ZASCA 154 (Judgment delivered by the Supreme Court of Appeal, Case No 162/10, 30 November 2010)

Criminal proceedings against the respondents in the regional court ought not to have been interrupted to enable them to apply to the High Court for a declaratory order as to whether they qualified for amnesty under the Small Business Tax Amnesty and Amendment of Taxation Laws Act 9 of 2006

The facts of CSARS v Saira Essa Productions CC were that Essa and Corlett were husband and wife and were joint members of Saira Essa Productions CC. In 2003, SARS had commenced criminal investigations against Essa and Corlett for non-payment of PAYE, under declaration of VAT, and the non-filing of tax returns for the 2003/4 tax years.

In the course of a criminal prosecution against these two individuals in regard to the VAT, the presiding magistrate in the regional court acceded to their request for an interruption of those proceedings to enable them to apply to the High Court for a declaratory order that they qualified for amnesty from prosecution for these offences under the Small Business Tax Amnesty and Amendment of Taxation Laws Act 9 of 2006. The High Court handed down a declaratory order that these two individuals had complied with their obligations under the amnesty legislation and were therefore exempt from prosecution on the charges that had been brought against them in the regional court.

SARS appealed to the Supreme Court of Appeal which held that the High Court had erred in finding that amnesty had validly been granted in respect of the VAT in issue because the amnesty legislation precluded SARS from approving an application for amnesty in circumstances such as the present, and also because the VAT in question had been paid before the application for amnesty had been submitted.

The Supreme Court of Appeal also held that the criminal proceedings in the regional court should not have been interrupted in order to seek a declaratory order from the High Court, inter alia because such an order would have been academic if those criminal proceedings did not result in a conviction at the end of the trial. The Supreme Court of Appeal upheld SARS's appeal against the order of the High Court and awarded costs on a punitive scale against the two individuals in question on the basis that their application to the High Court had been vexatious.

COMPENSATION FOR THE PREMATURE TERMINATION OF AN EXCLUSIVE DISTRIBUTION RIGHT; CAPITAL OR INCOME?

ABC Ltd v CSARS (Judgment delivered in the Western Cape Tax Court, Case number 11470, 14 March 2011)

Compensation received for the premature termination of a contractual distribution right may be either capital or revenue, depending on whether such compensation was for the diminution in the value of a capital asset or for the loss of trading profits.

In this decision of the Western Cape Tax Court, the facts were that the taxpayer company, which had been a wholesale seller of liquor to retail outlets since the 1970s, had been appointed for a period of 10 years (and terminable thereafter on one year's notice) as the exclusive distributor of certain whiskies for resale in southern Africa, and had undertaken not to distribute any competing products. The taxpayer had thereafter agreed to a proposal that this distribution agreement be terminated and, in consideration for so agreeing, had been paid a lump sum in compensation for the premature termination of the exclusive distribution rights.

The issue before the court was whether the taxpayer had discharged the onus resting upon it in terms of s 82 of the Income Tax Act 58 of 1962 of proving that this compensation was of a capital nature in that it was not for the loss of future profits but was intended to fill a hole in its income-earning structure.

A further issue before the court was whether, if the assessment in question were not set aside, SARS had been correct in declining to exercise its discretion in terms of s 89quat(3) of the Income Tax Act to waive the interest that was payable in terms of s 89quat(2) on the underpayment of provisional tax.

It was held that there is no single criterion for determining whether a receipt or accrual is of a capital or of a revenue nature, and that each case must be determined on its own facts. In the present matter, the exclusive distribution right in question was one of the taxpayer's capital assets. It did not follow, however, that the compensation payment was necessarily of a capital nature. The critical question was whether the taxpayer had been compensated for the capital value of this right that is to say for the loss of the value of that capital asset, or for loss of the profits the taxpayer would otherwise have made from the sale of the whisky. The exclusive distribution right in question had a finite lifespan and what the parties had agreed upon was the compensation to be paid for the relinquishing of this wasting asset. The method of calculating the compensation was an important factor but was not determinative of its fiscal nature.

In the result, it was held that the taxpayer had not discharged the onus of proving that the compensation in question was to fill a hole in its income-earning structure, as distinct from being compensation for the loss of future profits. SARS had therefore been correct in its determination that the compensation was of a revenue nature

As regards the issue of whether SARS had been correct in declining to waive interest in terms of s 89quat(3), it was held that the taxpayer had reasonable grounds for contending that the compensation in question should not have been included in taxable income. Consequently SARS had erred in refusing to waive such interest.

WHETHER TRADING STOCK HAD BEEN ACQUIRED FOR NO CONSIDERATION

Reported as ITC 1851 (2011) 73 SATC 241: Eastern Cape Tax Court: Judgement delivered on 28 October 2010:

The question whether trading stock was acquired for no consideration depends on the proper interpretation of the relevant contract; in this regard, the parol evidence rule will apply.

The taxpayer company had purchased a business and a schedule to the agreement reflected that the inventory of the business had been allocated a nil value. Section 22(4) of the Income Tax Act 58 of 1962 provides that where trading stock is acquired for no consideration, it is deemed to have been acquired at its market value on the date of acquisition. The taxpayer company in this case had accordingly claimed a deduction in terms of s 22(2) equal to the market value of the trading stock in question on acquisition.

It was held that, on a proper analysis of the agreement in question, the ‘inventory' to which schedule 6 to the agreement allocated a nil value in fact constituted trading stock and that other provisions of the agreement contained indicia that a proportion of the R80 million purchase price of the business and a proportion of the liabilities in respect of the purchase of the trading stock constituted consideration for the acquisition of that trading stock.

It was further held that the attribution of a nil value to the inventory by schedule 6 to the agreement was of little probative value and that the arbitrary allocation of the purchase price did not establish that no consideration had been given for the trading stock; indeed, the sale agreement itself proved the contrary. The parole evidence rule prohibited the leading of extrinsic evidence to contradict, add to, or modify the meaning of a document that was intended to be a complete memorial of a jural act and the taxpayer was therefore barred from adducing oral evidence regarding the negotiations that had preceded the conclusion of the agreement of sale.

It was held that, on a proper analysis of the agreement, consideration had indeed been given for the trading stock and that it had not been acquired for no consideration. However the taxpayer's conduct in contesting these issues had been reasonable and consequently no interest ought to be payable in terms of s 89 quat(3) on the underpayment of provisional tax.

LUMP SUM COMPENSATION FOR THE PREMATURE TERMINATION OF AN EXCLUSIVE DISTRIBUTION RIGHT HELD TO BE SUBJECT TO VAT

 

ABC Ltd v CSARS (Judgment delivered in the Western Cape Tax Court, Case No 179, 14 March 2011)

 

The surrender of a contractual right for the exclusive distribution of goods was held to constitute services that had been voluntarily supplied and the compensation received for such surrender of rights was held to be subject to VAT at a rate of zero per cent

In this decision of the Western Cape Tax Court, the vendor in question carried on business as a liquor wholesaler and had been awarded an exclusive distribution right to buy and sell stipulated whiskies in a designated territory for a fixed period. Prior to the end of that fixed period, the vendor had entered into an agreement for the premature termination of those distribution rights and had received a lump sum payment in compensation.

The issue before the court was whether, on these facts, there had been a taxable supply and, if so, whether such supply was subject to VAT at the standard rate of 14% or at zero per cent.

It was held that, in the context of the premature termination of the distribution rights, the surrender of such rights had constituted ‘services' which had been voluntarily ‘supplied', as defined in s 1 of the Value-Added Tax Act.

It was held that the value of those services was the amount of compensation received by the vendor and that the latter's decision to surrender its distribution rights had occurred in the ‘course or furtherance of any enterprise carried on' by the vendor as contemplated in s 7(1)(a) of the Act.

It was accordingly held that, in this regard, the vendors had supplied services on which VAT was chargeable.

It was further held that those services had not been supplied directly in connection with movable property situated inside the Republic at the time of such supply and that the supply was therefore subject to VAT at the rate of zero per cent in terms of s 11(2)(l) of the Act.

 


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