Tax Update Lecture: The Effect of Section 103 on Tax Planning
01 July 2007
Posted by: TaxFind™
Tax Update Lecture: The Effect of Section 103 On Tax Planning
The proposed changes to section 103 of the Income Tax Act will have a major effect on certain tax planning procedures.This is the opinion of Prof. Matthew Lester presented in a Tax Update lecture recently.
Section 103 of the Act concentrates mainly on the general anti-avoidance provisions and a discussion paper is currently on the table to support the amendments to the section.The principal debate surrounding these amendments focuses on how to establish when a transaction, arrangement or scheme is viewed as abnormal.The proposed changes will make it easier for the revenue authority, as well as the taxpayer to understand what will be deemed as abnormal. Prof. Lester suggests that this task is much more difficult than it actually sounds, especially under the current section 103.The problem is that the taxpayer is free to construct arrangements in such a manner as to reduce exposure to tax to a minimum.It is up to the revenue authority to decide when the taxpayer has crossed the legal boundary.
The discussion paper suggests that a group of indicators should be included in the new legislation that would serve as indication of abnormality.These indicators are listed in Prof. Lester's tax update.It is also suggested that where some of these indicators are present, a rebuttable presumption will exist which creates quite a burden on the taxpayer.
However, Prof. Lester believes that the proposed amendments would also change the purpose requirement and bring it in line with that of other countries.Determining abnormality would have to be made "objectively with reference to the relevant facts and circumstances". Prof. Lester believes that it will be difficult for the taxpayer to rebut the presumptions of tax avoidance1 abnormality.In addition, when specific audits arise, it would make sense to raise a section 103 investigation as alternative, provided due notice is given.This would bring the law in line with other foreign jurisdictions such as New Zealand, Canada and Australia. On the issue of penalties, Prof. Lester feels strongly that penalties at their current rate (100% for interest and 200% penalty) are essential for the efficient working of any revenue system,as they serve primarily as effective deterrents.Currently, if SARS was successful on a section103 attack, the taxpayer would only pay the tax and the interest. Prof. Lester believes that it is necessary to add penalties to this scenario, bringing revenue in line with other jurisdictions.
The new Advance Tax Ruling system is also deemed important.By modifying this system, the taxpayer would be able to get a ruling in advance of what SARS think of an arrangement, scheme or transaction.This would effectively leave the taxpayer who wants to set up a complex structure with no excuse, because it will be expected of him/her to obtain an advance ruling from SARS.Such a system should just maintain consistent rulings to ensure fairness, as these rulings cannot be used as precedents.Prof. Lester suggests the following leading up to the implementation of the new section 103:
-Different provisions should be put in place for schemes that are already in place (retrospectivity).
-The amendments seem to be aimed at corporate finance structures and not really the individual taxpayer.
It is, therefore, important to take note of certain aspects when entering into any corporate finance structure.These are listed in the tax update paper.
In conclusion, Prof. Lester believes that the new legislation will be effective in deterring people from avoiding tax by entering into abnormal arrangements.He is of the opinion that such taxpayers will become an endangered species, once this legislation is passed.
Source: By TaxTALK