By David Warneke (Moneywebtax)
The Tax Court in South Gauteng recently handed down judgment in case number 12860, a matter between TML Consultancy CC and CSARS. The case is of particular relevance to small business corporations and micro businesses registered for the turnover tax that are involved in providing consulting, broking or management services. The corporation in question (the appellant in this case) was engaged in the business of ‘key account trade marketing', which consisted of negotiating the listing and sales of mainly food products with major retail corporate. The appellant's business also entailed the provision of promotional activities relating to the products of its clients.
By way of background, small business corporations enjoy a number of tax benefits which include a lower rate of income tax when compared with normal companies and accelerated wear and tear rates on their assets. These benefits apply to small business corporations as defined in section 12E of the Income Tax Act. There are a number of pre-requisites to qualification as a small business corporation, including one pre-requisite that disqualifies an inordinate number of corporations. The pre-requisite in question is that not more than 20 per cent of the total of all non-capital receipts and accruals and the capital gains of the corporation may consist collectively of investment income and income from the rendering of a ‘personal service'.
The term ‘personal service' was, during the tax years in question, defined as:
‘any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health, secretarial services, management, sport, surveying, translation, valuation or veterinary science, if the service is performed personally by any person who holds an interest in that [corporation]'.
A similar definition of the term ‘professional service' in the Sixth Schedule to the Income Tax Act disqualifies micro businesses from registering on the turnover tax system.
In terms of section 12E the service will not disqualify a corporation from falling into the definition of a small business corporation if the corporation has three or more full time employees (other than shareholders or persons connected to the shareholders) who are engaged in the business of rendering the service on a full time basis.
The import of the judgment is the relatively narrow interpretation given to the term ‘consulting' for purposes of the above disqualification. Prior to this decision it was uncertain whether the issuing of advice for a large enough fee in any circumstances by a corporation would potentially disqualify it from being classified as a small business corporation. The decision also sheds light on the interpretation of the terms ‘broking' and ‘management'.
In reaching its decision, the court relied on the ordinary or dictionary meanings of the various terms. It found that the services listed in the definition of ‘personal service' fall into two categories. The first of these consists of the items accounting, actuarial science, architecture, auctioneering, auditing, broking, draftsmanship, education, engineering, health, information technology, law, management, real estate, research, secretarial services, surveying, translation, valuation and veterinary service. The second consists of the items broadcasting, commercial arts, entertainment and sport. The court found that the items in the first category are all professional or quasi- professional activities, requiring a particular qualification and, in many instances, a licence, certificate or membership of a professional body. The court found that the term consulting which is the least easily defined of all the terms must be read eiusdem generis (latin for ‘of the same kind') with the other items in the first category. Importantly, this implied that the term ‘consulting' is limited to the offering of advice by a professional or qualified person.
In relation to the item ‘broking', the court considered a number of alternative dictionary meanings of the term ‘broking' or ‘broker'. It was not necessary, on the facts of the case, for the Court to decide which of the meanings to apply. The following meanings of ‘broker' were considered: ‘a person who buys and sells goods or assets for others', or ‘a person or organisation that buys and sells securities, currencies, properties, insurance etc on behalf of another'. A dictionary definition of ‘broking' was ‘the business or service of buying and selling goods or assets for others'.
In relation to the item ‘management', the court found that the meaning of the term is ‘the activity or skill of directing and controlling the work of a company or organisation or part of it'. ‘Management' will therefore not disqualify a corporation that does not control or direct the activities of its clients in circumstances where the management function rests with the clients.
This judgment is especially good news for corporations which, like the appellant in this case, offer non-professional advice, such as advising clients on marketing strategies. It means that such corporations will not be automatically disqualified from claiming significant income tax benefits.