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ABC Ltd v CSARS ITC 12984 (5 Sep 2014)

Monday, 15 September 2014   (0 Comments)
Posted by: Author: Pieter Faber
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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 penalties raised.


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.



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