ruses of a deadbeat state · summary 08 june 2015: summary of all tax information exchange...

© 2015 C Divaris/The Electronic Publishing Corp CC Postnet Suite 72 Private Bag X87 BRYANSTON 2021 Phone 011-234-2434 Fax 086-515-0955 [email protected].

To subscribe (free), e-mail ‘subscribe’ to [email protected]. By supplying your e-mail address, you agree to receive e-mail notifications of forthcoming seminars and related offers from Bsp Seminars®. You can unsubscribe at any time by e-mailing ‘unsubscribe’ to the same address.

—An irreverent newsletter designed to keep you up to date—

Ruses Of A Deadbeat State The South African government is a lousy payer. Try to avoid being its creditor, especially not a victim-creditor.

MONTHLY LISTING Latest Legislation & Legislative Material To Emerge Or To Be Found Since Issue #146

This is a free publication devoted to unearthing what is going on in the SA tax field. If it isn’t here, it never happened. Unless otherwise indicated (‘§’), every document listed is cumulatively included in the Tax Shock, Horror Database, which is available

monthly, quarterly or even individually on DVD by post for R250 a month inclusive of VAT at 14%. This is perhaps the only newsletter in the world with its own stylebook (also free), by Costa Divaris & Duncan McAllister (2014 ed):

http://www.bspseminars.co.za/BspStylebook.pdf

For an extraordinary collection of tax and tax-related acts, books, databases and newsletters by and compiled by Costa Divaris: http://www.bspseminars.co.za/BspSeminarsPublications.pdf

Archived IN 15 March 2006: Interpretation Note 30 (Issue 1)—Documentary proof required on consignment or delivery of movable goods to a recipient at an address in an export country. Archived.*

Archived IN 18 February 2009: Interpretation Note 46 (Issue 1)—Income tax: amalgamation of amateur & professional sporting bodies. Archived.*

Archived IN 31 March 2009: Interpretation Note 18 (Issue 1)—Rebate for foreign taxes: natural persons. Archived.*

Archived IN 07 December 2009: Interpretation Note 46 (Issue 2)—Income tax: amalgamation of amateur & professional sporting bodies. Archived.*

Archived IN 30 March 2012: Interpretation Note 31 (Issue 1)—Documentary proof required for the zero-rating of goods & services. Archived.*

Archived IN 30 March 2012: Interpretation Note 40 (Issue 1)—VAT treatment of the supply of goods &/or services to &/or from a customs controlled area of an industrial development zone. Archived.*

Archived IN 06 June 2012: Interpretation Note 43 (Issue 3)— Circumstances in which certain amounts received or accrued from disposal of shares are deemed to be of capital nature. Archived.*

Archived IN 01 October 2012: Interpretation Note 23 (Issue 1)—Estimated assessments (foreign funds or assets). Archived.*

Archived IN 04 October 2012: Interpretation Note 58 (Issue 1)—The Brummeria case & the right to use loan capital interest free. Archived.*

Archived IN 02 November 2012: Interpretation Note 47 (Issue 2)—Wear-&-tear or depreciation allowance. Archived.*

Archived IN 06 November 2012: Interpretation Note 46 (Issue 3)—Income tax: amalgamation of amateur & professional sporting bodies. Archived.*

Archived IN 06 November 2012: Interpretation Note 64 (Issue 1)—Income tax exemption: bodies corporate established under the Sectional Titles Act no 95 of 1986, share block companies established under the Share Blocks Control Act no 59 of 1980 & associations of persons managing the collective interests common to all members. Archived.*

On these 2012 items 06 November 2012: Tax Shock, Horror Database updated with INs archived in 2012. Sikhakhane report 05 November 2014: Investigation report—Conduct of Mr Johan Hendrikus van

Loggerenberg. For the recommendations, see the Monthly Notebook. Since the report is ninety-eight pages long, I am excluding it from the TSHD. But read on for a link.*§

High Court case 09 December 2014: Lezmin 2358 CC v Tomeridian Properties CC and Others (36813/2014) [2014] ZAGPJHC 366. Very obscurely, VAT features in this judgment on a

Issue: 147 Tax Shock Horror Database—14 742 items (3,79 GB)—5 950 subscribers June 2015

mailto:[email protected]


http://www.bspseminars.co.za/

http://www.bspseminars.co.za/

147 Tax Shock, Horror 2015—June—2


purported cancellation of a property transaction.§ National Budget 25 February 2015: W2. Website annexure to the 2015 Budget Review—Structure of the Review government accounts (146 TSH 2015). SABC News 17 Mar 2015: SARS Commissioner urged to release Sikhakhane report. By Julius

Malema’s lawyer.§ SCOF summary 25 Mar 2015: SARS on Sikhakhane report; etc. Lacking sight of the report (although not

actually admitting it), the SCOF could focus on really important stuff, like the alleged preponderance of whites at SARS. See the Monthly Notebook.§

Eyewitness News 25 Mar 2015: SARS Commissioner: Sikhakhane report isn’t ready for Parly—MPs were not given the report, which contains findings of an investigation panel led by Muzi Sikhakhane.§

SABC News 25 Mar 2015: Moyane refuses to release rogue unit report.§ Eyewitness News 26 Mar 2015: DA in possession of Sikhakhane report.§ High Court case 04 April 2012: Meijer NO and Another v Firstrand Bank Ltd (formerly known as First

National Bank of Southern Africa) and Another, In re: Firstrand Bank Ltd (formerly known as First National Bank of Southern Africa) and Another v Meijer and Others (2123/2010) [2012] ZAWCHC 23. On divorce & trusts (146 TSH 2015).

Missing SARS draft 22 April 2015: I cannot find any earlier reference to or even download this document on the automatic exchange of information under FATCA:

The implementation of the intergovernmental agreement (IGA) is on track and SARS published a draft general guide to provide further assistance to financial institutions.§

GoSouthOnline 26 April 2015: Zuma rejects judicial commission of inquiry into SARS.§ SARS AB release 28 April 2015: SARS advisory board release on Sikhakhane report: 9. The SAB considers that it would be in the public interest and promote transparency, for the full

Sikhakhane report to be made public. It is noted that SARS has no objection thereto. Click here to access the report. SARS may be approached to obtain copies (contact person: Luther Lebelo: 083 463 8882). The SAB is engaging with SARS in respect of the recommendations in the report. It is to be emphasized that the most important recommendation has been implemented, namely the disbandment of the covert unit.*

Politicsweb 28 April 2015: Publishes Sikhakhane report.§ SABC News 28 April 2015: SARS establishes secret intelligence unit.§ SABC News 29 April 2015: SARS aims to restore its integrity. On the closure of the ‘rogue’ unit.§ Tax court case 15 May 2015: TC 13276. A case under art 5(1) & (2)(k) of the tax treaty with the USA. Per

Vally J, in an extraordinarily discursive judgment: It is common cause that the appellant, a resident of the USA, provided consulting services to X in

South Africa through its employees (the number of which varied from time to time, but constituted 17 in total) for a period exceeding 183 days during February 2007 and May 2008. On these facts, there is no dispute that the requirements of article 5(2)(k) were met, and if the interpretation given above is correct then it follows that the appellant became liable for taxation in South Africa as its operations fell within the meaning of ‘permanent establishment’ as used in the DTA.

Moreover, the boardroom in which the appellant worked while in SA constituted ‘a fixed place of business’ here. The appellant raised a poor defence on the issue of the additional tax imposed under s 76 of the Income Tax Act, as it stood at the time, & so lost on that ground as well. Read on for the sequelae of the case.*

Business Day 21 May 2015: SARS official quits as spy unit fallout continues. I understand that the resignee had twenty years’ service but I reckon the SCOF will be pleased.§

MOU 22 May 2015: Memorandum of understanding between SARS & the Mauritius Revenue Authority concerning the application of the provision of art 4(3) of the agreement between the government of the Republic of Mauritius & the government of the RSA for the avoidance of double taxation & the prevention of fiscal evasion with respect to taxes on income signed on 17 May 2013 in Maputo. How to settle the question of dual residence. A mixed text & image document & thus inaccessible. Unforgivable.

RAF notice 21 May 2015: RAF financial status update. About 5 300 service-providers are owed R7 b, some since October 2014:

1 209 writs to the value of R175 m have been recorded and are due.… We are awaiting the additional funding allocated to the Road Accident Fund (RAF) by the

Minister of Finance, and currently the view is that this will be solely dedicated to addressing the oldest outstanding amounts for at least the first four months following receipt in no order other than from the oldest outstanding amount. It is further important to note that the additional funding is not sufficient to address both the backlog and close the gap between productivity and available funding going forward. The situation we find ourselves in is here to stay for the foreseeable future as indications are that the Accounts Payable book will only reduce to a comfortable level in the next 24+ months.

Politicsweb 27 May 2015: SA’s looming crisis. An interview with RW Johnson on his latest book How Long Will South Africa Survive? The book does Mr Johnson no credit, & his prediction of

http://www.sars.gov.za/AllDocs/Documents/Adhoc/Sikhakhane%20Report.pdf

http://www.sars.gov.za/AllDocs/Documents/Adhoc/Sikhakhane%20Report.pdf



an approach to the IMF within two years, resulting in ‘a regime change of some kind’ is way off the mark. We can run our country, badly, for much, much longer than that. We have low external borrowings, & our debt-to-GDP ratio will take time to reach even 50%.§

SCA case 28 May 2015: CSARS v Candice-Jean van der Merwe (20152/2014) [2015] ZASCA 86. An application for condonation of a lapsed appeal, which could not have resulted in a worse outcome for the taxpayer, who, together with her father Gary (GW van der Merwe), has a colourful fiscal history (131 TSH 2014, for example). The following extract from the judgment of Ponnan JA ought to jog your memory:

Despite relatively modest earnings from her modelling career (she declared taxable income of R20 023, R20 912, R24 995 and R45 336 for the 2009 to 2012 tax years) lady luck, it would seem, suddenly smiled on the applicant during 2013. According to SARS, it had been made aware by the Financial Intelligence Centre that the Standard Bank of South Africa had received USD15,3 million for her benefit on 16 May 2013. The remitter of those funds, which had been transferred from the Bank Med Sal in Lebanon, was identified as Muhamad Muhamad Nazih Rawwas. Moreover, she acquired two motor vehicles during May and June of that year, namely an Audi R8 Spyder and a Range Rover Evoque collectively valued in excess of R 2,5 million. SARS asserted that: (a) the applicant was simply a conduit and had received the funds in question on behalf of and for the benefit of her father; and (b) the income declared by her could not sustain the acquisition of those vehicles.

This being a family newsletter, you need to read the judgment to see the taxpayer’s explanation for her good fortune, although, alas, to no avail:

Here the breaches of the rules are of such a nature and the explanation offered so unacceptable and wanting that condonation ought not, in my view, to be granted, irrespective of the applicant’s prospects of success, which were in any event poor. It remains to add that the conduct encountered here is deserving of an order of costs on the punitive scale. The conduct of the applicant and her father throughout has generated costs that should not have been incurred. Those costs should plainly not be borne by compliant taxpayers. It follows that the award of costs on the scale as between attorney and client is justified in this case.

Acceding to SARS’s application, the court also appointed a curator bonis, both to safeguard assets & investigate how Van der Merwe père came to control his daughter’s considerable wealth.*

SCA case 01 June 2015: Miles Plant Hire v CSARS (20430/2014) [2015] ZASCA 98. An appeal for condonation of a lapsed appeal against a final order of winding-up that went horribly wrong for the taxpayer’s sole director. Per Meyer AJA:

Finally the matter of costs. SARS seeks a punitive costs order de bonis propriis [out of his own pocket] against Ms Pandaram. I am of the view that an award of costs against her personally on the scale as between attorney and client is warranted and appropriate in the circumstances of this case. Ms Pandaram is the person who represented Miles in the appeal and in the application for condonation. The liquidators were given the assurance that Miles’ estate would not be exposed to any costs. Ms Pandaram has shown a general lack of candour and has played loose and fast with the rules of our courts. There is no justifiable reason why the body of creditors should financially be prejudiced as a result of this litigation. Moreover, SARS has been put through the unnecessary trouble from defending a judgment from the high court in its favour. There seems to be no reason for compliant taxpayers to be saddled with those costs.*

OECD summary 01 June 2015: Jurisdictions participating in the Convention on Mutual Administrative Assistance in Tax Matters. An astonishing list.*

news24 01 June 2015: Malema the victor as SARS withdraws sequestration.§ National Assembly re- 02 June 2015: Drastic measures required to deal with compensation fund mess, says lease committee: SCOPA noted the action by the Minister and Director-General of Labour to suspend the Chief

Financial Officer of the Compensation Fund and the removal of top management including the Commissioner, Mr Shadrack Mkhonto, as of 01 June 2015. But the Committee believes that more stringent measures are necessary to ensure that the entity functions in a manner it is supposed to.

Why would the National Assembly concern itself with this insignificant scandal, involving a mere R12 m in wasteful expenditure & R26 m in criminal losses? Because it might be of concern to the unions?

SARS release 02 June 2015: SARS withdrawal of provisional sequestration order against Mr Malema: It is important to note that the Court made no finding that SARS is bound by the compromise

agreement with Mr Malema that it entered into in May 2014. SARS retains its position that the compromise agreement is not binding. Hence no concession has been made by SARS, with respect to the recovery of the current and future outstanding taxes.*

After the flood of recent revelations, all write-offs & compromises entered into by SARS over the past ten years ought to be the subject of an independent forensic enquiry.

news24 02 June 2015: Malema hits back at SARS.§ Business Day 02 June 2015: SARS lets Malema off the hook.§ Treasury release 03 June 2015: Minister tables ESKOM special appropriation bill: Today, the Minister of Finance Mr Nhlanhla Nene tabled in Parliament the ESKOM Special



Appropriation Bill which will enable the appropriation of the R23 billion allocation to ESKOM as well as the Amendment Bill which will allow for the conversion of the R60 billion existing subordinated loan to the company into equity.

It seems that this additional money will enable ESKOM to continue overpaying for diesel & (substandard) coal supplied by privileged providers. Wouldn’t it be cheaper to buy out the providers, even with a golden handshake? As for the conversion of earlier loans to share capital, the original funding, according to the ESKOM Subordinated Loan Special Appropriation Bill (2008/09–2010/11 Financial Years) Bill, 2015(§), it was advanced

in support of its investment in enhanced electricity generation capacity and security of supply. What a curious view of ‘investment’! Treasury speech 03 June 2015: Remarks by MOF—National Assembly. Introducing the Rates & Monetary

Amounts & Amendment of Revenue Laws Bill, the Eskom Special Appropriation Bill & the Eskom Subordinated Loan Special Appropriation Bill.

Bill 03 June 2015: Rates & Monetary Amounts & Amendment of Revenue Laws Bill, 2015 [B 15—2015].*

Updated SARS table 03 June 2015: Interest rates—Table 1: A note was added to Table 1 to explain the difference between the PFMA's determination of the

‘prescribed rate’ and the implementation thereof under the Income Tax Act, 1962.* SARS release 04 June 2015: SARS enforcement operations for May 2015: The final order for the winding up of the closed corporation Valinor Trading 142 (trading as Out

of Africa Adventurous Safaris), was handed down in the Gauteng North High Court on 29 May. The entity is related to the Limpopo game farm owner who was arrested for alleged rhino poaching and related crimes in South Africa in 2010. SARS applied for the liquidation of the entity after obtaining a judgement for outstanding VAT debt of R93 million and outstanding income tax debt of R123 million, based on the inability of Valinor to pay its outstanding debt.*

Footnote: A news24 report of 21 September 2010 appears to be relevant: Dawie Groenewald, 42, the wealthy driving force behind Out of Africa Adventurous Safaris in

Polokwane, his wife, Sariette, 34, and Tielman Erasmus, a professional hunter, are behind bars. They were arrested on Monday along with Dr Karel Toet and Dr Manie du Plessis, two veterinarians from Modimolle, and Toet's wife, Marisa.

ZAeconomist 04 June 2015: Will the Reserve Bank prove data or path dependent? The major uncertainty facing the markets in the near future will be the reaction to the Fed rate

increase. The impact of this widely expected move on emerging market currencies will be very hard to predict with accuracy. In the past, rising US rates that accompanied faster US growth rates have usually had a favourable impact on emerging markets. This is because US growth implies faster global growth, from which emerging market economies and their financial markets and currencies stand to benefit. It makes little sense for the Reserve Bank to talk up local interest rates for fear that higher rates in the US will weaken the rand and cause inflation in SA to increase. Higher interest rates will do nothing to counter such a shock, should it occur.§

CCT decision 05 June 2015: Chevron SA (Pty) Limited v Wilson T/A Wilson’s Transport and Others [2015] ZACC 15. An unsuccessful attempt under the NCA by a debtor to score an immense refund on account of the creditor’s failure to register as a credit-provider: Per Madlanga J (footnotes suppressed):

While this Court has deemed it ‘unwise to attempt…a comprehensive definition of property’, it cannot be gainsaid that money in hand constitutes a property interest protected by section 25 of the Constitution. Unlike the personal right this Court was concerned with in Opperman, here Chevron received payment of approximately R33 million.

So, thanks to this case & Wesbank v CSARS (92 TSH 2010), we now know that the protection-of-property provision of the Constitution (s 25) covers land, corporeal movables & money in hand. The Opperman case referred to mentions a trade mark as a possible candidate, & definitely includes a right to restitution of money paid, based on unjustified enrichment.§

DTC release 05 June 2015: Release of Davis Tax Committee first interim report on macro analysis for public comment:

The Macro Analysis Report aims to articulate a set of overarching principles of a good tax system to guide an assessment of the current South African tax system so as to identify the needs/priorities for reforms and to make relevant recommendations for tax reforms. It serves as a useful precursor of other, more specialized reports of the DTC. The Macro Analysis Sub-Committee consulted widely and took into account ten submissions from the public in producing the report.

DTC presentation 05 June 2015: DTC chairperson (Judge Dennis Davis) to the Standing Committee on Finance.

DTC abridged report 05 June 2015: First interim report on macro analysis for the MOF—The tax system & inclusive growth in SA: towards an analytical framework for the DTC.

DTC report 05 June 2015: First interim report on macro analysis for the MOF—The tax system & inclusive growth in SA: towards an analytical framework for the DTC.

On these items 05 June 2015: I’ll read this report as soon as the Katz Commission releases & I have



read its final report. First things first. FIC release 05 June 2015: Cross border remittance exemption: The Minister of Finance has approved an exemption for cross border remittances. The

exemption is intended to reduce the regulatory obligations for financial institutions providing cross-border remittance services. This is to enable a reduction in the costs involved in remittances and to encourage remitters to use formal channels for fund transfers. At the same time, the intention is to reduce the risk of anonymous cross-border transfers that would encourage money laundering and terrorist financing.

GN 461 GG 38844 05 June 2015: Exemption in terms of Financial Intelligence Centre Act, 2001. Under s 74. Now allowed are single transactions not exceeding R3 000 a day & R10 000 in a calendar month.

Treasury release 05 June 2015: First batch of the draft Taxation Laws Amendment Bill, 2015. All about counter measures for tax-free corporate migrations, transitional tax issues resulting from the regulation of the business of hedge funds & tax implications of outright transfer of collateral.*

Draft bill 05 June 2015: Draft Taxation Laws Amendment Bill. 2015.* Draft EM 05 June 2015: Draft Explanatory Memorandum on the Taxation Laws Amendment Bill.

2015 (first batch) WP—‘15.* On these items 05 June 2015: An explanatory note from SARS: National Treasury released the First Batch of the 2015 Draft Taxation Laws Amendment Bill on

5 June 2015 for public comment. It is intended to solicit comments on three specific amendments that might require further consultation before it is included in the draft Taxation Laws Amendment Bill to be published in July. It also [serves] notice to taxpayers of proposals for earlier effective dates for some of the proposed amendments.

How can a draft, highly likely to be amended, serve as effective notice of changes having patrimonial significance? SA business has been putting up with this sort of crap for years, & the big accounting & legal firms lap it up.*

Treasury release 05 June 2015:Second draft of ministerial regulations issued under the Financial Markets Act 19, 2012.

GN 449 GG 38839 05 June 2015: Agreement between the government of the RSA & the government of Belize for the exchange of information relating to tax matters.*

GN 470 GG 38860 05 June 2015: Minute under s 5(3) of the Diplomatic Immunities & Privileges Act. This is the supposed granting of immunity to delegates to the meeting of the Commission of the African Union in June 2015, including the President of the Republic of Sudan, Omar Hassan Ahmad Al Bashir. The agreement concerned is the Host Agreement set out in GN 409 GG 35376 of 24 May 2015.§

SARS guide 05 June 2015: Guide on the US Foreign Account Tax Compliance Act (FATCA).* SARS release 05 June 2015: Launch of small business support desks & opening of new Soweto

branch.* SARS speech 05 June 2015: Launch of the small business desk & official opening of Orlando East

branch, Soweto. By the CSARS. As usual, the mythical NDP scores a mention.* Business Day 05 June 2015: ANC votes down salary cut to R1 for president. More to the point, his

salary is now R2,7 m.§ Treasury release 06 June 2015: Fitch Ratings affirms South Africa’s ratings, maintains negative outlook: Fitch said key drivers for the ratings decision included weak economic growth potential on the

back of electricity supply constraints and external financing vulnerabilities. The country’s deep local markets enhance fiscal financing flexibility, the ratings agency said. It added that the structure of government debt, 91 per cent of which is denominated in local currency, limited exchange rate and refinancing risks.

Sunday Times 07 June 2015: Juju facing garnishee threat. Based partly upon an alleged leak at SARS.§ Sunday Times 07 June 2015: Neil Aggett’s torturer paid millions by SARS. About Steve Whitehead & his

alleged intelligence work for SARS.§ Updated SARS summary 08 June 2015: Summary of all tax information exchange agreements.* Draft SARS PN 08 June 2015: Incidences of noncompliance by a person in terms of s 210(2) of the Tax

Administration Act, 2011 that are subject to a fixed amount penalty in accordance with s 210(1) & 211 of that act. All about automatic exchange of information (AEOI) under FATCA.*

new24 08 June 2015: SARS sues former spokesperson for defamation. About Adrian Lackay.§ IMF statement 09 June 2015: SA: concluding statement of an IMF staff visit: With potential growth estimated to have declined to 2–2.5 percent, alleviating electricity

bottlenecks and implementing structural reforms are key to reviving growth and creating more jobs. Global growth will improve only modestly and the expected increase in US interest rates could renew external financing pressures. Also, there is limited room for demand management policies.

Draft regulation 11 June 2015: Draft tariff notice to amend Schedule no 6: Provision is being created for the use of undenatured ethyl alcohol of an alcoholic strength by



volume exceeding 80% by volume or higher to be used in the fortification of wine under rebate of duty.*§

SARS updated BRS 11 June 2014: Automatic exchange of information (FATCA) SARS_External BRS_2014_Automatic_Exchange_of_Information_v_1_0_. Illegal © claim. At 142 pages, too large for inclusion in the Tax Shock, Horror Database. In any event, I am no longer including these mysterious documents in the TSHD.*§

Updated SARS table 11 June 2015: Table A—Average exchange rates for a year of assessment.* Updated SARS table 11 June 2015: Table B—Average monthly exchange rates.* Treasury speech 12 June 2015: SA’s tax system & the tax reform agenda for 2015 & beyond. By the MOF. Treasury speech 12 June 2015: Sub-national Doing Business Report. By the deputy MOF. SARB speech 12 June 2015: Global monetary policy normalization & SA financial markets. By Daniel

Mminele: We at the South African Reserve Bank are mindful of our mandate and are committed to

achieving our inflation target in the interest of sustainable and balanced economic growth. The MPC has indicated that the balance of risks to our inflation outlook continues to be tilted to the upside, and that recently inflation risks have increased, which suggest that an unchanged monetary policy stance cannot be maintained indefinitely.

Even in the face of a moribund economy? GN R 475 GG 38864 12 June 2015: Levy on potatoes under the Marketing of Agricultural Products Act. GN 510 GG 38874 12 June 2015: Income tax 2015: notice to furnish returns for the 2015 year of

assessment. Under s 66(1) of the Income Tax Act read with s 25 of the Tax Administration Act.*

BDlive 12 June 2015: Government will not ‘act unilaterally on tax’. According to the MOF. Yeah.§ Treasury release 15 June 2015: Local government revenue & expenditure: third quarter local government

s 71 report for the period: 1 July 2014–31 March 2015: It needs to be acknowledged that not all the outstanding debt of R104,9 billion is realistically

collectable as these amounts are inclusive of debt older than 90 days (historic debt that has accumulated over an extended period), interest on arrears and other recoveries.

If rates and consumer debt is limited to below 90 days, and all interest is excluded from the calculation then the actual realistically collectable amount is estimated at R20,8 billion.

Treasury release 15 June 2015: Standard & Poor’s affirms SA’s ratings, maintains stable outlook: Insofar as the energy constraint is concerned, efforts to resolve the challenges are well under

way. Eskom will be capitalized in a deficit neutral manner as per plan; independent power producers are delivering close to 2 000 megawatts (MW) of electricity and more have been contracted that will take their contribution to around 5 000 MW when construction of the plants is completed.

What could be more pathetic? ESKOM is an unmitigated disaster, no matter how it might be funded, & 2 000 MW are peanuts in the face of the Medupi & Kusile fiascos. Stand by for more magical thinking:

The implementation of the National Development Plan (NDP) is getting embedded in the way government works: it started with a granular plan on the ocean economy and is being extended to agriculture and other areas of delivery.

BPR 193 15 June 2015: Debt reduction by way of set-off. The same transaction the government has concluded with ESKOM, without benefit of a binding private ruling—capitalizing a loan account.*

BPR 194 15 June 2015: Disposal of shares through a share buy-back & a donation. I pass. Far too much work is necessary to see if this BPR is to any extent justified.*

Draft regulation 15 June 2015: Draft tariff notice to amend General Note B.4 in Schedule no 1: This draft proposes an amendment to General Note B.4 to provide for the calculation of the duty

on goods with a statistical unit of ‘u’ (number of units) to be based on full units only and not proportionately.*§

Treasury release 17 June 2015: New SA & Mauritius tax treaty enters into force. Generally effective as from 1 January 2016.

GN 471 GG 38862 17 June 2015: Agreement between the government of the RSA & the government of the Republic of Mauritius for the avoidance of double taxation & the prevention of fiscal evasion with respect to taxes on income.*

Updated SARS summary 17 June 2015: Summary of all treaties for the avoidance of double taxation.* GN R 526 GG 38886 17 June 2015: Determination of upper limits of salaries, allowances & benefits of

different members of municipal councils. Under the Remuneration of Public Office Bearers Act. Doesn’t this come suspiciously soon after GN R243 GG 38608 of 25 March 2015 (144 TSH 2015)?

Treasury speech 17 June 2015: Third Commonwealth stakeholders’ conference on public debt management & user group meeting. By the MOF:

In South Africa, we experienced a recession in 2009 that led to a tax revenue shortfall of R60 billion. This recession came at a time when we had just posted two years of a budget surplus. As a result, we had fiscal room to respond and take an expansionary stance to counter its effects. Government has expanded its debt in response to difficult economic circumstances.



As a percentage of GDP, net debt has grown from 21,8 per cent at the start of the financial crisis in 2008/09 to 40,8 per cent in 2014/15. Revenue collection has underperformed due to weak economic growth, leading to increased debt accumulation to support the fiscal stance.

And I thought that it was down to borrowing to pay salaries & overspending generally! Pinocchio also had his say:

We are making good progress in areas such as ports reform, the introduction of a single transport regulator, broadband rollout and the reform of key state owned enterprises such as South African Airways (SAA) and Eskom. We have also had success in putting in place policies that target job creation such as the Jobs Fund, Expanded Public Works Program (EPWP) and the Employment Tax Incentive (ETI).

Bullshit baffles brains (BBB). High Court case 17 June 2015: Mark Lifman and Others v CSARS and Others (5961/15) [2015] ZAWCHC.

The outcome of an urgent & then semi-urgent interim interdict to frustrate default judgments obtained by SARS under s 172 of the Tax Administration Act. Includes an attempt to stay the disposal of movable goods attached & removed under warrants of execution. The underlying tax debt arose from voluntary submissions made, & excluded further tax debts covered in letters of finding, still pending (a press report reproduced in 145 TSH 2015 mentions a figure of 388 m). Per Mantame J:

After careful consideration of Section 172(1) of the T AA, l come to the conclusion that applicants are disingenuous in their reading and interpretation of this Section. Firstly, they do not dispute the fact that they have an outstanding tax debt. and that first respondent intended to take a civil judgment amongst others should they fail to make payment by end of March 2015. Applicants are not upfront with this Court as to what would empower first respondent to rely on these two above underlined undisputed points amongst others. if it is not Section 172(1). Applicants took issue with the 10 business days’ notice that he was not given by the first respondent. In my opinion, this point is absurd, as the purpose of giving notice is to give notification or warning to that person or entity to allow preparations to be made.

The day after SARS obtained its default judgments the taxpayer started to go into business rescue. While Mantame J took steps to prevent the tax debt before him from falling into any business rescue, it seems pretty certain that any other tax debts are going to be involved in a further, interesting dispute, the question being whether tax defaulters may seek refuge, when all else fails, in a business rescue. Wouldn’t the lawyers love that one! There are fees to be earned, regardless of the merits.*

CCT decision 18 June 2015: South African Reserve Bank and Another v Shuttleworth and Another [2015] ZACC 17. I am so biased against the decision of the majority—finding against Mr Shuttleworth & thus, incidentally, saving the state some R2,9 billion in exit levies collected since 2003—that I cannot do it any justice. It found the exit levy not only to be constitutional but not a tax, being aimed at regulating conduct rather than raising revenue. If our law truly says that a tax is only an impost designed to raise revenue, the law is an ass. Froneman J’s lonely dissenting judgment is far more persuasive:§

Briefly stated, my reasons for disagreement are these: (a) The exit charge of 10% raised revenue for the national government. (b) National revenue of whatever kind, tax or not, may only be raised by original legislation

passed by Parliament. Only the manner of its implementation, not the decision to raise it, may be regulated in delegated legislation.

(c) Parliament may only delegate subordinate regulatory authority to the Executive and may not assign plenary legislative power to another body. The regulation-making power granted to the President in section 9(1) of the Exchanges Act effectively assigns plenary legislative power to the President. That is constitutionally impermissible.

(d) Even if national revenue could be validly raised by delegated legislation, the power to do so may not be further sub-delegated.

(e) If it was nevertheless possible to sub-delegate the power to raise national revenue, this power was not sub-delegated to the Minister in section 9(1) of the Exchanges Act.

(f) If there was, somehow, still a proper sub-delegation to the Minister, it could only be a sub-delegation of the same power, namely to legislate. In other words, the Minister could only impose the exit charge by way of legislation. He did not do so.

(g) For any of the reasons set out in (b) to (f), the Minister’s imposition of the exit charge by announcement in Parliament was constitutionally invalid.

LSSA release 18 June 2015: Law Society condemns compromise of the rule of law: The Law Society of South Africa (LSSA) raises its serious concern at the clear trend emerging of

undermining the Rule of Law and disregarding court orders. Generally, this has been a concern for some time, but the clear flouting of our constitutional and international obligations and the order of the Gauteng High Court earlier this week in the events surrounding the African Union Summit, have been a glaring manifestation of this trend.

‘We also express our serious concern at the trend by African leaders—including our Government—to emasculate regional and international instruments and tribunals set up to protect human rights and the victims of human rights abuses. This is evident in the attitude adopted towards the International Criminal Court and the SADC Tribunal, and the lack of progress



in granting criminal jurisdiction to the African Court on Human and Peoples’ Rights,’ say LSSA Co-Chairpersons Busani Mabunda and Richard Scott.

SARB speech 18 June 2015: At the Sake24 Economist of the Year presentation, By the governor. About inflation targeting.

SARB release 18 June 2015: Response to Constitutional Court judgment—Mr Mark Shuttleworth. The SARB is…wait for it…pleased.

SARB release 19 June 2015: Release of banknotes bearing Governor Lesetja Kganyago’s signature. GN 512 GG 38878 19 June 2015: Amendment of rules (DAR/155) under ss 19A & 120 of the Customs &

Excise Act (other fermented beverages).* GN 587 GG 38877 19 June 2015: Guidelines pertaining to rebate of the duty on various rebate provisions

in terms of the Customs & Excise Act. Instructions from ITAC on how to claim rebates. Draft SARS PN 19 June 2015: Draft public notice listing an arrangement for purposes of s 35(2) of the

Tax Administration Act, 2011. The rendering of technical, managerial or consultancy services by a nonresident to a resident to be a reportable arrangement in the targeted circumstances. Clearly inspired by TC 13276. We’ll show those bloody Yankees!*

CRS 19 June 2015: Common reporting standard—Standard for automatic exchange of financial account information, An OECD document.*

World Bank 22 June 2015: Sector study of effective tax burden & effectiveness of investment incentives in SA—Part I (footnotes suppressed):

South Africa’s METR (marginal effective tax rates) is internationally competitive. For manufacturing it ranks 58th out of 95 countries and the analysis suggests that the tax system is not a major deterrent to investment. Representatives with whom the mission met consistently noted that the tax system was not among the major problems facing investors. Rather, the challenges to higher investment, and ultimately growth, related primarily to non-tax business environment issues.

You can see why my idea of a single income tax depreciation allowance (145 TSH 2015) would never be politically acceptable:

There is substantial variation in the METR across sectors. The METR on capital varies between 31.9% for iron ore mining, 23% for the electricity sector, 19.6% for manufacturing, and ˗19.7% for chrome mining.… The significant variation in METR s across sectors suggests further work is needed to determine whether the corporate tax code and system of accelerated depreciation and investment allowances may be (i) encouraging greater capital investment at the expense of labour, (iii) favouring some sectors at the expense of others who offer greater growth and job potential, and (iii) if the investment incentives are generating their intended benefits relative to their cost.

What poppycock. We prefer to let competing vested interests slug it out.§ SARS updated BRS 22 June 2015 (or 18 June or 4 June): IT 3 data submission SARS_External

BRS_2014_IT3s_v2.0.3-27. Effective as from 1 March 2015: This BRS guides the year-end submissions due 31 May 2016 (for the reporting period 1 March

2015 to 29 February 2016 data). Illegal © claim. 250 pages.*§ SARS updated BRS 22 June 2015 (or 8 June or 4 June): Administration of dividends tax SARS_External

BRS_2014_Dividends Tax_v2.0.1-6. Effective as from 1 March 2015. Illegal © claim. Only seventy-nine pages.*§

Treasury release 23 June 2015: The International Monetary Fund staff concludes visit to SA for 2015: The IMF’s forecast for growth in South Africa is 2 per cent in 2015–16, rebounding to 2,8 per

cent over the medium term, predicated on increased energy availability. The IMF is also predicting that debt should stabilize at about 50 per cent of GDP by 2019/20, which is lower than the 56 per cent of GDP projected in the 2014 Article IV.

The improvement in the terms of trade has temporarily lowered inflation and somewhat reduced external vulnerability, the Fund said. It projected that the current account deficit would narrow to 4,8 per cent of GDP in 2015 from 5,4 per cent in 2014 due to lower oil prices and the fact that the South African balance of payments has shown resilience to the appreciation of the US dollar.

Archived IN 23 June 2015: Interpretation Note 46 (Issue 4)—Income tax: amalgamation of amateur & professional sporting bodies;

The conditions and requirements relating to the amalgamation transactions as explained in the Note are no longer relevant, as the period within which the amalgamation transactions had to be completed, has lapsed on 31 December 2012.*

IRBA release 24 June 2015: Revised guide for registered auditors: reportable irregularities in terms of the Auditing Profession Act. This is effective as from 1 July 2015.

Marikana report 25 June 2015: Report of the Judicial Commission of Inquiry into the Events at Marikana Mine In Rustenburg (which I was unable to download from SA Government Online). Almost as callous as the events themselves was the delay in the release of the report, while it was being considered by the President. Whether or not he needed the time, the fact is that three months were removed from the period in which the victims & their families must lodge delictual claims before these prescribe.§



High Court case 25 June 2015: Fastjet Holdings (Pty) Ltd v Minister of Finance and Others (64901/2013) [2015] ZAGPPHC. An unsuccessful claim for the repayment of customs & excise duty paid on the importation of cigarettes from Zimbabwe at first cleared but then seized by the customs authorities. The seizure rendered the cigarettes noncompliant with a supervening ‘health & safety’ standard. But they were in any event found to be noncompliant with packaging rules in place at the time of importation. Arguments relying upon unjust enrichment & contract (with SARS!) crashed & burned.*

CCT decision 26 June 2015: Trencon Construction (Pty) Limited v Industrial Development Corporation of South Africa Limited and Another [2015] ZACC 22. The IDC called for a point-based tender to upgrade its head office but awarded the work to the runner-up in the points race. After a protracted legal battle, the Constitutional Court substituted its own decision for the IDC’s, with the result that Trencon secured the tender after all. Per Khampepe J (footnotes suppressed):

(1) Exceptional circumstances test Pursuant to administrative review under section 6 of PAJA and once administrative action is set

aside, section 8(1) affords courts a wide discretion to grant ‘any order that is just and equitable’. In exceptional circumstances, section 8(1)(c)(ii)(aa) affords a court the discretion to make a substitution order.

Section 8(1)(c)(ii)(aa) must be read in the context of section 8(1). Simply put, an exceptional circumstances enquiry must take place in the context of what is just and equitable in the circumstances. In effect, even where there are exceptional circumstances, a court must be satisfied that it would be just and equitable to grant an order of substitution.

…. In our constitutional framework, a court considering what constitutes exceptional

circumstances must be guided by an approach that is consonant with the Constitution. This approach should entail affording appropriate deference to the administrator. Indeed, the idea that courts ought to recognize their own limitations still rings true. It is informed not only by the deference courts have to afford an administrator but also by the appreciation that courts are ordinarily not vested with the skills and expertise required of an administrator.

…. To my mind, given the doctrine of separation of powers, in conducting this enquiry there are

certain factors that should inevitably hold greater weight. The first is whether a court is in as good a position as the administrator to make the decision. The second is whether the decision of an administrator is a foregone conclusion. These two factors must be considered cumulatively. Thereafter, a court should still consider other relevant factors. These may include delay, bias or the incompetence of an administrator. The ultimate consideration is whether a substitution order is just and equitable. This will involve a consideration of fairness to all implicated parties. It is prudent to emphasize that the exceptional circumstances enquiry requires an examination of each matter on a case-by-case basis that accounts for all relevant facts and circumstances.

‘Exceptional circumstances’ are an issue also under the Tax Administration Act.§ GN 538 GG 38894 26 June 2015: Directive for conduct within the national payment system in respect of

the Financial Action Task Force recommendations for electronic funds transfers—Directive no 1 of 2015. Issued by the SARB under s 10(1)(c) of the South African Reserve Bank Act.

GN 546 GG 38916 26 June 2015: Allocations to metropolitan municipalities of general fuel levy revenue. Under item 3(2)(a) of Schedule 1 of the Taxation Laws Amendment Act no 17 of 2009.

GN 596 GG 38894 26 June 2015: Request for continuation & amendment of statutory measures in the SA pecan nut industry. Includes the continuation, at an increased rate, of the levy under the Marketing of Agricultural Products Act. Regardless whether these levies are or are not taxes, I am no longer going to list them.

Mail & Guardian 26 June 2015: SA takes foreign direct investment hit. Referring to the 2015 World Investment Report by UNCTAD, which shows a significant turnaround, for the worse, since last year’s Report. As the dti said, as recently as last month (146 TSH 2015): ‘Investor cash is streaming into SA’. Not.§

Updated IN 26 June 2015: Interpretation Note 18 (Issue 3)—Rebates & deduction for foreign taxes on income. This has expanded from fifty-eight to 140 pages, & appears to be magnificent, even better than before. I wonder, though, how we are meant to tolerate such an incredible level of complexity while traversing only two provisions of the Income Tax Act, s 6quat & s 6quin.*

Archived IN 26 June 2015: Interpretation Note 18 (Issue 2)—Rebates or deduction for foreign taxes on income.*

Updated SARS summary 26 June 2015: Summary of all interpretation notes.* BPR 195 26 June 2015: Securities transfer tax exemption where election has been made that

s 42 of the act will not apply. Asset-for-share transaction relief deselected & the STT. If I understand this binding private ruling properly, it says that the STT exemption linked to s 42 of the Income Tax Act applies even when the parties agree that s 42 does not



apply. Can that be right? Is this what happens when you rely upon imprecise cross-references? For all the explanation given, this BPR might as well have represented the fruits of a bribe.*

* Found or to be found on the SARS website. Concurrently on the SARS ‘What’s new’ page. § Not included in Tax Shock, Horror Database.

LOST & FOUND TSH Database This month 86 items were added to the Tax Shock, Horror Database. Land subdivision Since 16 September 1998, the President has failed to proclaim the Subdivision of

Agricultural Land Act Repeal Act 64 of 1998. C&E consultants Since 1 January 2002, the CSARS has failed under s 99A of the Customs & Excise Act to

gazette requirements for the registration of consultants to principals. PCC 24 28 November 2014: The revised PCC 24 remains unavailable (140 TSH 2014). PCC 30 28 November 2014: PCC 30 remains unavailable (140 TSH 2014). SAICA FAQS 19 January 2015: Still prominently displayed on the SAICA website is a supposed reply to

a supposed question implying that the withholding by one of its members of a client’s tax profile in response to nonpayment is a matter of contract.

MONTHLY NOTEBOOK

Nkandla and FIFA: terrific spin If you count the roads and other facilities ancillary to the President’s Nkandla homestead, perhaps as much as billion rand has been spent. The government’s genius has been to treat this as a normal outlay, probably to be repeated, if not progressively exceeded, each time a new President is inaugurated, all the way up to the time of the Second

Coming, and to focus the controversy on the minute portion of the ‘security upgrade’ that might or might not be for the President’s personal account.

Equally brilliantly, what might have been a bribe designed to secure the 2010 FIFA series of white elephants is described as a ‘donation’, but no one asks whether donations tax is applicable.

Readers’ views—new law on tax invoices Regular correspondent Phillip West submits this novel view of the law from a SARS official. ‘This is an extract’, he says, ‘from a letter to a vendor who was charged an understatement penalty on two invoices that did not have the recipient’s (client’s) VAT registration number.’

NB: Assessments raised in connection with invoices or

credit notes or debit notes denied in terms of section 16(2) read with sections 20 and 21 cannot be objected to but the Vendor may claim such invoices or credit notes or debit notes in subsequent tax periods in terms of the provisions of section 16(3)(g).

In my experience, this sort of illegal crap emanates from the SARS head office.

Time of day for payment—a tall tale There were a couple of references to this topic in 144 TSH 2015, particularly to the ability claimed by SARS to fix the time of day on which payments and returns due on 31 March 2015 were required to be made. This claim is hogwash.

In the first place, s 162(1) of the Tax Administration Act bears the heading ‘Determination of time and manner of payment of tax’ but includes no other mention of the time for anything, much less payment.

Then s 244(2) deals specifically with the time of day on which a payment, submission or other action must be done but requires the Commissioner to ‘prescribe’ that time.

One of the great many deficiencies of the act, which has been drafted and amended by amateurs, is that it fails to define ‘prescribe’. In 141 TSH 2014, I reached the astonishing conclusion that the Commissioner may ‘prescribe’, but only by way of regulation! And this in an act that goes out of its way to require mere Gazette notices, which it stupidly and unnecessarily calls ‘public notices’.

Certainly, the Commissioner doesn’t get to

prescribe anything at his mere whim, with a posting to the SARS website or by sending a circular to recognized controlling bodies. By no stretch of the imagination might such a manoeuvre amount to a communication to taxpayers in general, even if it were authorized by the act, which, it most certainly is not.

Nor does he prescribe anything by including some language in a SARS publication. Interpretation Notes and advanced tax rulings are not binding upon taxpayers, while SARS denies that its other publications are binding even upon itself (97 TSH 2011). If these other publications are not binding upon SARS, how could they possibly be binding upon taxpayers? In any event, there are scores, possibly hundreds, of these other publications, which are constantly updated, on the great majority of occasions, silently, that is, without notice to taxpayers, in any shape or form.

Even the ‘prescribing’ of forms to be used for objections and appeals, a topic covered mainly in a 2012 SARS publication, enjoys no force of law, despite its use and abuse by SARS officials on a daily basis.



Provisional tax & the CGT: as you were I am awfully fond of saying that it is professional misconduct to utter a word on the CGT without consulting the SARS publication Comprehensive Guide to CGT, which I continue to rate as the best fiscal publication SA has ever seen. Well. in 144 TSH 2015, I was guilty of just such professional misconduct, since, if only I had consulted para 23.3 of the Guide, I would have been directed to the definition of a ‘provisional taxpayer’ in s 1(1) of the Income Tax Act, which, in relation to individuals, requires a victim to derive ‘income’, of which the CGT comprises no part, being a special type of ‘taxable income’. As the Guide says:

Accordingly a capital gain cannot make a person a provisional taxpayer.

Computing inclusional taxable income With the definition using ‘income’ and the para 18(1)(c) exemption, while opening with ‘income’, using ‘taxable income’, I can see how I went wrong

but there really is no excuse. What are the other ‘plug-ins’ to ‘taxable income’,

which must also be incapable on their own from making an unincorporated person a provisional taxpayer?

My latest list of the components of what I call ‘inclusional taxable income’ looks like this (The Taxation of Trusts 2014 ed ver 2):

Section 8(1)(a)(i): Allowances or advances included in taxable income.

Section 26A: Inclusion of taxable capital gain in taxable income.

Section 45(4)(b): Intra-group transactions. Section 48C: Transitional provisions; registered

micro business. Section 22(1): Inclusion in taxable income of

closing trading stock. Section 22(2): Deduction from taxable income of

opening trading stock.

Recommendations of the Sikhakhane report What follow are the recommendations of the external panel set up by Ivan Pillay under s 9 of the South African Revenue Service Act to conduct an investigation into the allegations of impropriety against Mr Johan Hendrikus van Loggerenberg (see the Monthly Listing) (indentations suppressed):

190 In light of the above findings, we make the following recommendations: 190.1 SARS should include in its Code of Conduct some guidelines regarding romantic relationships between its senior managers and staff. 190.2 SARS should clearly develop formal operational relations with state agencies authorized to gather intelligence and investigate organized crime. In this regard, SARS in co-operation with the relevant organs, should develop clear guidelines for co-operation in respect of SARS's own mandate; 190.3 SARS should institute disciplinary proceedings in accordance with its Code of Conduct and Disciplinary processes and charge Mr Van Loggerenberg in regard to the following conduct:

190.3.1 His unauthorized engagement with and disclosure of information to the media and consequently bringing SARS into disrepute; 190.3.2 His unauthorized disclosure of certain information to Ms Walter and consequently violating section 7 of the TAA; 190.3.3 Failure to adhere to SARS's Code of Conduct by meeting Ms Walter alone on 2 September 2013; 190.3.4 Conducting himself in a manner which brought SARS into disrepute in; 190.3.5 His involvement in the audit of Ms Walter in violation of the principles of good governance and in violation of the Code of Conduct; 190.3.6 His conduct in engaging in a romantic relationship with Ms Walter while knowing that she was a representative of entities that were under

investigation by SARS: 190.3.7 His involvement in Wachizungu with full knowledge that some of its donors had had their disputes settled with SARS, were under investigation or represented entities under investigation by SARS had the potential to bring SARS into disrepute.

190.4 In respect of the unlawful establishment of the Special Projects Unit/NRG/HRIU the following is recommended: 190.4.1 As we understand it, the Inspector General of Intelligence is already investigating Ms Walter's complaint. The activities and functions of this unit must be specifically investigated by the Inspector General, alternatively; 190.4.2 We are of the view that the Commissioner should recommend to the President that a judicial commission of inquiry with powers of compulsion in terms of section 3 of the Commissions Act 8 of 1947 should be appointed. Such Commission, if considered should inquire into the activities, funding, management of the NRG and its predecessors as well to determine if there has been improper conduct on the part of senior government officials, including those who may have left their positions. We are of the view that an unlawful establishment of a covert unit within a civilian organ of state is indeed a matter of public concern as envisaged in section 1 of the Commissions Act. 190.4.3 SARS should ensure that proper structures of co-operation between SARS and Government agencies statutorily tasked with intelligence gathering and crime investigation are established in order to assist SARS with the capacity it may require. Alternatively, the Commissioner, through the Minister of Finance may request Parliament to enact legislation giving SARS the investigative capacity it requires. 190.4.4 SARS should conduct a forensic investigation into all the settlements concluded with tax payers that had been under investigation since 2005.



190.4.5 In the meantime, we recommend that the Commissioner moves speedily to put in place a process to ensure that the NRG or HRIU are truly disbanded,

persons involved are debriefed, protected from intimidation and are reintegrated into SARS's official and civilian structures.

The State Liability Act suits a deadbeat government This short statute tells you a lot about South Africa.

It has a good side, in that, in s 1, it renders the state equivalent to a person in a claim before a competent court, whether it arises contractually or out of a wrong committed by a servant of the state acting within his or her capacity as such.

It has a procedural side, in that, in s 2, it requires proceedings to be taken, nominally, against the executive authority of the department concerned, meaning the relevant cabinet minister or MEC. A ‘department’ is defined in s 4A as a national or provincial department. (SARS, being a legal person, thanks to the South African Revenue Service Act, falls outside of the purview of the State Liability Act.)

And, in s 4, it reminds you that other statutes might lawfully limit the liability of the state, the national or provincial governments or their departments springing from the acts or omissions of its or their servants; prescribe periods within which claims are to be made; or impose conditions on the institution during which claims of an action.

Finally, it reveals its true purpose in its lengthy and detailed s 3, complete with an Orwellian heading— ‘Satisfaction of final court orders sounding in money’—whose true purpose is to delay such satisfaction and make a mockery of court orders.

Its opening gambit is to constrain execution and attachment processes against the state and its property. So how will you fare after having secured a court order in your favour sounding in money, even one calling for immediate payment by the state?

The State Attorney or attorney of record has seven days in which to report the court order to three different parties.

Payment must be made within thirty days or within an agreed period. But don’t spend it just yet.

If it is not so made, the judgment creditor must serve the court order on four parties.

The relevant treasury then has fourteen days to make payment or make suitable arrangements if there is insufficient cash in the kitty.

If it fails to do so, the judgment creditor must arrange for a writ or warrant of execution against movable property owned by the state and used by the relevant department.

The sheriff of the court gets to attach but not remove the movable property concerned, subject to some argy-bargy on the property available for attachment.

After thirty days from the date of attachment, the sheriff may remove and sell the attached property.

Except that an interested party may apply to court for a stay of a sale in execution, giving notice to the judgment creditor and the sheriff.

So what would you expect to happen? The government effectively tells the courts to piss off. Eventually, I believe, our courts will repay with interest the many insults they have suffered at its hands. But what is less certain is the survival, commercial or physical, of anyone contracting with or injured by the government. The mystery of what is a ‘developmental state’ (52 TSH 2007) has over the years become clear. It is a state in which priority over resources is afforded to political and labour elites; in which corruption and sumptuary waste are rewarded with impunity; and in which the rural population is at once suborned and cruelly repressed. In such a state, creditors come very late in the queue.

Onus, and the Pinestone case CSARS v Pinestone Properties CC 2002 (4) SA 202 (N) was a curious case, in which SARS adopted a wrong-headed line of attack and consequently suffered a possibly unwarranted defeat.

A building repaired by the taxpayer was subsequently sold by it. What SARS ought to have done, if the facts supported such an approach, was to have challenged the classification of the work done as ‘repairs’ for purposes of the deduction made available by s 11(d) of the Income Tax Act. If that work was aimed not, essentially, at restoring the building to its previous condition but at enhancing its appeal to a prospective buyer, no deduction would have been allowable.

Instead, SARS went for the entirely novel, if not nutty, idea that the sale of any building results in a recovery or recoupment of the amounts expended in the past upon its repair accessible to inclusion in the taxpayer’s income under s 8(4)(a). At the time, bizarre as SARS’s case seemed, taxpayers and their advisers

nevertheless breathed a sigh of relief when Magid J found against SARS.

Today, the case is interesting for what it says about a topic that SARS would rather wish you to ignore—the onus resting upon it in tax cases:

Mr Naidu was initially inclined to concede that the onus was on the Commissioner to prove that the cost of repairs had indeed been recovered or recouped within the meaning of those words as used in s 8(4)(a) of the Act. In reply, however, he retracted the concession in the light of the provisions of s 82 of the Act which reads as follows:

The burden of proof that any amount is exempt from or not liable to any tax chargeable under this Act or is subject to any deduction, abatement or set-off in terms of this Act, shall be upon the person claiming such exemption, non-liability, deduction, abatement or set-off….

In my view s 82 of the Act is of no relevance to this



enquiry because, unless the appellant can be shown to have ‘recovered or recouped’ the cost of the repairs, the amount which the appellant sought to add back to the respondent's income for tax purposes cannot be taxable. In Commissioner for Inland Revenue v Butcher Bros (Pty) Ltd 1945 AD 301 the facts were that vacant land had been leased to a tenant who was obliged to erect buildings to the value of not less than £55 000 on the property. When the buildings were completed the Commissioner included the sum of £55 000 in the taxpayer's income on the basis that the taxpayer had received ‘a premium or like consideration' for the grant of the lease on the basis that the buildings acceded to the land. In delivering the judgment of the Court

Feetham JA said at 322: The assessment in dispute, made by the Commissioner…can only be allowed to stand if some ‘amount’' accrued to or was received by the company in the tax year ended 30 June 1935, by virtue of its rights under the building clauses in the lease, and it is essential for the Commissioner, in order to support his assessment, to show that some ‘'amount’' has accrued to or been received by the [taxpayer] by virtue of such rights.

(My emphasis.) By a parity of reasoning in the instant case the Commissioner must show that an amount previously allowed to be deducted has been recovered or recouped by the taxpayer.

Just how low will a deadbeat government go? The lengths to which the government will go in conserving cash for loftier purposes than the discharge of its admitted liabilities in favour of its creditors are revealed in the unreported judgment of Mathopo J in Rewayne Hersig v Premier, Health & Social Development (42685) [2011] ZAGPJHC (30 April 2015). The judgment is poorly typed and so a little garbled but nevertheless devastating. I have supplemented the story it relates with some personal knowledge of the history of the matter.

The facts The plaintiff’s claim for delictual damages arising from the negligence of the staff of a provincial hospital was proven, on the question of liability, before the High Court. In response, the defendant—that is, the government—tried, without success, to appeal to the SCA. It succeeded, nevertheless, in delaying the hearing on the quantum, the present case, and so delaying payment and thus any relief for its victim. Having been thrashed as well on the question of quantum, thanks to expert testimony, it resorted to a ruse that had already failed twice in the same division of the court. Unsurprisingly, Mathopo J rejected it for a third time, while the government is currently seeking leave to appeal his judgment, thus delaying even further any obligation even to start thinking about payment, in any shape or form.

What it balked at was the discharge, by way of immediate payment, of that portion of the plaintiff’s claim relating to prospective medical costs.

Thanks to the ministrations of the hospital concerned, the plaintiff is in urgent need of specialist medical treatment, both now and for the rest of his life. What the government (belatedly) proposed to the court was, effectively, that when the plaintiff required such treatment he should present himself to a service-provider, such as a hospital (in practice, private-sector hospitals would be ruled out, so it would in all likelihood be the self-same hospital that harmed him in the first place), which would then submit a written quotation to the government’s accounting officer, who would then, as provided for by the State Liability Act (see elsewhere in this issue), take up to just-before-forever to pay the amount due

to the hospital concerned. The sheer evilness of this callous plan is somewhat

ameliorated by the supposition that the hospital concerned would, on the strength of the prayed-for court order, to which the hospital would not be a party, in the meantime provide the necessary medical services, without any certainty of eventual payment. If it comes as a surprise to you that our grossly overpaid and sadly underqualified bureaucrats can be so uncaring about a fellow citizen physically maimed by the state, perhaps it is time to sharpen your perceptions of what kind of country it is that we live in.

The government wanted the court either to acknowledge the alleged common-law principle that damages need not be compensated in terms of money only (!), or to develop the common law to that effect. What, effectively, was proposed, instead of an immediate money settlement, was an undertaking by the government that it would pay—or, rather, delay for as long as possible and perhaps never pay—unnamed hospitals not a party to the proceedings.

The government’s credibility may be judged by the manner in which it dealt with the rest of the plaintiff’s claim, in which the plaintiff was altogether successful. Not only has the humanitarian need to settle the principal sum been blithely brushed aside but even a court order providing for modest yet urgent interim relief was simply ignored. (Thanks to an action under the State Liability Act, the government was compelled to satisfy the order during June 2015.)

The judgment This is the gravamen of what Mathopo J had to say:

The anomaly or the absurdity in the defendant’s plea is best illustrated by the urgent application obtained by the plaintiff on 24 March [2015] for urgent treatment of his bedsores. During the hearing of this matter I was informed by the parties that despite the lapse of the period of 30 days the defendant had not yet complied with the order of Makume J. Quite clearly, the approach of the defendant is preposterous and absurd. …. There is no doubt that the plaintiff sustained severe bodily injuries. He has now been rendered paraplegic



and he is permanently confined to a wheelchair. He has to a large extent suffered permanent loss of amenities of life. Every aspect of his life, personal, social, sport, leisure and work has been permanently affected. He has to make serious adjustment to his lifestyle and aspiration. He has completely lost his independence and status as a productive member of society. All his future decisions regarding his life have been truncated and devastated. He will have to make concerted efforts throughout his life to optimize his residual abilities. He has greatly been devastated emotionally and physically and currently he is suffering ongoing pains as a result of the actions of the servants or employees of the defendant. He is presently suffering from pain and occasional bedsores with the result that on 24 March 2015, he had to approach this Court on urgent basis to seek urgent medical treatment. The defendant, as it was obliged to do [missing text] and I have been informed that to this day the plaintiff has not been able to access the urgent medical treatment despite the order [by] my brother Makume. This is regrettable and utterly soul destroying. It is lamentable that the defendant in these proceedings adopted an attitude that for every medical treatment or expenses the plaintiff must submit

quotations to the service providers who are clearly unknown to the plaintiff. The intention is not hard to find. The purpose is to do everything possible to delay and postpone payment of what is justifiably due to the plaintiff. Such a conduct cannot be countenanced in our society or in a country of ours that is based on the true and democratic principles of Ubuntu and human dignity. Ubuntu and human dignity cannot countenance a behaviour where a wrongdoer [dictates] to the victim as to when and how such a victim has to be paid. This is clearly unconscionable. The findings of the experts indicate that the injuries of the plaintiff are of a permanent nature. The indignity of having to do daily functions of relieving himself must be clearly horrendous and awful. He has to live with this condition for the rest of his life. I shudder to think how the plaintiff goes about his normal daily activities and all his problems occurred as a result of the negligent conduct of the defendant's employees. One would have expected that the defendant would make reparations as quickly as possible to try and put the plaintiff in the position he was prior to the delict but its nonchalant and persistent attitude in defending this case and raising spurious defences which have been rejected by a number of judges in this Court is to say the least preposterous and absurd.

SCOF on the (unseen) Sikhakhane report From the summary of 25 March 2015 of its meeting by the Financial Standing Committee of the National Assembly:

Summary The South African Revenue Service (SARS) briefed the Committee on the Sikhakhane report and said that the report was preliminary in nature. It sought to highlight challenges that had been in the public domain about allegations of the existence of a ‘rogue unit’ within SARS, amongst others. The Memorandum of Understanding (MOU) between SARS and National Intelligence had sought to create a unit with the aim of combating illicit trade and protecting the economy. The unit was to reside within the National Research Group (NRG) in order to comply with the Constitution, and relevant taxation and intelligence legislation. The Sikhakhane report also aimed to investigate allegations of corrupt practices. any possible breach of the policies and processes of SARS, and any general acts of impropriety. The findings of the Sikhakhane report showed that the establishment, existence and operations of the NRG or a high-risk investigation unit were unlawful and without the requisite statutory authority, and the unit had been operating in a covert manner that had created a climate of fear within the organization. There was prima facie evidence that the unit may have abused its power by engaging in activities that resided in other agencies of government and which it had no lawful authority to perform, and had damaged the reputation of SARS as an organ of state. The Sikhakhane report had recommended that the organization should put in place processes to ensure that the unit was disbanded and the people involved in

the unit were debriefed and protected from Intimidation. It was Incumbent upon SARS to put In place a number of processes to Investigate and reverse Incidences of malpractice within the organization. SARS had brought in KPMG to work together with senior council to conduct forensic and legal evidence analysis, and the KPMG report was expected to be completed by June 2015. Members wanted to know the person who had authorized the establishment of the unit, the funding model that had been used to fund the unit and the liabilities that It had Incurred. What were the main reasons for the recent mass exodus of the senior officials at SARS? One Member strongly believed there was a need for the establishment of the Judicial Commission of inquiry ln order to get to the bottom of the problem. Members expressed concern about the current fractious environment at SARS, as this was likely to Impact on the reputation and social contract of the organization. Why had the unit never appeared in the financial statements of SARS? There had been allegations that the resignation of the head of anti-corruption and security at SARS was as a result of a failure to deliver a car on time to the SARS Commissioner. What was the cost involved ln the employing KPMG and Bain & Company as consultants? What had been done to protect the Integrity of the SARS? Were there any individuals within the organization that had been purged? The demographic representation of SARS was also highlighted. as only 6% of the auditors within the organization were Africans and 23% were women. The resignations of competent people In the Information Technology (IT) section were particularly troubling. as this was an important platform for SARS.

Feature Supplement to 147 Tax Shock Horror 2015

Cases

June 2015

Winners & Losers In That Other Beautiful Game Current & Past SATC Case Reports

by Julian Ware © 2015 J Ware ([email protected])

Preservation order— tax administration CSARS v Tradex (Pty) Ltd & Others

Western Cape High Court (2014)—77 SATC 121 (judgment delivered by Rogers J): The focus of a preservation order is the risk of dissipation of assets. It will not be granted routinely. SARS must demonstrate that there is a risk, and that it is material and appreciable. The purpose of an order is not to put a taxpayer under pressure. Since SARS failed to establish that there was a prima facie risk of assets being diminished by the taxpayer, the order was denied.

Exit levy— exchange control Shuttleworth v SARB & Others

Supreme Court of Appeal (2014)—77 SATC 145 (judgment delivered by Navsa ADP & Ponnan JA; Majiedt JA, Fourie AJA & Mocumie AJA concurring): The 10% exit levy imposed by the Reserve Bank upon the export of capital by ‘our’ famous spaceman upon his emigration was unlawful. It was a revenue-raising mechanism, and a form of taxation. Taxes may be imposed only if introduced in a money Bill enacted in accordance with the provisions of ss 75 and 77 of the Constitution. (On 18 June, the Constitutional Court held that regulation 10(1)(c) of the Exchange Control Regulations was constitutionally valid. The Supreme Court erred, it said, when it concluded that the dominant purpose of the levy was to raise revenue, and that it was subject to the provisions of s 75 of the Constitution. Its main purpose was directed at curbing or discouraging the export of capital. The generation of revenue was incidental to this purpose. Does the CCT judgment pave the way for abuse? Read the dissenting judgment of Froneman J—see the Monthly Listing—and draw your own conclusion.)

Trading stock— postponement of deduction / Taxpayer v / CSARS

ITC 1875 (Gauteng Tax Court—Case 13410 (2014))—77 SATC 161 (judgment delivered by Victor J): Yet another confusing judgment filled with non-sequiturs and a taxpayer—a mining operator extracting mineral-bearing ore from the earth and then smelting it to obtain high-value saleable concentrate products—that might just be pushing its luck. The case involved the application of s 23F(2) of the Income Tax Act (the postponement of a deduction for trading stock when consideration for its disposal will not accrue during the year). The extracted mineral-bearing ore was not trading stock, but the concentrate was. Section 23F(2) applied to the ‘acquisition’ costs of the concentrate but not of the ore. Perhaps you can figure it out.

Grounds of assessment— application for amendment Taxpayer v CSARS

ITC 1876 (Western Cape Tax Court—Case 13238/13164 (2014))—77 SATC 175 (judgment delivered by Rogers J): Involving s 103(2) of the Income Tax Act, the anti-avoidance provision aimed at trafficking in assessed losses. The Commissioner brought an application before the court to amend his grounds of assessment under rule 10 of the then prevailing tax court rules. Could he travel beyond matters upon which he initially expressed satisfaction? A distinction needs to be drawn between appeals concerned with objective questions of fact and law, and those concerned with the exercise by the Commissioner of powers enjoyed by him, upon being satisfied of a particular matter. Since his satisfaction constituted a jurisdictional fact for the issue of the assessment, the Commissioner was precluded from amending his grounds.

t sh

SA Withholding

Taxes —A Seminar

Presenter

Costa Divaris

1. PAYE for foreign employers. 2. 'Liftings' tax.

3. Nonresident sellers of fixed property. 4. Foreign entertainers & sportspersons.

5. Royalties. 6. Interest.

7. Service fees (from 1 January 2016).

Price, with handout, R2 950 or handout only, R2 000.

Handout in the Bsp Seminars ‘book’ style, with full text of relevant extracts from

the Income Tax Act and Tax Administration Act, together with full commentary. Printed and bound. Also on CD.

Venues & Dates

DURBAN—Umhlanga—28 July 2015 Coastlands Hotel

CAPE TOWN—30 July 2015 Garden Court Nelson Mandela Boulevard

PRETORIA—4 August 2015 Kleinkaap

JOHANNESBURG—6 August 2015 Wanderers Golf Club

IMPORTANT NOTICE:

Subscribers to the Bsp Seminars® Subscription Service attend and receive the handout at no additional cost,

and may bring a guest, for only R500.

Reserve your place and arrange payment by e-mailing Lesley Byrne at

[email protected]

Bsp Seminars


Feature Supplement to 147Tax Shock Horror 2015

Briefing

June 2015 ‘Determined value’ of cars

by Michael Stein © 2015 M L Stein ([email protected])

Paragraph 7 of the Seventh Schedule to the Income Tax Act provides the rules for the valuation of the taxable fringe benefit arising when an employee is given the right of use of a motor vehicle by his or her employer. A critical factor in the process of valuation is the ‘determined value’ of the vehicle.

How the change came about The 2014 Budget Review contained the following statement about the determined value of a vehicle:

Company car fringe benefits Use of a company car by an employee is a taxable fringe

benefit based on the market value of the vehicle. However, car manufacturers that import vehicles calculate the fringe benefit at cost. To align the treatment of company car fringe benefits for all employees (whether or not they work for a vehicle manufacturer), government proposes that actual retail market value be used in all cases. This reform will be phased in over four years.

Consequently, the definition of ‘determined value’ in para 7(1) was amended by the Taxation Laws Amendment Act 2014, with effect as from 1 March 2015.

The post-amendment definition, to the extent that it applies to motor vehicles acquired by an employer on or after 1 March 2015, may be depicted thusly, when an employee is given the use of a motor vehicle by his or her employer and the employer is a company:

For a vehicle acquired by the employer other than upon the termination of the employer’s hiring of the vehicle under a lease, the retail market value as determined by the Minister of Finance by regulation (see below), excluding finance charges or interest payable by the employer on the acquisition of the vehicle.

For a vehicle held by the employer under a lease or originally held by it under a lease (but not an operating lease; see below) and acquired by it upon the termination of the lease, the retail market value of the vehicle when it first obtained the right to use the vehicle. The determined value when the lease was an ‘instalment credit agreement’ for VAT purposes is not its retail market value but its ‘cash value’ for VAT purposes.

For any other vehicle acquired by the employer, its retail market value as determined by the Minister of Finance by regulation at the time when the

employer first obtained it or the right of using it or manufactured it.

The determined value of a vehicle not acquired under an operating lease may be reduced if the employer first acquired it or the right to use it at least twelve months before the employer granted the employee the right to use it for private purposes. In these circumstances, the determined value may be reduced by a depreciation allowance, on the reducing-balance basis, calculated at the rate of 15% for each completed period of twelve months from the date on which the employer first obtained the vehicle or the right to use it to the date on which the employee was first granted the right to use it.

But should the vehicle or the right of its use have been acquired by the employer from its associated institution, and should the employee have enjoyed the right to use it before its acquisition by his or her current employer, its determined value will not be reduced by this depreciation allowance. Instead, the determined value will be set at the same determined value as was fixed when the employee was first granted the right to use it.

Operating lease An ‘operating lease’ is a lease of movable property concluded by a lessor in the ordinary course of a business—but not a banking, financial services or insurance business—of letting movable property if

the property may be hired by the general public directly from the lessor under that lease for less than one month;

the cost of maintaining and repairing it in order to counter normal wear-and-tear is borne by the lessor; and

the risk of destruction or loss of or other disadvantage to the property is not assumed by the lessee, except for a claim that may be made against the lessee if it fails to take proper care of the property.

Regulations The Minister of Finance issued the regulations on the determined value of a motor vehicle on 28 April 2015 (GN R 362 GG 38744 of 28 April 2015).They deal with the retail market value of motor vehicles provided by three kinds of employer, namely, motor vehicle manufacturers and importers; motor vehicle dealers


June 2015

Feature Supplement to 147Tax Shock Horror 2015

or rental companies; and other employers.

Motor vehicle manufacturers & importers For a new motor vehicle or a motor vehicle used for the purposes of demonstration, its determined value is:

In years of assessment commencing on or after 1 March 2015 but before 1 March 2016, an amount equal to the dealer billing price (excluding VAT) reduced by 10%.

In years of assessment commencing on or after 1 March 2016 but before 1 March 2017, an amount equal to the dealer billing price (excluding VAT) reduced by 5%.

In years of assessment commencing on or after 1 March 2017 but before 1 March 2018, an amount equal to the dealer billing price (excluding VAT),

In years of assessment commencing on or after 1 March 2018, an amount equal to the dealer billing price (including VAT).

For a pre-owned motor vehicle:

In years of assessment commencing before 1 March 2018, the cost to the employer to acquire the motor vehicle (excluding finance charges, interest or VAT payable by the employer on its acquisition), or, when the motor vehicle is acquired at no cost to the employer, its market value as well as any costs of repairs incurred for the purposes of granting an employee the right of its use.

In years of assessment commencing on or after 1 March 2018, the cost to the employer to acquire the motor vehicle (excluding finance charges or interest payable by the employer on its acquisition), or when the motor vehicle is acquired at no cost to the employer, its market value, as well as any costs of repairs incurred for the purposes of granting an employee the right of its use (including VAT).

Dealers and rental companies For a new motor vehicle or a motor vehicle used for the purposes of demonstration:

In years of assessment commencing on or after 1 March 2015 but before 1 March 2018, the dealer billing price (excluding VAT).

In years of assessment commencing on or after 1 March 2018, an amount equal to the dealer billing price (including VAT).

For a pre-owned motor vehicle:

In years of assessment commencing before 1 March 2018, the cost to the employer to acquire the motor vehicle (excluding finance charges, interest or VAT payable by the employer on its acquisition), or, when the motor vehicle is acquired at no cost to the employer, its market value as well as any costs of repairs incurred for the purposes of granting an employee the right of its use.

In years of assessment commencing on or after 1 March 2018, the cost to the employer to acquire the motor vehicle (excluding finance charges or interest payable by the employer on its acquisition), or, when the motor vehicle is acquired at no cost to the employer, its market value, as well as any costs of repairs incurred for the purposes of granting an employee the right of its use (including VAT).

Other employers In any year of assessment, the price paid for the

acquisition of the motor vehicle.

Dealer billing price The term ‘dealer billing price’ is used in various parts of the regulations. It is defined as

the recommended selling price of a motor vehicle as determined by the manufacturer thereof in the Republic or importer thereof in respect of the selling of motor vehicles to motor vehicle dealers and motor vehicle rental companies.

Monthly value The monthly value of the private use of a motor vehicle is an amount equal to 3,5% of its determined value. But when it is the subject of a maintenance plan at the time the employer acquires it or the right to use it, the amount must be reduced from 3,5% to 3,25% of its determined value.

A ‘maintenance plan’, for a motor vehicle, is a contractual obligation undertaken by a provider in the ordinary course of trade with the general public to underwrite the costs of all maintenance of a motor vehicle, other than the costs related to top-up fluids, tyres or abuse of the motor vehicle, for a period of no less than three years and a distance travelled by the motor vehicle of no less than 60 000 kilometres from the date that the provider undertakes the contractual obligation.

Nevertheless, the contractual obligation may terminate at the earlier of the end of the period of three years and the date on which the distance of 60 000 kilometres is travelled by the motor vehicle.

For other T&Cs affecting the taxation of this fringe benefit, see para 7 of the Seventh Schedule.

t sh


Davey’s Locker

June 2015 Offshore trusts Estate planning

by Tony Davey © 2015 A H Davey ([email protected] www.tonydavey.com)

Following upon last month’s piece (146 TSH 2015) on the interface between offshore trusts and income tax, readers have asked me to address the relevant estate planning issues. Bear in mind, however, that the Davis Tax Committee’s next interim report, apparently due in August, will make recommendations on estate duty and trusts.

Classic estate-freezing structure As with the onshore trust methodology, an interest-free loan is made to the offshore trust, using your maximum R10 million annual foreign investment allowance and your R1 million foreign discretionary allowance.

The R10 million allowance requires tax clearance, while the R1 million allowance may, as from 1 April 2015, be used for any purpose, including investments.

The estate-freezing rationale is that your interest-free loan is fixed, while the growth in the offshore trust’s investment portfolio, being trust capital, will not be dutiable in the resident lender’s estate.

Rand-denominated loan Viewed from an estate-freezing

perspective, it is preferable for the loan to be rand- denominated, in order that any currency fluctuations do not affect the static value of your fixed rand loan account. (The income tax consequences of an interest-free loan were canvassed in 146 TSH 2015.)

Loan repayment Upon the death of a resident lender, the fixed rand loan will be the only estate-dutiable asset relative to the offshore funds.

According to the Exchange Control Manual, para F5.5, bequests may be remitted abroad, provided that the recipient heir is a recognized nonresident. It follows that the loan may be bequeathed to the non resident trust and hence extinguished, thereby obviating the need for its repayment.

Courtesy of para 12A(6) of the Eighth Schedule to the Income Tax Act, effective as from January 2013, the waiver of a debt in favour of an heir to a deceased estate does not trigger any capital gains tax, although the loan value is estate dutiable.

t sh


Shortcut Keys in Word by Duncan S McAllister ©2015

June 2015

ALT sequence keys (Outlook 2010)—File tab Here are the ALT sequence keys for accessing the functions on the File tab of the Ribbon.

File [ALT + F]

ALT, F, A Save As ALT, F, M Save Attachments ALT, F, I Info ALT, F, I, A Selected Account—IMAP/SMTP ALT, F, I, D Add an account ALT, F, I, S Account settings ALT, F, I, S, A Account settings [add and remove accounts or change

existing connection settings ALT, F, I, S, E Delegate Access ALT, F, I, S, B Download Address Book ALT, F, I, S, M Manage Mobile Notifications ALT, F, I, S, P Prepare for offline use ALT, F, I, L Access this account on the web ALT, F, I, O Automatic Replies ALT, F, I, T Clean Up Tools ALT, F, I, T, M Mailbox Clean Up ALT, F, I, T, Y Empty Deleted Items Folder ALT, F, I, T, R Archive ALT, F, I, R Manage rules and alerts ALT, F, I, X Return to Home ALT, F, O Open ALT, F, O, C Open Calendar ALT, F, O, O Open Outlook Data File ALT, F, O, I Import and Export Wizard ALT, F, O, U Open User’s Folder ALT, F, P Print ALT, F, P, P Print - Send item directly to default printer ALT, F, P, I Select a printer from Print Preview ALT, F, P, R Open print options ALT, F, P, Y, 1 Define print styles—Table style ALT, F, P, Y, 2 Define print styles—Memo style ALT, F, H Help ALT, F, T Options ALT, F, X Exit

T S H


June 2015 Evidence Corner—evidence could make a welcome change to tax cases

Taking rights seriously

by Andrew Paizes © 2015 A Paizes ([email protected])

In S v Magwaza [2015] ZASCA 36 (unreported, SCA case no 20169/14, 25 March 2015) the Supreme Court of Appeal had to consider the admissibility of a pointing-out and a confession, on the strength of which the appellant had been convicted by the trial court of murder and robbery with aggravating circumstances, a decision upheld by a full bench of the high court.

Both the trial court and the full court focussed solely on the voluntariness of the appellant’s conduct, and, as Ponnan JA (with whom Maya, Mhlantla, Zondi JJA and Meyer AJA agreed) observed, ‘[n]either touched, even tangentially, on the Constitution’s exclusionary provision—s 35(5)’ at [21]. There was certainly reason to do so, since, as Ponnan JA remarked (at [17]), even if it were to be accepted that the cumulative effect of the evidence given by the investigating officers—which was very unclear as to what had been conveyed to the appellant—was that there had been ‘a warning of sorts’, that warning was ‘woefully inadequate’.

For, while there was some reference in their evidence to the rights to silence and legal representation, there was ‘no indication that the appellant was warned of the consequences of not remaining silent (the logical corollary of the right to silence) or of his entitlement to the services of a legal representative at State

expense’. The suggestion that this

deficiency may have been cured by the detailed warning given to the appellant subsequently by the police captain who recorded his statement was without merit in the court’s view, since the appellant had already confessed to the robbery by that time.

It was important, said the court at [17], ‘to appreciate that a constitutional right is not to be regarded as satisfied simply by some incantation which a detainee may not understand’. The ‘purpose of making a suspect aware of his rights is so that he may make a decision whether to exercise them and plainly he cannot do that if he does not understand what those rights are’. It had to follow, therefore, that ‘the failure to properly inform a detainee of his constitutional rights renders them illusory’, since ‘[w]hat must govern is the substance of what the suspect can reasonably be supposed to have understood, rather than the formalism of the precise words used’ (see R v Evans (1991) 4 CR (4th) at [144], [160] and [162]).

Ponnan JA cited what Froneman J had said in S v Melani & others 1996 (1) SACR 335 (E) at 347e–h—that the right to consult with a legal practitioner and especially the right to be informed of this right is closely connected to the presumption of innocence, the right of silence and the proscription

of compelled admissions and confessions, which were all recognized as ‘basic principles of our law’.

Froneman J stressed that the failure to recognize the importance of informing an accused of his right to consult with a legal adviser during the pre-trial stage had the effect of depriving persons, especially the uneducated, the unsophisticated and the poor, of the protection of their right to remain silent and not to incriminate themselves. This, he said, offended ‘not only the concept of substantive fairness which now informs the right to a fair trial in this country but also the right to equality before the law’.

These rights, said Ponnan JA, existed ‘from the inception of the criminal trial, that is from arrest, until its culmination (up to and during the trial itself)’.

The failure to warn the appellant properly of his constitutional rights caused him a ‘high degree of prejudice…because of the close causal connection between the violation and the conscriptive evidence’ (at [18]), since ‘plainly, the rights infringement resulted in the creation of evidence which otherwise would not have existed’.

The court examined the position in Canada under the Charter of Rights, and applied what was said in R v Ross (1989) 37 CRR 369 at 379: that ‘the use of any evidence that could not have been obtained but for the participation of

June 2015


the accused in the construction of the evidence for the purpose of the trial would tend to render the trial process unfair’.

Ponnan JA endorsed the view expressed by De Villiers JP in R v Ndoyana & another 1958 (2) SA 562 (E) at 563 that the circumstances leading up to an accused’s appearance before a magistrate or justice of the peace to make a confession are ‘not less important than the circumstances surrounding the actual making of the confession’.

So, too, the warning issued by Harcourt J in S v Majozi 1964 (1) SA 68 (N) at 71E–G that one ‘must not permit the proceedings before the magistrate or justice to draw a veil between the preceding events and the completed confession’.

The trial court and full bench, in his (Ponnan JA’s) view, had failed to appreciate the observation of SE van der Merwe (Principles of Evidence 3 ed (2009) at para 12.9.7 that ‘[i]f an accused was not prior to custodial police questioning informed by the police of his constitutional right to silence, the court might in the exercise of its discretion conclude that even though the accused had responded voluntarily, all admissions made by

the accused to the police should be excluded in order to secure a fair trial’.

All these considerations prompted the court to conclude (at [21]) that ‘those factors which justify exclusion materially, outweigh[ed] those which call for admission’. After giving the matter ‘anxious consideration and not without some hesitation’, it came to the decision that the evidence should have been excluded.

Although accepting that the ‘public reaction to the exclusion of such evidence [was] likely to be one of outrage’, it was mindful of the commitment made in S v Tandwa & others 2008 (1) SACR 613 (SCA) at [121] to winning the ‘struggle for a just order’, which could be achieved only ‘through means that have moral authority’, an authority which would be lost ‘if we condone coercion and violence and other corrupt means in sustaining order’.

The decision in Magwaza is important, since it brings into sharp relief a number of issues concerning the responsibility of the courts in giving effect to the rights enshrined in the Bill of Rights.

First, it demonstrates that courts will, at times have to be

courageous enough to hand down ‘unpopular’ judgments, which may incur the displeasure or even the ire of the general populace, if they are to take rights sufficiently seriously.

Secondly, it stresses the need to focus on the substance of a right and not its form, by seeking to address the purpose that right seeks to serve.

Thirdly, it illustrates the interconnection of the rights: the right to be informed adequately of the right to legal representation was shown to be strongly connected to a host of other rights, including the right to be presumed innocent, the right to silence, the right not to be compelled to make an admission or a confession, and, even, the right to equality.

And, fourthly, it underlines the importance of understanding that, in many matters concerning the admissibility of evidence, the technical requirements set out in the common law or in legislation have to be considered together with and subject to higher imperatives—those set out in the Constitution.

t sh

By COSTA DIVARIS

Subscription enquiries: LESLEY BYRNE

[email protected]



The Practice Manager

June 2015 by Eric Milner

© 2015 E Milner ([email protected])

A tax deferred is a tax saved, or is it? One of the tenets of tax planning that I have always lived by is that ‘a tax deferred is a tax saved’. But is the principle still valid?

Consider, for example, the consequences of the

increase in the tax on dividends ostensibly by 50% (from 10% to 15%) and actually by an effective 76,5% in April 2012, owing to the change in the tax base upon which the tax is levied.

Calculation STC

Payable by company DT

Payable by shareholder

Net dividend required 100,00 100,00

Tax 10,00 17,65

Total cost 110,00 117,65

Check Gross dividends 100,00 117,65

Tax rate 10% 15%

Tax on Dividend 10,00 17,65

Net dividend 100,00 100,00

% Increase in tax

76,5% Similarly, the tax on capital gains increased by an effective 33,33% on 1 March 2012.

Such large swings in tax make me nervous, and have caused me to re-examine the principle that a tax deferred is a tax saved, particularly in light of the very real shortfall in government income compared with expenditure.

Consequently, I revisited a piece of advice that I gave in March 2012. I was consulted by the directors of Company X, who shall remain anonymous, and who had been advised to declare a dividend before the end of the month, so as to save tax. The amount of the dividend was substantial, but for the present purposes, I use a figure of R20 million upon which to base the calculations.

Superficially, the advice made a lot of sense, since the tax payable on a dividend declared in March 2012 of R20 million amounted to R2 million, while the tax due on a dividend paid in April 2012 would amount to R3 million. If you calculate the cost of declaring a net dividend of R20 million, the true cost of paying a dividend in April 2012 increased to R3,53 million, or an extra R1,53 million for being tardy.

That, however, is not the end of the story. Company X did not actually have the funds to pay the dividend. The full advice given to it was to:

Declare a dividend of R20 million.

Create a loan account for the dividend in the name of the shareholders.

Pay interest of 10% annually on the loan account to the shareholders.

At the time I considered this to be bad advice for the following reasons:

The company was effectively paying a tax of R2 million now instead of tax in the future.

With the expansion plans that it had in place, I did not foresee the possibility of its repaying the loan account anytime soon.

The R2 million interest raised in the books of the company each year would be nondeductible for tax purposes.

The company would not actually pay the interest to the shareholders annually but would credit the amount to a loan account in the name of the shareholders until such time as it could repay the loans.

But the accrual of interest of R2 million a year would be taxable in the shareholder’s hands, most likely at 40%, and without, at least in the first few years, any corresponding cash-flow!

A simple calculation, using inflation of 6% as a guideline, results in the value of R2 million tax paid to

June 2015


SARS in April 2012 reaching R3 million in under seven years, and R3.5 million in just over nine years. Thus, if the loan account of R20 million is not repaid at the latest by August 2021, the shareholders are worse off than if they had waited and paid the 15% dividends tax at a later stage, as long as the rate of the dividend tax does not change in the interim.

At an annual interest rate of 10%, as originally proposed, the loan account of R20 million needs to be repaid by approximately December 2017. What is even worse in this scenario is that the shareholders would have incurred tax on the interest accrued of approximately R620 000 over the six-year period.

If the rate of return a company can achieve using the money for projects or operations is higher than 10%, the period to repay the loan and still be ahead of the economic curve is further reduced. The following table indicates the relevant dates after which it would have been better to have paid a 15% dividends tax rather than declare a dividend against a loan account.

Interest rate Date economic losses start to be incurred on loan

accounts 6% Aug 2021

10% Dec 2017 15% June 2016 20% Feb 2015

A final twist in the tail was that not only was the loan account unlikely to be repaid anytime soon but the shareholders had been requested to assist with the recapitalization of the company to fund expansion.

The company’s balance sheet looks poorly, owing to the large outstanding loan account, which has resulted in its being unable to raise all the funds it needs. Although it is unlikely that the R2 million would have been sufficient to fund the expansion required, paying SARS R2 million when it was not necessary to do so, and loading the balance sheet with a large liability has certainly had a negative impact on the company.

The conclusion Assuredly, there were instances in which the declaration of a dividend before 1 April 2012 was well justified, for example, when cash was to be distributed in the near future, or to take advantage of an STC credit. But in some instances, the opposite was true, in that waiting to pay a dividend was more beneficial, for example, with dividends to be paid to corporate shareholders. What appeared to happen, at least in some instances, was that advisers applied a generic strategy based purely upon the potential tax savings, without properly working out the economic rational applicable to each company.

What conclusions can be drawn from this type of situation? First, the principle that a tax deferred is a tax saved still holds true, except in limited circumstances. Secondly, time is running out to repay loan accounts created by the declaration of dividends before April 2012. Finally, it is dangerous to apply the same strategy to all clients without having regard to the individual circumstance of each client.

T S H

Bsp Seminars

Publications for Professionals

The greatest collection, ever, of up-to-date, hard, information on SA taxes,

meticulously presented.

By and compiled by

Costa Divaris

Acts Books

Databases Newsletters

Subscription Services

FOR FULL DETAILS, DOWNLOAD THE FULL LIST

BY CLICKING HERE: http://www.bspseminars.co.za/BspSeminarsPublications.pdf

http://www.bspseminars.co.za/BspSeminarsPublications.pdf