Source: https://old.juta.co.za/newsletter/newsletter/juta-tax-law-review-march-2012-1/
Timestamp: 2019-08-20 22:38:36
Document Index: 259918195

Matched Legal Cases: ['Case No: 218', 'Case No: 669', 'Case No: 757', 'Case No: 13446', 'Case NO: 162', 'Case No: 11470', 'Case No: 179']

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The Taxation Laws Amendment Act 24 of 2011; promulgated 10 January 2012
The Taxation Laws Second Amendment Act 25 of 2011; promulgated 14 December 2011
Explanatory Memorandum on the Taxation Laws Amendment Bill of 2011
An Explanatory Memorandum on the Taxation Laws Amendment Bill of 2011 has been released by the South African Revenue Service and it explains the policy reasons behind the legislative amendments effected by the above amending Acts and comments on the substance of the amendments.
INTERPRETATION NOTE 64 DATED 22 FEBRUARY 2012
Interpretation Note 64
This interpretation note replaces Practice Note No 8 issued on 26 March 2001 and provides guidance on the application and interpretation of s 10(1)(e) of the Income Tax Act. This paragraph deals with the tax exemption in respect of bodies corporate established under the Sectional Titles Act 95 of 1986, share block companies established under the Share Blocks Control Act 59 of 1980 and associations of persons managing the collective interests common to all members.
CSARS v Multichoice Africa [2011] ZASCA 41 (Judgment delivered by the Supreme Court of Appeal, Case No: 218/10, 29 March 2011)
Tariff classification under the Customers and Excise Act must be implemented in accordance with the principles laid down in International Business Machines SA (Pty) Ltd v CCE 47 SATC 261
CSARS v Labat [2011] ZASCA 157 (Judgment delivered by the Supreme Court of Appeal, Case No: 669/10, 28 September 2011)
The Supreme Court of Appeal repeated its earlier criticism of the inappropriate granting by the High Court of the right to appeal to the Supreme Court of Appeal as this increases litigants’ costs and results in a congestion of the Supreme Court of Appeal roll with cases that do not deserve that court’s attention.
Clear Enterprises (Pty) Ltd v CSARS [2011] ZASCA 164 (Judgment delivered by the Supreme Court of Appeal, Case No: 757/10, 29 September 2011)
THE INTERRELATIONSHIP BETWEEN THE INCOME TAX ACT AND SOUTH AFRICA'S INTERNATIONAL DOUBLE TAX AGREEMENTS
CSARS v Van Kets [2011] ZAWCHC 435 (Judgment delivered by the Cape High Court, Case No: 13446/2011, 22 November 2011)
The interpretation of SARS’s information-gathering powers in terms of s 74A and s 74B of the Income Tax Act must take account of South Africa’s obligations under international tax agreements
The decision of the Western Cape High Court in CSARS v Van Kets [2011] ZAWCHC 435 concerned the interrelationship between s 74A and s 74B of the Income Tax Act 58 of 1962 and the provisions of South Africa’s international tax agreements. These provisions empower SARS to demand that a person furnish information ‘for the purposes of the administration of this Act’.
In the present case, the Australian tax authorities had requested SARS to use these statutory powers to oblige a South African resident, Van Kets, to divulge information in his possession concerning one Saville, who was not a resident of the Republic but was resident in Australia and was a person of interest to the Australian fiscal authorities. Van Kets was a co-director with Saville in a certain foreign company and was thus a potential source of information about Saville’s financial affairs.
The question was whether South Africa’s Income Tax Act gave SARS the power to use its information-gathering powers so as to require a South African resident to give information concerning a non-resident who had no potential tax liability toward the South African fiscus.
The High Court answered this question in the affirmative on the basis that the provisions of South Africa’s double tax agreement with Australia for the international exchange of information had the effect of broadening the scope of ss 74A and 74B of South Africa’s Income Tax Act.
Mobile Telephone Networks Holdings (Pty) Ltd v CSARS [2011] ZAGPJHC 181 (Judgment delivered by the South Gauteng High Court, Case No: A5033/10, (Tax Court case No 12401), 8 July 2011)
The court commented that the applicable legal principles (as laid down in Port Eilizabeth Electric Tramway Co Ltd 1936 CPD 241) were clear and that it was the application of those principles to the facts of this matter that introduced complexities.
SARS argued that audit fees constituted an expense incurred after the earning of income, in that the audit verifies the expenditure after it has been incurred, and that the incurral of this expenditure does not advance the taxpayer’s trade nor the production of income.
It was common cause that the taxpayer's business constituted ‘trading’ as envisaged in s 1 of the Income Tax Act and that the work of the auditors extended beyond the verification of interest income and the receipt of dividends.
The court held that the expenditure in relation to the audit fees had been incurred to facilitate the carrying on of the taxpayer’s trade, not only in a legally compliant manner but also to generate income. The court affirmed that a taxpayer is not required to demonstrate a direct causal link between expenditure and the production of income, but merely needs to show a close connection between the two. The court also affirmed the well-established principle that, in determining the causal connection between expenditure and income, regard must be had both to the purpose of the expenditure and to what it actually effects.
As far as the professional fee charged by the outside firm for the training of the taxpayer’s staff on a new computerised accounting package was concerned, the court held that the taxpayer had discharged the onus of proving that the criteria for deductibility were satisfied, inter alia on the basis of the principle laid down in Joffe & Co Ltd v CIR 1946 AD that such expenditure was a necessary concomitant of the taxpayer’s income-earning operations.
The court ordered that the deductibility of the quantum of the audit fees be remitted to the Commissioner to enable the latter to make new assessments for the relevant years of assessment on the basis that 94% of the audit fee was deductible. As regards the professional fee for the training of the taxpayer’s staff on the computerised accounting package, the court ruled that such fees were deductible.
AMNESTY UNDER TAX AMNESTY LEGISLATION
CSARS v Saira Essa Productions CC [2010] ZASCA 154 (Judgment delivered by the Supreme Court of Appeal, Case NO: 162/10), 30 November 2010)
The Supreme Court of Appeal also held that the criminal proceedings in the regional court should not have been interrupted in order to seek a declaratory order from the High Court, inter alia because such an order would have been academic if those criminal proceedings did not result in a conviction at the end of the trial. The Supreme Court of Appeal upheld SARS’s appeal against the order of the High Court and awarded costs on a punitive scale against the two individuals in question on the basis that their application to the High Court had been vexatious.
ABC Ltd v CSARS (Judgment delivered in the Western Cape Tax Court, Case No: 11470, 14 March 2011)
In this decision of the Western Cape Tax Court, the facts were that the taxpayer company, which had been a wholesale seller of liquor to retail outlets since the 1970s, had been appointed for a period of 10 years (and terminable thereafter on one year’s notice) as the exclusive distributor of certain whiskies for resale in southern Africa, and had undertaken not to distribute any competing products. The taxpayer had thereafter agreed to a proposal that this distribution agreement be terminated and, in consideration for so agreeing, had been paid a lump sum in compensation for the premature termination of the exclusive distribution rights.
It was held that there is no single criterion for determining whether a receipt or accrual is of a capital or of a revenue nature, and that each case must be determined on its own facts. In the present matter, the exclusive distribution right in question was one of the taxpayer’s capital assets. It did not follow, however, that the compensation payment was necessarily of a capital nature. The critical question was whether the taxpayer had been compensated for the capital value of this right, that is to say for the loss of the value of that capital asset, or for loss of the profits the taxpayer would otherwise have made from the sale of the whisky. The exclusive distribution right in question had a finite lifespan and what the parties had agreed upon was the compensation to be paid for the relinquishing of this wasting asset. The method of calculating the compensation was an important factor but was not determinative of its fiscal nature.
In the result, it was held that the taxpayer had not discharged the onus of proving that the compensation in question was to fill a hole in its income-earning structure, as distinct from being compensation for the loss of future profits. SARS had therefore been correct in its determination that the compensation was of a revenue nature.
Reported as ITC 1851 (2011) 73 SATC 241: Eastern Cape Tax Court: (Judgement delivered on 28 October 2010)
It was held that, on a proper analysis of the agreement in question, the ‘inventory’ to which schedule 6 to the agreement allocated a nil value in fact constituted trading stock and that other provisions of the agreement contained indicia that a proportion of the R80 million purchase price of the business and a proportion of the liabilities in respect of the purchase of the trading stock constituted consideration for the acquisition of that trading stock.
It was held that, on a proper analysis of the agreement, consideration had indeed been given for the trading stock and that it had not been acquired for no consideration. However the taxpayer’s conduct in contesting these issues had been reasonable and consequently no interest ought to be payable in terms of s 89 quat(3) on the underpayment of provisional tax.
ABC Ltd v CSARS (Judgment delivered in the Western Cape Tax Court, Case No: 179, 14 March 2011)
The surrender of a contractual right for the exclusive distribution of goods was held to constitute services that had been voluntarily supplied and the compensation received for such surrender of rights was held to be subject to VAT at a rate of zero per cent.
It was held that, in the context of the premature termination of the distribution rights, the surrender of such rights had constituted ‘services’ which had been voluntarily ‘supplied’, as defined in s 1 of the Value-Added Tax Act.
It was held that the value of those services was the amount of compensation received by the vendor and that the latter's decision to surrender its distribution rights had occurred in the ‘course or furtherance of any enterprise carried on’ by the vendor as contemplated in s 7(1)(a) of the Act.