Tax Update Critical Changes and Case Law

Jerry Botha CFP®

Tax Environment

1999/2000 = 579 Pages

Since then = 1,868 Pages

2011: Tax Law Amendments 135 pages

2011 Response Documents from SARS 110 pages and Explanatory Document on Amendment Act 185 pages

Tax Administration Bill (National Assembly) 204 pages

Tax Environment

Complexity of tax law

Quantum of legal provisions

Strength of anti avoidance and penalty provisions

Court decisions

Pressures on collection

Raubenheimer v Raubenheimer (1 June 2012)

Interpretation of a will made by the appellant’s husband prior to his death (accepted under 2(3) of the Wills Act). The will had not been properly witnessed and contained a clause that although the estate was bequeathed to the appellant she was to have a usufruct over the matrimonial home in Pretoria until her death or remarriage. It also referred to a list of specific bequests which was not attached thereto.

After death, two children born from a previous marriage contended that this will was invalid as, it failed to comply with the relevant statutory provisions as to its signature and, secondly, as it was void for vagueness.

Per LEACH JA“It is a never-ending source of amazement that so many people rely on untrained advisors when preparing their wills, one of the most important documents they are ever likely to sign. In Ex Parte Kock NO,1 a high court decried the number of instances in which wills had to be rejected as invalid due to a lack of compliance with prescribed formalities and the regularity with which the courts were being approached to construe badly drafted wills, before urging intending testators ‘in their own interests as well as in the interests of those whom they intend to benefit when they die. To consult only persons who are suitably trained in the drafting and execution of wills and other deeds containing testamentary dispositions’. Despite this, the courts continue all too often to be called on to deal with disputed wills which are the product of shoddy drafting or incompetent advice. This is another such case”

Medical Aid ChangeWhere the Credit Comes into Play

Medical Aid ChangeMonthly Credit

Medical Aid ChangeEnd of Year Claim

A – Medical Scheme Expenses

B & C – Local and foreign medical expenses (out of pocket)

D – Physical impairment / Disability expenses

Medical Aid ChangeEnd of Year Claim

Above 65 – A, B, C and D

Physical impairment / Disability -B, C, D-Actual contributions – 4 x credit

(R24,000 – (R230 x 12 x 4) = R12,960

Medical Aid ChangeEnd of Year Claim

Rest (normal taxpayers)

-Actual contributions – 4 x credit

(R24,000 – (R230 x 12 x 4) = R12,960; AND

- (B + C) over 7.5% of taxable income (excluding retirement fund withdrawal / benefit)

Fit and ProperLegislated Reporting

• Section 105A – Reporting of Unprofessional Conduct

• Any professional association, body or board, such as FPI and FSB.

• Affairs of taxpayer, including personal affairs

• Done or omitted to do anything in opinion of Commissioner -

• Avoid, postpone any duty or obligation under the Income Tax Act

• Includes negligence

• Or contravened any rule or code of conduct of any professional body

• SARS may report you to said body …

Fit and ProperLegislated Reporting

Reportable Arrangements• Section 76A of the Act

• Arrangement – transaction, scheme, operation

• Tax Benefit

• Various exclusions

• 60 days to report to SARS (website)

• Reportable Arrangement Number

Tax Offences

• Section 104 of the Act

• Any person with intent to evade or to assist any other person to evade

• Includes any false answers, including verbally, false books or records or any fraud, art or contrivance

• Imprisonment up to 5 years

200% Tax Penalty

Default in rendering a tax return

Omit any amount

Incorrect statement in return that reduces tax

• 200% penalty must be imposed.

• Commissioner may then remit the penalty as thinks fit, except where intention to evade (when extenuating circumstances come into play).

• Rare that courts override the 200% penalty where SARS wins case.

Section 11(w) & Deferred Compensation and Employer Insurance

• Significant changes were introduced 01 March 2012.

• Covered by Beatrie Gouws from National Treasury during Tax Workshop sessions, as well as Marius Botha case studies.

• Follow-up sessions with National Treasury.

• Further refinements will follow -

Section 11(w) & Deferred Compensation and Employer Insurance

• Deductibility of premiums on Contingent Liability Policies

• Administrative issues around unapproved PHI policies (can there be approved PHI policies?)

• Employer accident cover parameters confirmed.

• Taxation of proceed from 11(w)(i) policies

Section 11(w) & Deferred Compensation and Employer Insurance

• Exemption from tax of policy benefits where premiums are not tax deductible on –

• Old employer-owned policies with cash values

• Employer owned policies with risk benefits only (not for key person purposes, such as contingent liability policies)

• Certain endownment policies, such as where employer takes for savings purposes.

• Deferred compensation policies to be ceded to pension or provident fund.

Section 11(w) & Deferred Compensation and Employer Insurance

• Problem cases for members

• We will raise them with National Treasury

• But we need exact facts (not client information) and full details to raise

NOTE: ITEMS FOR SUBMISSION CAN JUST BE EMAILED TO jerry@taxconsulting.co.za or almo@fpimail.co.za

Dividends Tax

Dividends Tax

• Personal income tax 40% above R617,000, thus saving minimal.

• Foreign clients should have branches (28% only) and not subsidiaries.

• Small business corporations becoming very attractive –

0% on the first R 63,556

7% on R 63,556 to R 350,000

28% in excess of R 350,000

Severance Benefit

55 years

Sickness, accident, injury or incapacity through infirmity of mind or body

Retrenchment

= no more R30,000 or average tax rates

= lump sum benefit table

Withdrawal Rules

Withdrawal

Lump Sum Benefits October 2007 – “retire”

Lump Sum Withdrawal Benefits March 2009 – “take cash”

Severance Benefits March 2011 – “not retrenchment”

Operates cumulatively (of course)

Retirement

Lump Sum on Retirement

Retrenchment amounts

Cumulated and recomputed on retirement table

Less

Tax Payable on early withdrawals / severance on same table

The Hitchhicker’s Guide to the Galaxy

•"The answer to the ultimate question of life, the universe and everything is 42."

•For decision on withdrawal = max R49,950 (2011) and R59,400 (2012)

•Reconcile –

2011(R300,000 – R22,500) x 18% = R49,950

2012 (do re-computation on any amount of R945,000) and delta = R59,400

•Is the tax impact enough to influence a decision?

Provisional Tax RulesTaxpayers must do estimates now for 1st and 2nd

No more SARS basic amounts.

This necessarily requires information from financial advisors before provisional deadlines.

Above R1m = 80% accuracy

Below R1m = 90% accuracy

Tax Filing ObligationWhere you had more than one source of income, even where you worked on a week somewhere else or had any interest or other income.

Where you did not work the full 12 months – this is where you will also qualify for a tax refund.

Where your employment income equals or exceeds R120,000 for the year.

Where you are older than 65 years. New exemptions – below tax threshold (65 and 75).

Where you had a retirement annuity, medical aid expenses, made donations, received a travel allowance etc. - all these will allow you to qualify for a tax refund

Tax Filing Obligation

• Recommend cases of uncertainty uses SARS tax wizard.

• http://www.sars.gov.za/Wizard2012/Wizard.htm

• Make sure you have a copy hereof for future tax reference.

Non-Compliance PenaltySection 211 of Administration Act

Penalty Regime• Not only tax returns but any administrative non-compliance (request

to update banking details), applied per month

• Taxpayer only notified when imposed, amended / adjusted or cancelled.

• Initial notice also serves as final notice before debt collection.

• SMS only send monthly.

Understatement penalty percentage table – section 223 of TAB

Employees’ Tax Planning• Company vehicles and travel allowance 20% rule (only 20% of

taxable value collected as PAYE) -

• Whole amount taxable on IRP5• Claim with logbook on personal tax assessment

• More than 80% business with vehicle –

• Company vehicles makes most financial sense.

• Business equipment and related services exempt from Fringe Benefit tax where more than 50% used for business

Employees’ Tax Planning• Business equipment and related services exempt from Fringe

Benefit tax where more than 50% used for business –

• Cellular Phones • Home Phones• 3G cards• Home ADSL lines• Laptops• Hardware (printers, backup devices etc.)• Software• Etc

Residency Transfer• Disposal of residency from company to a trust into hands of

individual extended to 31 December 2012.

• Free from transfer duty, capital gains tax, secondary tax on companies and dividends tax.

• Detailed SARS guide (Issue 2) hereon.

• Take note CGT cost increased 13.32% (individuals and special trusts), 18.65% (companies) and 26.64% (trusts)

Tax Administration Act Passed National Assembly

• Creates “serious tax offence” category – imprisonment for period exceeding two years.

• Compulsory identity cards for officials

• SARS is internally only bound to –

• “Practice generally prevailing” – official publication regarding application or interpretation of the Act.

• Binding Ruling (section 75)

• Creates Tax Ombudsman – appointed Minister, but staff seconded from SARS.

• 5 year retention period remains, but where audit, until audit is concluded.

Tax AdministrationSelection for Inspection, verification or audit

• Senior SARS official must authorise field audit or criminal investigation and person must produce the authorisation

• Obligation to keep taxpayer informed – 21 days

• Serious tax offense appears committed – must be referred for criminal investigation

Tax AdministrationInspection

• May arrive at premise without prior notice to determine (a) identity of occupant (b) registered for tax (c) whether person is keeping and retaining records.

• Relevant material may be obtained from a 3rd party and this may be obtained under oath.

• May request any person to attend interview to clarify issues of concern or produce material under control.

Tax AdministrationInquiries

• Notice to appear and produce documents to inquiry.

• You may not refuse to give incriminating evidence.

• Incriminating evidence not admissible in criminal proceedings.

Tax AdministrationSearch and Seizure

• Warrant must be issued

• May search without warrant in various cases

• Incriminating evidence not admissible in criminal proceedings.

SARS v Van Kets• Australia Revenue requested SARS for information.

• SARS invoked section 74 to obtain information from taxpayer.

• Taxpayer refused.

• SARS application granted.

• Take note:

• Exchange of information contained in all DTA’s.• Make sure that local and offshore tax positions synchronise

SARS v Van Kets• Australia Revenue requested SARS for information.

• SARS invoked section 74 to obtain information from taxpayer.

• Taxpayer refused.

• SARS application granted.

• Take note:

• Exchange of information contained in all DTA’s.• Make sure that local and offshore tax positions synchronise

ITC 1835 vs. ITC 1793• Deceased and husband executed a joint will, with first dying spouse bequeathed household

possessions to survivor and residue to inter vivos trust, with life long usufruct for survivor and the to son for one year.

• On death of testatrix the trust owned her some R500k.

• Winding up of the estate, executor neither demanded nor received payment of debt from trust and merely reflected in L&D. The debt as a claim was awarded to the trust as sole heir of the residue.

• SARS raised assessment same basis as ITC 1793 – shares sold to family trust on loan account and bequeathed the debt to the trust. CGT under 12(5) of the Eight Schedule (debt discharged for no consideration).

• Court found 12(5) did not apply – intention of the creditor is key in disposing of debt. How estate administered not important

JDW vs. SARS No 11537• Tax assessments 1996 to 2002.

• 3 rental properties registered in children’s names

• Rental income not disclosed in his name.

• Liable to 20% donations’ tax.

• Rental income deemed to be that of the parent – Section 7(3) and application confirmed in Commissioner for SARS v Woulidge.

• 200% SARS penalty confirmed.

• Case referred by Judge to Director of Public Prosecution for criminal charges

CSARS vs. Tradehold

• Deemed disposal of assets when become non-resident

• Claimed the Double Tax Agreement did not allow the Eight Schedule provision

• Amazingly, SCA agreed with taxpayer.

• Decision is wrong (perhaps more correctly, badly argued by SARS)

• SARS agrees wrong and will change the law

ITC 11038 (King Decision)

• Not disclosed sale of shares in tax returns and claimed CGT in nature (disposed before CGT)

• Around R1.5b in play and 2/3rd were penalties (200%)

• Compulsory reading for anyone who wishes some insight into what our courts think of offshore trusts and aggressive evasion.

Future ProposalsBe on the lookout for –

•New retirement tax regime

•Tax Preferred savings and Investment accounts