VAT, Indemnity Payments and Capitec Bank: The Good, the Bad and the Ugly (Part 1)

by | Jun 11, 2024 | BTCLQ, BTCLQ V15 I2

VAT, Indemnity Payments and Capitec Bank: The Good, the Bad and the Ugly (Part 1)

Author: Des Kruger

ISSN: 2219-1585
Affiliations: Independent Consultant
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 2, 2024, p. 1 – 14

Abstract

The recent Constitutional Court decision in Capitec Bank Limited v Commissioner for the South African Revenue Service is seminal, but is, with respect, unfortunately wrongly decided (the bad). That said, Rogers J, in a unanimous judgment, has provided clarity in regard to a number of VAT provisions (the good and the bad), most notable the treatment of a supply for no consideration and the application for apportionment outside the ambit of the Value- Added Tax Act, 1991 (VAT Act), amongst others. In essence Capitec Bank sought a deduction under section 16(3)(c) of the VAT Act of amounts credited to borrowers accounts under a loan cover arrangement on the happening of specified events, namely the death or retrenchment of the borrower. Capitec Bank has essentially undertaken to apply the claim proceeds derived by it under a credit life policy entered into with an insurer against the indebtedness of the borrower on his or her death or retrenchment. Section 16(3)(c) provides for a deduction against a vendor’s output tax of any amounts paid to a person to indemnify that person under a ‘contract of ‘insurance’. The deduction is equal to the tax fraction (15/115) of such indemnity payments. Importantly, the deduction is only available if the ‘contract of insurance’ under which the payments are made is a taxable supply. SARS sought to disallow the deduction on the grounds that the ‘contract of insurance’ was not a taxable supply as it was not a supply made in the course or furtherance of any ‘enterprise’ carried on by the bank. SARS argued that as no consideration was charged for the loan cover, it could not be said that Capitec Bank was carrying on an enterprise in relation to its loan cover activities. In addition, SARS argued that the loan cover was so closely connected to its exempt activity of providing loans (an exempt supply), that the provision of the loan cover similarly constituted an exempt supply. An exempt supply is specifically excluded from the ambit of the definition of ‘enterprise’. Capitec Bank naturally sought to counter such arguments by submitting that the supply of the loan cover free-of-charge did not disqualify the supply as being a taxable supply, relying, inter alia, on the provisions of section 10(23) of the VAT Act. As regards the argument by SARS that the supply of the loan cover was an exempt supply, Capitec Bank argued that the loan cover related to its overall business that comprised both exempt (loans) and taxable (fee) activities and as such was not in itself an exempt supply.

 

Circular Cash Flows: A Primer

by | Jun 11, 2024 | BTCLQ, BTCLQ V15 I2

Circular Cash Flows: A Primer

Author: Ed Liptak

ISSN: 2219-1585
Affiliations: Independent Consultant
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 2, 2024, p. 15 – 23

Abstract

Tax shelter schemes based upon circular cash flows presented a significant problem when the current general anti-avoidance rule (‘GAAR’) was enacted in 2006. It was hoped that by including a non-exclusive list of the most common characteristics of these schemes in the GAAR itself it would give the South African Revenue Service (‘SARS‘) the tools to identify and stop these arrangements and, more importantly, to deter taxpayers from entering into them in the first place. Unfortunately, experience has shown that practitioners and commentators — and even SARS from time to time — continue to overlook or ignore the telltale signs of circular cash flows. This article is intended to be a primer on that score.

 

The Enviroserv Case: A Shift in Interpretation of What is a Process of Manufacture

by | Jun 11, 2024 | BTCLQ, BTCLQ V15 I2

The Enviroserv Case: A Shift in Interpretation of What is a Process of Manufacture

Author: Michael Rudnicki

ISSN: 2219-1585
Affiliations: Tax Executive, Bowman’s Attorneys, Johannesburg
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 2, 2024, p. 24 – 30

Abstract

This article explores the case of Enviroserv Waste Management (Pty) Limited v the Commissioner for the South African Revenue Service in relation to the facts,
the outcome and the principles developed therein. The case focuses on the business of waste management services conducted by Enviroserv and whether the decomposition and biodegradation of waste in the cells within a landfill site constitute a process of manufacture or a similar process. The article considers the objective transformation of the input into the process as considered in some of the older court decisions. In those decisions the court argued that an article must be ‘essentially different’ from the article that existed before it had undergone the process. The more recent cases focus on the nature, form, shape or utility of the article and that a non-physical transformation could also be an essential difference in a product. The disputed issue related to whether the process that took place in the cells constituted plant used directly in a process of manufacture or a similar process, as contemplated in section 12C of the Income Tax Act, 1962 (‘the Act’). SARS argued that the cells are a storage facility, and that leachate is a byproduct of the waste disposal process. The Commissioner further argued that the cells are buildings and not plant. The provisions of section 12C do not apply to buildings. Section 12C provides a taxpayer a deduction of 20% per annum of the cost of machinery or plant, owned by the taxpayer and used directly in a process of manufacture or a similar process. The court considered the meanings of ‘process’ and ‘manufacture’, which are not defined in the Act from various precedent, to be something made which is different from that out of which it is made. The court held that the process undertaken by Enviroserv constituted a process of separation of the leachate from the solid waste. SARS argued that the cells are ‘waste disposal assets’, defined in section 37B of the Act, are not ‘plant’ as defined in section 12C and are akin to dumps or reservoirs contemplated in the section. Defining features of section 37B are that assets are used in a process that is ancillary to a process of manufacture and are required by environmental law. The provisions of section 12C do not have such requirement. The court also did not find it necessary to consider whether the structure was permanent. The focus was on the process undertaken inside the cell and that this process was intended and desired by the taxpayer within its manufacturing process and therefore not ancillary thereto.

 

Supreme Court of Appeal Refuses ‘Reverse’ Piercing of the Corporate Veil

by | Apr 27, 2024 | BTCLQ, BTCLQ V15 I1

Supreme Court of Appeal Refuses ‘Reverse’ Piercing of the Corporate Veil

Author: Albertus Marais

ISSN: 2219-1585
Affiliations: Advocate of the High Court, CA (SA), Certified Tax Advisor (SAIT), Adjunct Senior Lecturer (UCT Law Faculty) and Director at AJM
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 1, 2024, p. 1 – 8

Abstract

A company is a separate legal person in terms of South African law. That principle is also widely recognised in most countries. Sometimes, however, either through common law or statutory operation, the separate legal personality of a company may be ignored. Where a company’s separate legal personality is ignored for limited purposes, it is often referred to as a court ‘piercing the corporate veil’ of the company.
In South Africa, the piercing doctrine has historically been developed under the common law. More recently, however, that doctrine has now been incorporated into statute and, more specifically, section 20(9) of the Companies Act. The codification of the piercing doctrine is still rather new, and the recent case in The Butcher Shop and Grill is important because it reasserts the principles that have recently emerged in South African law in this regard.
That case is also important because it not only reasserts the interaction between section 20(9) and the common law but also because it deals with the interesting concept of so-called ‘reverse piercing’, that is, where a company’s shareholder approaches a court to have the separate legal personality of the company in which shares are owned disregarded. The Butcher Shop and Grill is important in this sense because it confirms the basic principle that a company is a legal person, the existence of which must at all times be acknowledged unless the separate identity of the legal person was the subject of abuse. This makes reverse piercing highly unlikely, if not impossible.

Understatement Penalties Through the Cases

by | Apr 27, 2024 | BTCLQ, BTCLQ V15 I1

Understatement Penalties Through the Cases

Author: Annalie Pinch

ISSN: 2219-1585
Affiliations: Senior Consultant, Bowman Gilfillan
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 1, 2024, p. 9 – 19

Abstract

The understatement penalty (‘USP’) provisions were introduced in the Tax Administration Act in 2011 (‘the TAA’) with effect from 1 October 2012. These
provisions stipulate, amongst other things, when the South African Revenue Service (‘SARS’) may impose understatement penalties, when no penalties may be imposed, how the penalty must be calculated and when penalties imposed must be remitted. In particular, the USP rules require there to be an ‘understatement’, as defined in section 221 of the TAA. However, where an understatement arises from a ‘bona fide inadvertent error’, no penalty may be imposed. This term is not defined and has accordingly been the subject of many disputes between taxpayers and SARS, resulting in the term being considered by the tax court, the Supreme Court of Appeal (‘SCA’) and currently the Constitution Court, as discussed in this article. While SARS adopts a narrow view of what constitutes a bona fide inadvertent error, the SCA held in CSARS v The Thistle Trust (Thistle) that SARS was not entitled to levy an understatement penalty because the taxpayer made an error, but did so in good faith and acted unintentionally. In Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd (Coronation), the SCA held that the understatement arose from a bona fide inadvertent error because it resulted from the taxpayer relying on a tax opinion from a tax practitioner.
The TAA also stipulates that the burden of proof is on SARS in respect of the facts on which SARS bases the imposition of an understatement penalty. The onus of proof has similarly been the subject of case law, resulting in a clearer understanding of the requirements that SARS has to meet in imposing understatement penalties. In terms of Purlish Holdings (Pty) Ltd v The Commissioner for the South African Revenue Service (Purlish Holdings) and Enviroserv Waste Management (Pty) Ltd v The Commissioner for the South African Revenue Service (Enviroserv), SARS must show not only that the taxpayer committed the conduct envisaged in the definition of ‘understatement’ (e g, an incorrect statement in a return), but also that such conduct resulted in prejudice suffered by SARS or the fiscus. Furthermore, it was held in Purlish Holdings that ‘prejudice’ is not limited to financial prejudice.

Thistle and Coronation: Can a Taxpayer Place Reliance on a Legal Opinion to Avoid or Reduce Penalties While at the Same Time Withholding Disclosure of the Opinion from SARS?

by | Apr 27, 2024 | BTCLQ, BTCLQ V15 I1

Thistle and Coronation: Can a Taxpayer Place Reliance on a Legal Opinion to Avoid or Reduce Penalties While at the Same Time Withholding Disclosure of the Opinion from SARS?

Author: Matthew Blumberg SC

ISSN: 2219-1585
Affiliations: N/A
Source: Business Tax & Company Law Quarterly, Volume 15 Issue 1, 2024, p. 20 – 27

Abstract

Understatement penalties1 featured in two tax cases recently argued in the Constitutional Court. In both cases, the taxpayer had sought to avoid or reduce liability for understatement penalties on the basis that the taxpayer’s contentious tax position had been based on a favourable legal opinion. In the one case, the opinion was disclosed to SARS. In the other, it was not. In the latter case, SARS contended that the taxpayer ought to have disclosed the opinion and adduced it in evidence. The SCA had disagreed, finding that ‘it was not incumbent on [the taxpayer] to disclose a tax opinion that it had obtained, any more than it would be on any other party which litigates on the basis of a procured legal opinion.’
It is, for various reasons, difficult to predict whether or not the Constitutional Court will engage with this finding. For the reasons explored below, however, taxpayers should proceed with caution before seeking to invoke the SCA-finding as authority for the proposition that they may rely on a legal opinion to avoid or reduce penalties, while at the same time withholding disclosure of the opinion from SARS.