ETI schemes: SARS rules


In a Binding Private Ruling issued on 6 July 2021, SARS has made strict ruling on an Employment Tax Incentive Act (ETI) scheme that has been doing the rounds. It is not often that negative rulings get published and it is therefore a unique situation that should serve as a warning to those participating in ETI schemes. The ruling determines that students in the proposed training programme are not considered “employees” as contemplated in the ETI Act and that the applicant in this case will not be entitled to claim an employment tax incentive in respect of any of them. The basic tenets of the scheme are as follows:

  • The applicant: A resident company
  • Company B: A resident non-profit company
  • The applicant and company B will enter into an agreement with the stated purpose that students will be employed by the applicant for the purpose of obtaining a qualification. The students will participate in a training programme offered by company B
  • Company B will train the students for a year, supply a tablet, data and cash per month as incentive to stay in the programme. Students will have to perform certain online tasks every week and meet for group discussions every second week.
  • The applicant will invoice company B for payroll related services that the applicant will render monthly in respect of each student it proposes to employ.
  • The applicant will sign agreements with the students for a period of 12 months and pay the students a monthly salary. The applicant is not obliged to employ the students after the 12 month training programme has been completed.
  • The students will consent to forfeit their monthly salaries in order to be trained by company B. The students will be on the applicant’s payroll and protected by its group life policy.
  • The students are not required to do any work. The main duty of a student will be to attend training courses “virtually” at the skills centres hosted by company B.
  • There is no expectation that a student will report to the applicant’s offices on a daily basis. There may be times that the students would be expected to make themselves available to perform specific forms of work such as marketing, printing and distribution of pamphlets. The applicant will only call on them to perform these ad hoc activities to the extent that doing so does not interfere with their studies.
  • Company B will exercise supervision and control over the students by way of mentors assigned to each of them. The mentors will monitor and supervise the students to ensure they progress successfully through the training course.

Ultimately, SARS ruled that:

  1. a) No student will meet the definition of an “employee” in section 1(1) of the ETI Act.
  2. b) The applicant will not be entitled to claim an incentive, as contemplated in the ETI Act, in respect of any of the students.

This should serve as a warning to carefully interrogate schemes of this nature before entering into them as they could have adverse tax consequences. Always speak to your tax advisor before assuming the applicability of any tax benefit.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Cut your losses!

On 18 March 2021, the Supreme Court of Appeal delivered judgment in the case of Massmart Holdings Limited v The Commissioner for the South African Revenue Service. The case dealt with losses which were incurred within the broader Massmart group in respect of the investing of equity instruments as part of an employee share incentive scheme. The mechanism of the scheme was that shares allocated to the designated employees would be purchased from a share Trust with funding from Massmart Holdings.

Upon distribution of those shares to the designated employees, the share Trust could either have losses in respect of the distribution, or taxable gains. Over several years of assessment, the Trust realised losses on the distributions on the vesting of those shares in the designated employees for a cumulative amount of R954 million.

Rather than claiming these capital losses in the Trust from where they arose, the group proceeded to claim those losses in Massmart Holdings. In other words, the group attempted to claim losses on the disposal of assets which never belonged to the claiming party in the first instance.

Massmart’s original objection to SARS’ disallowance of the losses of the Trust was that Massmart Holdings was essentially an extension of the Trust and that it maintained control over the Trust’s activities and should therefore be allowed to claim the losses. After disallowance of the objection, Massmart added a further ground on appeal being that it [Massmart] acquired a right to call on the Trust for delivery of the shares to the identified employees. It argued that its base cost for that asset was the loss incurred by the Trust on that realisation event (i.e. when the shares vested) and that it obtained no proceeds on that disposal, resulting in a capital loss.

Without entertaining that argument in too much detail, the Supreme Court of Appeal (“SCA”) found that it was not possible for Massmart to claim those losses and that there exists no mechanism in terms of which losses can be distributed out of a Trust into the hands of a beneficiary. While a distribution of gains is well recognised in our common law and law of taxation, it is a firm principle which has now been confirmed by the SCA that Trust losses cannot be distributed from trusts to beneficiaries.

Ironically, Massmart was adequately advised by their respective advisors prior to claiming the losses, but proceeded nevertheless. It appears the battle was lost before it even proceeded to court.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Tax oddities and VAT frustrations

The Tax Administration Act provides for the audit and verification of taxpayers’ tax returns for all taxes administered by the Commissioner for the South African Revenue Service (SARS). In many instances, such requests for information are general, boiler-plate letters received by taxpayers, not indicating specifically what additional information SARS requires in the circumstances and which supporting documents must be provided. In recent times, in respect of both income tax and value-added tax, SARS has taken an arbitrary approach in issuing additional assessments based on information provided by taxpayers in response to the inadequate (or vague at best) requests for information.

Income tax

Many taxpayers (who are natural persons) have recently received a request from SARS in which they list the bank accounts that are registered in the name of the taxpayer, as well as a summary of the total number of credits (deposits) made into these respective bank accounts. SARS then requests the taxpayer to explain why those credit amounts should not all be included in the taxpayer’s taxable income. This is a highly arbitrary approach followed by SARS in accepting that all deposits made into a taxpayer’s bank account constitutes income. There can, of course, be multiple other reasons for such deposits, including donations between spouses, receipt of gifts, loan funding received, prize winnings, transfers between the taxpayer’s own accounts, transfers out of bond accounts into current accounts, et cetera. This approach displays a lack of understanding regarding commercial realities and places the taxpayer on the back foot: having to discharge the onus of amounts that should not be classified as income.

Value-Added Tax

Arguably, no VAT vendor in South Africa has escaped frustration from the administration of the VAT system, particularly as it relates to the verification of VAT returns. A practice that has recently emerged is that if one or two pieces of supporting documents provided to SARS does not meet the requirements of a valid tax invoice, SARS immediately, and without further inquiry, disallows all input VAT claimed by a taxpayer during the relevant tax period. This is a highly invasive approach in which SARS accepts that none of the goods and services received by a vendor during that period is valid, or that they lack supporting documents. Unless SARS is specific in their requests, a taxpayer cannot identify the information that should be provided to them. The blanket disallowance of all input VAT is an irrational practice that should be addressed at the appropriate level.

The examples above merely illustrate some of the arbitrary practices that taxpayers have recently been confronted with – as such, taxpayers are advised to carefully navigate the dispute resolution process, since providing SARS with incorrect information, or making incorrect statements in their correspondence with the revenue authority, may lead to severe prejudice as a result of these unacceptable practices.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Why do I need to know my rights as taxpayer?

Since the introduction of the Tax Administration Act in 2011, which aimed to consolidate most of the administrative matters in tax acts, taxpayers have become ever more aware of their rights in dealing with the South African Revenue Service (SARS). There has also been a significant increase in the number of cases in the Tax Court (as well as in our High Courts) that relate not to substantive tax matters, but rather to the exercise of taxpayers’ rights. We briefly highlight below some of the rights that taxpayers have in terms of the Tax Administration Act, and which they may wish to enforce at some stage.

  • You are entitled to receive reasons for any assessment that SARS raises and any taxes it imposes. Therefore, SARS is not allowed to simply raise assessments without giving you (when called on in terms of the dispute resolution rules) a full understanding of their justification and their interpretation of the law, which underlies the specific matter.
  • SARS is not allowed to appoint a third party to deduct money from your account (for example, a bank) without providing you with the proper notice at least ten days in advance, as well as providing you with remedies to address the matter.
  • SARS is not entitled to divulge your information (except as required by law) to any third parties.
  • Provided that your returns were free of material deficiencies, SARS must pay interest on delayed VAT refunds. This is a matter that is often overlooked in practice since taxpayers are all too happy to receive the actual VAT amount – do not forget about your interest!
  • SARS must provide you with a tax clearance certificate within 21 business days after the submission of an application. More and more institutions require the issuance of tax clearance certificates for general business purposes.

Although taxpayers have many rights afforded to them, one often finds a practical challenge in exercising those rights. The legislation provides for relief in certain circumstances but does not prescribe a form and manner in which taxpayers must utilise that relief (for example, an application for a reduced assessment where there has been an undisputed factual error). Although the law provides for relief, the Act does not prescribe how that relief must be exercised.

This is one of the clear shortcomings within our system of tax administration and one hopes that in due course, National Treasury and the Minister of Finance will identify these fallibilities as a systemic issue within the administration of our tax system, in order to approach the Tax Ombud to make recommendations on how taxpayers can exercise their rights afforded to them daily.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Interest on delayed VAT refunds: The “materiality” question

Section 45 of the Value-Added Tax Act makes provision for the payment of interest on delayed VAT refunds. In terms of section 45(1) of the Act, the South African Revenue Service (“SARS”) must, within 21 business days after the date on which the vendor’s return in respect of a tax period is received, refund the vendor. This is provided that the VAT return is complete and not defective in any material respect.  

The Tax Court recently considered the concept of “materiality” in such cases in the case of ABC Trading CC v the Commissioner for the South African Revenue Service (VAT case no 1712). SARS was liable to refund the vendor an amount of R71 229 183. ABC instituted legal proceedings against SARS in the Johannesburg High Court, applying for an order compelling SARS to pay the refund relating to the second period as well as interest on the outstanding capital refund amount. The interest component came to R3 570115. Judgement was granted in favour of ABC. 

However, SARS continued with an audit relating to the relevant VAT period and issued a finding that ABC failed to declare deemed output tax on the use of a motor vehicle by its member. The VAT amounted to R200.36 per month, for three months. Based on this deficiency, SARS tried to recall the interest refunded to the taxpayer. ABC objected and appealed SARS’s decision to recall the interest on the basis that the quantum of the output tax relating to fringe benefits (R601,09 in total) was “trifling and clearly immaterial”, and did not constitute “material incompleteness or defectiveness. 

The question before the court was whether ABC’s failure to declare the output tax on the fringe benefit rendered the returns that ABC had provided “incomplete or defective in any material respect” as provided for in section 45(1)(i) of the Act, and whether SARS’s decision to “write back” the interest by affecting an “adjustment” was justified. To put it differently: Were the jurisdictional factors, i.e. that ABC’s returns were “incomplete or defective in any material aspect”, present for SARS to invoke the provisions of section 45(1)(i)?  

The court found that section 45 is a pragmatic provision not concerned with principle but with materiality. It recognises the fact that vendors may render returns that are incomplete or defective. If it were a matter of principle, then any defective or incomplete return would carry the consequence of SARS not having to pay interest. However, the Legislature, in its wisdom, determined that expedience trumps principle insofar as the payment of interest by SARS is concerned. The court further noted that in relation to one another, the “defect” and the amount owed by SARS is immaterial and the attempt by SARS to rely on the fringe benefit errors is a transparent attempt for SARS to ex post facto wriggle out of its obligations vis-à-vis ABC.  

The important takeaway from the judgement is that SARS is liable for interest on delayed VAT refunds where there are no material deficiencies, and taxpayers should exercise their rights in this regard. 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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