Business Tax and Company Law Quarterly - latest Issue
Volume 7, Issue 2, 2016
Author David CleggSource: Business Tax and Company Law Quarterly 7, pp 1 –5 (2016)More Less
An assessed loss from trade carried on in South Africa can be set off in determining the taxable income arising from an aggregate capital gain on the disposal of assets, whether within our outside South Africa. However, according to SARS, an assessed loss from a trade carried on outside South Africa cannot be set off against an aggregate capital gain from the disposal of assets outside South Africa. This asymmetrical result is argued to arise out of the wording of the definition of 'gross income'. But is that correct? This article analyses the law and arrives at a different conclusion.
Information-gathering by SARS under the TAA : trumping the taxpayer's right to tax finality - part IISource: Business Tax and Company Law Quarterly 7, pp 6 –16 (2016)More Less
The first part of this article, which appeared in the March 2016 issue of the BTCLQ, explored in depth the nature and extent of SARS's powers under the Tax Administration Act, No 28 of 2011 ('the TAA') to gather information from taxpayers in connection with their tax affairs, as well as the limitations imposed on the exercise of such powers. The article concluded that the breadth of SARS' powers under the TAA to gather 'foreseeably relevant' information from taxpayers, requiring only a reasonable possibility that the requested information will prove relevant, opens the way to potential abuse of its powers by SARS, or at least to protracted delays in finalising a taxpayer's tax position.
Based on an analysis and interpretation of the relevant statutory provisions, it was accepted that SARS's information-gathering powers under the TAA in effect 'trumped' the taxpayer's right to tax finality. However, the article pleaded for a more efficient, expeditious and systematic approach to information-gathering by SARS, with the aim of minimising delays and promoting the genuine interests of taxpayers in their quest for tax finality, without prejudicing tax collection.
Part II of the article which appears in this issue of the BTCLQ contains a discussion of a range of specific problems that may well be encountered by taxpayers in relation to the exercise of its information-gathering powers by SARS. The article analyses how these issues are likely to be resolved in the light of the relevant provisions of the TAA and with reference to pertinent judicial decisions. This analysis indicates that, though the TAA may load the dice in favour of SARS, taxpayers are entitled to expect that SARS will perform its duties diligently and without unreasonable delay. It also shows that there are limits to the far-reaching powers conferred by the TAA.
Part II of the article reiterates the call for SARS to assist taxpayers in achieving tax finality by using its information-gathering powers under the TAA as efficiently and expeditiously as possible.
Source: Business Tax and Company Law Quarterly 7, pp 17 –24 (2016)More Less
The South African franchise industry is growing at a rapid rate. Against this backdrop, SARS has issued a Draft Guide on the Taxation of Franchisors and Franchisees. This article summarises the character of payments under franchise agreements as well as the recommended treatment as set out in the guide. The tax principles as set out in the Draft Guide are generally well-established and undisputed. However, in practice, often payments under franchise agreements are composite payments which are not broken down into the categories designated in the guide. This, coupled with the generic nature of the analysis within the guide, is discussed in this article, as well as the concerns raised from industry stakeholders that the tax implications as summarised in the guide are in reality far more complex than presented.
The article then goes on to highlight certain of the complexities not explored within the guide. Firstly, the deduction of initial franchise fees by franchisees under section 11(f) of the Income Tax Act is discussed, specifically in the context of what constitutes a 'premium' as considered by our courts. To claim a 'premium' in terms of section 11(f) of the Income Tax Act, the franchisee would in the first instance need to evidence from the agreement what portion of the initial franchise payments relate to the ongoing right of use of the franchisors' intellectual property. Often franchise fees are not itemised in the standard agreement templates used by franchisors. To the extent such itemisation is agreed to by the franchisor, the franchisee would also be required to prove that the amount to be deducted is over and above the payments being made by the franchisee for the ongoing right of use of the intellectual property. This would require valuation and benchmarking exercises which the franchisee would again be reliant on the franchisors to provide. The ability of the franchisee to obtain the required information would therefore be determined by the franchisee's ability to place the matter on the agenda with the franchisor and the franchisor's appetite to support the franchisee in this regard, which it is submitted may prove unlikely. The article concludes that whilst there may be a foundational basis for such a deduction by a franchisee, in practice, the ability of the franchisee to obtain the required information and influence the terms and structure of the underlying franchise agreements to claim such a deduction may be difficult.
The deduction of royalty payments by franchisees is then discussed, again having regard to case law. It is concluded that whilst there may be a basis for the deduction, this will depend on the nature of the payment as evidenced in the underlying franchise agreements. A franchisee's ability to have the franchise agreement drafted to specifically itemise the composition of payments made in terms thereof and to reflect the true intention of the payment is questioned.
In addition, this article considers the need for tax incentives within the franchise industry and how such incentives may be structured, including deductions for franchisees of franchise payments or access by franchisees and franchisors alike to learnership allowances.