Page 743 - SAIT Compendium 2016 Volume1

CASE DIGEST 2012–2013
The respondent contended that as the taxpayer became unconditionally entitled to the fees in issue in the 2006 tax year, the whole amount ought to have been included in the taxpayer’s gross income in the 2006 tax year on an accrual basis and not in the 2007 tax year.
2003–6 Tax Years: Deduction of overseas travel expenses
The appellant argued that the overseas travel expenses in issue were deductible in terms of s 11(a) of the Act as they were incurred in order to raise working capital for the company’s operations, inter alia through loans from private investors and from public funds through a possible listing on the London Stock Exchange.
The respondent argued that the overseas travel expenditure sought to be deducted was capital in nature in that such expenditure was more attached to the cost of establishing, enhancing or adding to its income-earning structure as opposed to being attached to the cost of performing its income-earning operations. The respondent further argued that the reasons given for travelling overseas were invariably that the travelling took place with a view to establishing a new of ce in London or investigating the possibility of a listing. Consequently, insofar as such expenditure related to the raising of working capital, it formed part of the cost of performing its income-earning operations and therefore constituted an allowable deduction in terms of s 11(a) of the Act.
2003–6 Tax Years: Penalties in terms of section 76 of the Act
The taxpayer contended that SARS’ imposition of penalties had been based on the alleged non-disclosure of income or incorrect statements on the relevant tax returns which allegedly resulted in the avoidance of tax. However, in the present case no such non-disclosure or incorrect statements had been made and no tax had been raised in addition to what had been properly declared in the relevant tax returns.
The appellant further contended that the penalties in question were not applicable as it had not been guilty of transgressing s 76 of the Act and that SARS’ decision to apply the provisions of s 58 of the Act in regard to a so-called ‘deemed donation’ did not entitle it to raise penalties for failure to submit a Donation’s Tax Return in circumstances where the taxpayer, on reasonable grounds, disagreed with the opinion of SARS as to whether or not a donation had taken place pursuant to the provisions of s 58 of the Act.
The respondent argued that s 76(1) of the Act applied equally to all issues that constituted the basis of the present tax appeal as there had been either a default or omission or the making of incorrect statements. If any of the above elements were present the taxpayer was obliged to pay additional tax, being an amount equal to twice the difference between the tax calculated in respect of the taxable income returned by it and the tax which would have been properly chargeable.
SARS further contended that the fact that any omission, default or the making of incorrect statements had been due to the taxpayer’s accountants was no defence as the taxpayer remained ultimately responsible for its own tax affairs. Interest under section 89(2) of the Act
The appellant argued that SARS, in raising interest retrospectively, created an anomalous situation in that it became entitled to interest in respect of taxes not legally due at the time of the transaction concerned, nor payable during the period prior to its Notice of Assessment.
2006 Tax Year: Capital expenditure
The appellant argued that the L Consortium incurred expenditure in respect of the construction of its processing plant and the taxpayer’s 25% share of such expenditure quali ed for deduction in terms of s 36 of the Act.
Held
The court held that the s 11(a) deduction claimed in terms of the Income Tax Act 58 of 1962, in respect of of ce expenditure, was incurred by the taxpayer on behalf of another company, on loan account, in order to be converted into shares. The purchase expenditure relating to the acquisition of equity and to obtaining a listing, is capital in nature and that the taxpayer had not proved that the expenditure in issue should not be so regarded. The court directed the Commissioner to recalculate the accrual of the taxpayer’s entitlement to management fees. The court further held that the taxpayer’s claim that certain expenditure incurred on overseas travel was deductible in terms of s 11(a), was not supported with proof, and therefore the disallowance by SARS was not set aside. The court dismissed the taxpayer’s appeal against the imposition of penalties in terms of s 76. With regard to the assessment on donations tax, the court held that the transaction in question was not a donation in that consideration was given. As to the assessment to capital gains tax, it was held that the taxpayer had not discharged the onus of proving that the amount in question was not subject to tax. The appeal was entirely dismissed.
[Link: http://c.ymcdn.com/sites/www.thesait.org.za/resource/resmgr/2014_case_law/income_tax_case_no_1863_75_s. pdf]
10. Application of s 103(1) of Income Tax Act: Transactions entered into between taxpayer and trust (of which he was the sole trustee) with the sole purpose of avoiding income tax
[ITC 1864 75 SATC 233 (South Gauteng Tax Court Johannesburg – 20 November 2012)]
Introduction
The appellant, an instrument technician and sole trustee of an inter vivos trust, had raised objections against assessments issued by SARS. SARS disallowed the objections and the appeal was dismissed by the Tax Court.
Facts
The appellant had previously rendered services to clients through a labour broker and later on changed this arrangement in order to provide the services through a trust which he had formed. The appellant was the sole trustee and employee of the trust.
SAIT CompendIum oF TAx LegISLATIon VoLume 1 735
CASE DIGEST 2012-2013