It’s been a busy few weeks leading up to the year-end break, with a number of important developments impacting the lives of professional accountants. There were a raft of court cases that impact accountants and some new legislation that we need to understand. This article is compiled with the assistance of Saiba technical staff. A webinar on the latest regulatory and compliance updates given by Saiba technical advisor Lettie Janse van Vuuren can be viewed here.
Here are some of the issues this month:
- Does a taxpayer have the right to be heard before SARS revokes its tax compliant status?
- Is there an obligation on companies being wound up to deduct PAYE from retrenched employees?
- How SARS won a R1bn tax evasion case against Africa Cash & Carry for suppressing sales figures
- Can a taxpayer claim a diesel rebate for fuel stored off-site?
- Can SARS refuse an allowance in terms of the Income Tax Act to settle future obligations?
- CIPC compliance checklist raises concerns
- SA Reserve Bank fines Standard Bank R30m, imposes penalties on four other banks
- Other legislative news, including the likely impact of the Taxation Laws Amendment Bill
Recent court cases
Does a taxpayer have the right to be heard before SARS revokes its tax compliant status?
This was the issue before the court when SA Revenue Services unilaterally revoked the tax compliance status of Red Ant Security Relocation and Eviction Services (Pty) Ltd). The company in 2018 won an urgent interdict preventing SARS from revoking its tax compliant status, arguing that without a valid tax clearance certificate (TCC) it could not receive payment for its services, nor tender to provide new services, thus creating severe financial constraints. The SARS Commissioner was found to have flouted the Tax Administration Act and the Promotion of Administrative Justice Act.
Is there an obligation on companies being wound up to deduct PAYE from retrenched employees?
In the case SARS vs Pieters and others, the court was asked to determine whether employees who received severance pay when Slabbert Burger Transport was wound up in 2013 should have had PAYE deducted from their pay. The company paid out severance pay without deducting PAYE and, needless to say, the Commissioner wanted his cut. Section 98 of the Insolvency Act deems severance pay as preferential to other claims such as from post-liquidation charges (notably costs of administration). SARS lost the case in the High Court and again in the Supreme Court of Appeal. The judgment found that SARS was not without other remedies, such as claiming PAYE from the employees at the end of the tax year. Read more here.
SARS wins R1bn tax evasion case against Africa Cash & Carry
In November last year Fin24 reported that SARS won a R1 billion tax evasion case against Africa Cash & Carry. This followed an investigation by SARS into the use of sale suppression systems and the manual manipulation of accounting books. The Tax Court altered its assessments to include some 200% additional tax. Africa Cash & Carry disputed the results of the investigation and ultimately approached the Supreme Court of Appeal.
The Court found that the taxpayer had suppressed its sales for the 2003 to 2009 tax years below the level of its actual sales by manually manipulating its financial records, resulting in its income tax and VAT liability being understated. Africa Cash & Carry challenged the methods of assessment by SARS. The Supreme Court of Appeal specifically approved of the Tax Court’s finding that the use of the methodology employed by SARS was reasonable and that it had the power to alter the amounts in the estimated assessments issued by SARS, to amounts supported by the evidence adduced before it. Its judgement also commented on other methodologies which the taxpayer contended were more appropriate to estimate the amount of under-disclosed sales, income tax and VAT liability, which were all rejected in favour of the gross profit percentage method, says a statement by the SCA.
The taxpayer objected to SARS’s subsequent estimated assessments of its under-disclosed income tax and VAT liability, and when the objection was disallowed, appealed to the Tax Court. The Tax Court had approved of the gross profit percentage methodology used by SARS to estimate the amount of the taxpayer’s under–disclosed sales, altered the estimated assessments of income tax and VAT liability in terms of section 129(2)(b) of the Tax Administration Act 28 of 2011, reduced the liability for section 89quat interest accordingly, and dismissed the taxpayer’s appeal.
“SARS is committed to combat intentional tax evasion. SARS is concerned with the compliance levels within the Cash & Carry industry with a particular focus on ‘Ooplang’ schemes involving ‘Ghost Exports’, non-recording of the sale of cell-phone airtime, manipulation of loan accounts, claiming fraudulent invoices for VAT and Income Tax purposes, utilisation of intermediary shell companies to create invoices and sales suppression systems,” SARS said.
Can a taxpayer claim a diesel rebate for fuel stored off-site?
This was a case that came before the SCA, when SARS appealed a decision in favour of pineapple grower Langholm Farms granted by the Eastern Cape High Court. Langholm uses its own trucks to deliver farm produce to Summerpride Foods located 147 kms away in the Eastern Cape. When it drops off the produce, it fills up with diesel at the local co-operative and returns back to base. The Act says that a diesel rebate could only be claimed for diesel delivered, stored and dispensed from storage tanks situated on its premises. Langholm disputed this interpretation and asked the court for a declaratory order to ascertain what was allowable in terms of the Act. The SCA found the Act was clear enough, and came out in favour of SARS, ruling that a taxpayer can only claim for the diesel fuel stored and used on its own premises.
Can SARS refuse an allowance in terms of the Income Tax Act to settle future obligations?
It’s an important question, and again the SCA was asked to adjudicate in a case involving Clicks and SARS. Clicks sold ClubCard vouchers on which it earned immediate revenue, but with customer rewards that had to be settled at some point in the future. As the revenue was used to finance its future obligations under those sales contracts it contended that it was entitled to claim an allowance under Section 24C of the Act. The SCA held, in a unanimous judgment by Dlodlo JA, that while the revenue arose in terms of the sale contracts the allocation of points and the issue of rewards vouchers arose under the loyalty programme agreement.
The court ruled that the revenue and the expenditure did not arise under the same contract as required by s 24C and the Commissioner was correct to refuse the allowance. Revenue from the initial sales was used to finance the acquisition of trading stock in the ordinary course of Clicks’ business and not for the specific purpose of meeting any obligations to award points and issue rewards vouchers. The effect of such vouchers was no different from any other arrangement where Clicks offered customers a discount on purchases. The SCA doubted whether the cost of doing so constituted expenditure for the purpose of s 24C, but reached no final conclusion on that point. Clicks lost the appeal.
CIPC compliance checklist raises concerns
As we previously reported, the Companies and Intellectual Property Commission (CIPC) Compliance Checklist became effective from 1 January 2020, now requires all companies except close corporations to answer a 24 question compliance list. Directors and accountants document their interpretations and subsequent answers to the questions. As an example, the first question of the Compliance Checklist is: “Does the company comply with section 4 of the Companies Act?”. However, section 4, in Saica’s view, does not per se contain a compliance obligation. Rather, section 4 explains how the solvency and liquidity test should be applied, where this test is mentioned in other sections of the Companies Act, such as sections 45 or 46. There are also uncertainties over whether a company secretary is needed to complete the checklist, and the lack of definition of what CIPC means by a “calendar year”.
Other legislative news:
Taxation Laws Amendment Bill
According to Fin24, this bill affects individual savings and employment tax, business tax, Value Added Tax and the Customs and Excise Act.
A key proposal in the amendment was linked to the tax treatment of surviving spouses’ pensions.
“The amendment seeks to lessen the financial burden when calculating taxes, which retirement funds may withhold on spousal pensions,” Parliament said previously.
The particular amendment’s effective date has been shifted from March 2020 to March 2021 in order to allow SARS and taxpayers to get their systems ready for the changes.
“The bill also refines the Employment Incentive Scheme, to align it with the National Minimum Wage Act of 2018.
“The scheme, introduced in January 2014, aims to reduce the cost of hiring young people (18 to 29 years old) without work experience through a cost-sharing mechanism with government,” Parliament said.
Tax Administration Laws Amendment Bill
This bill makes technical corrections to several acts, including the Income Tax Act, the Customs and Excise Act, the Value Added Tax Act, among others.
The Rates and Monetary Amounts and Amendment of Revenue Laws Bill
According to Parliament, this bill deals with changes in rates and monetary thresholds, changes to personal income tax tables and increases of excise duties on alcohol and tobacco, among other things.
Most notably, the amendments to personal income tax aimed to raise an additional R12.8bn.
The bill allows for no increase in medical tax credits – this will help government to raise funding for National Health Insurance.
SA Reserve Bank fines Standard Bank R30m, imposes penalties on four other banks
In December last year the Reserve Bank imposed a R30 million fine on Standard Bank, with a directive to take remedial action, for failure to comply with suspicious and unusual transaction reporting requirements in terms of the Financial Intelligence Centre Act (FICA). Fin24 reports that R7.5 million of the R30 million is suspended for a period of three years subject to the bank adhering to certain conditions imposed by the SARB.
Smaller penalties were also imposed on GroBank (formerly SA Bank of Athens), Ubank, Bank of China (Johannesburg branch) and HBZ Bank. The Reserve Bank said it found weaknesses in each of the banks’ money laundering control measures following routine inspections conducted in terms of the Financial Intelligence Centre Act (FIC Act).
GroBank was fined R5 million, suspended for three years, subject to the bank adhering to certain conditions imposed by the SARB. Bank of China’s Johannesburg branch was fined R2 million, which was also suspended subject to adhering to certain conditions imposed by the SARB.
Ubank was fined R500,000 and given a directive to take remedial action for failure to comply with the cash threshold reporting requirements in terms of the act, while HBZ Bank was cautioned not to repeat the conduct which led to non-compliance by failing to comply with suspicious and unusual transaction reporting requirements, and failing to comply with training requirements of the act.
Standard-setters respond to investors’ changing needs
IFRS.org reports that the widespread use of non-GAAP measures is arguably the clearest reflection of the challenges involved with writing and maintaining accounting standards that properly reflect the economic reality.
Yet standard-setters themselves accept some responsibility for the growing prevalence of non-GAAP measures.
“One of the reasons why non-GAAP became so popular is that we ourselves have not provided much structure to the income statement,” International Accounting Standards Board (IASB) Chair Hans Hoogervorst said at a 16 October 2019 stakeholder event in New York City, jointly organised by the IFRS Foundation and CFA Institute.
IFRS Standards define revenue and profit or loss but not the subtotals that often sit between the income statement’s top line and bottom line. That left an opening for the companies to define their own performance measures to explain their performance. At the same time, securities analysts have been developing proprietary models using non-GAAP measures that they feel give them a view on a stock’s investment value.
Bob Pozen, a lecturer at the Massachusetts Institute of Technology’s Sloan School of Management, who was previously the chairman of MFS Investment Management, said too much credibility is given to the non-GAAP measures. Ultimately, they are performance indicators that are used to set compensation targets for senior executives. In Pozen’s view the Board’s plan to develop requirements for what it calls Management Performance Measures may lead to more discipline in the use of non-GAAP measures.
More guidance needed from standard setters
The Board hopes its Primary Financial Statements project will provide guidance for financial statements’ content and structure and provide clear definitions for terms like operating profit, and profits from investments and holdings in joint ventures and other associates. The introduction of more guidance for an income statement’s subtotals may leave businesses with less incentive to publicise non-GAAP measures.
“If the differences are not so big, then they might decide to forget about non-GAAP,” Hoogervorst said.
The reporting practices that distort financial statements are hardly limited to the use of non-GAAP measures. According to Hoogervorst, ‘other income’ and ‘other expenses’ are among the income statement categories that are often used with very little explanation about the items that are aggregated in them. According to Hoogervorst, income statement categories often used by companies with very little explanation about what it actually includes are those called ‘other income’ or ‘other expenses’, where there is far too much aggregation. Companies’ earnings can be lumped into this catchall category, which denies investors insight into the sources of a company’s income or the areas in which it is spending most of its money.
“That’s a source of frustration for many investors,” Hoogervorst said. He hopes the Primary Financial Statements project will result in more transparency both about non-GAAP and these ‘other’ items for investors.
The Board will publish its proposals in this area by the end of 2019.
Goodwill reporting still up in the air
The Board is also exploring whether to amend its approach to accounting for goodwill, but it is divided about the benefits of reintroducing goodwill amortisation to IFRS Standards. The Board plans to release a Discussion Paper in early 2020 for a 180-day comment period to weigh stakeholder interest in amending IFRS 3 Business Combinations and IAS 36 Impairment of Assets. Read more here.