Authored By: Khodani Sindisiwe Simerone
University of Pretoria
Case Full Title: ABC (PTY) LTD v The Commissioner for the South African Revenue Service (1)
Citation: (IT 14305) [2021] ZATC 1; 83 SATC 429 (7 January 2021)
Court Name and Bench
Court: TAX COURT OF SOUTH AFRICA
Bench: HONOURABLE JUSTICE BAM AJ
Date of judgment: Judgement delivered on 3 December 2020
Parties involved:
The Appellant, ABC (PTY) LTD, is in the ABC Group as a global organisation, which requires all of its enterprise activities around the world to apply similar standards.
The respondent, the Commissioner for the South African Revenue Service, is liable for leading and directing South Africa’s tax and customs administration, as well as fostering voluntary compliance of tax within the country.
Facts of the case
This case is between the appellant, ABC (PTY) LTD, which is part of the ABC Group and the Commissioner of The South African Revenue Services. ABC (PTY) LTD is a global organisation that consists of local employees and expatriate employees, appertained to as people dwelling and working outside their native country, both temporarily or permanently.
As part of its global enterprise activities, employees of the ABC Group are required to work in foreign countries for brief or medium-term durations. These expatriate employees remain dwellers of their home countries and continue to submit tax returns there. Additional charges are incurred due to the fact that ABC Group requires employees to work in foreign countries from time to time. The employment relationship works on a tax equalisation basis, which is the common standard throughout ABC Group. This means that the expatriate employees pay the same tax rate in the other country as he or she would have paid if they had remained in their home country.
The company provided tax consulting services for their expatriate employees at their own expenditure. This was to ensure that the employees recognise tax procedures that they would correctly follow and protect the interests of the ABC (PTY) LTD and the ABC Group. The company therefore became responsible for deducting tax from their employees’ salaries to submit to SARS, and made sure that the tax they paid in the foreign country they worked in was at the same rate as the tax that they would have paid in the country in which they reside in.
However, SARS saw the tax consulting services as a taxable fringe benefit/ employee benefit provided by ABC (PTY) LTD.
Subsequently, ABC (PTY) LTD then approached the Tax Court in South Africa, held in Johannesburg, arguing that the tax consulting services that the company provided to their expatriate employees do not constitute as taxable fringe benefits explained under the definition of gross income in Section 1 of the Income Tax Act 58 of 1962, nor below paragraph 2(e) or 2(h) of the Seventh Schedule to the Act.
Matters raised
The matters raised before the court in this case were:
- Whether the PAYE (Pay as You Earn) assessments, from 2004 to 2009 issued through SARS due to tax consultation services for the expatriate employees relates to taxable benefits provided by ABC (PTY) LTD
- Whether this taxable benefit falls beneath Section 1 in the Income Tax Act 58 of 1962, as well as paragraph 2(e) or 2(h) of the Seventh Schedule to the Act
- Whether the appeal lodged with the aid of ABC (PTY) LTD was unreasonable
- Whether or not the court awarded costs to SARS if the grounds of the appeal were unreasonable
Arguments of the parties:
Appellant: ABC (PTY) LTD
ABC (PTY) LTD argues that SARS made an error by way of treating those payments as falling in the definition of “gross income”, in Section 1 of the Income Tax Act 58 of 1962. ABC (PTY) LTD also argues that the payments do not fall within Paragraphs 2(e) or 2(h) of the Seventh Schedule to the Act. ABC (PTY) LTD asks the court to dismiss SARS’s assessment under the presumption that the services that they provided were not benefits. This was due to the fact that the employees’ gross income and tax liabilities remained the same under tax equalisation.
ABC (PTY) LTD responded that the expert fees had been paid for tax advice and help in completing tax returns for certain expatriate employees. ABC (PTY) LTD did not agree that those were taxable fringe benefits and created the assumption that the benefit should enhance
the employee’s economic or financial position. Two witnesses were called on behalf on the company to elaborate on more information regarding the tax consulting services. The first witness confirmed that the expatriate had no other choice but to use the tax consultant provided. She explained that tax is a complex field for employees to manage and understand on their own. The second witness was one of the tax consultants providing services to the expatriate employers. She confirmed that the company, JKL, providing the services assisted the ABC (PTY) LTD expatriate employees with tax returns from their home country.
Commissioner of SARS:
SARS viewed the payments made by ABC (PTY) LTD to the consultancy companies on behalf of the expatriate employees as fringe benefit tax below Paragraph (i) of the definition of gross income, examined with Paragraphs 2(e) and 2(h) of the Seventh Schedule. SARS calculated and provided that the employees’ tax in respect of the tax consulting services amounted to R2,378,407.72. They also noted that the correct approach to this issue is whether the employees would have paid for the tax consulting services themselves either way.
Section 1 of the Income Tax Act 58 of 1962 is defined as “the total amount, in cash or otherwise, received by or accrued to a person from a source within South Africa during the year of assessment, excluding amounts of a capital nature” (2). Gross income is not just defined as money received, but the accrual of money or the value of benefits such as employee benefits. The tax consulting services provided by ABC (PTY) LTD can be seen as an employee benefit and ought to be subject to tax.
ABC (PTY) LTD protested to the assessment given by SARS. SARS dismissed the objection. As a result, ABC (PTY) LTD lodged this appeal.
Final decision
SARS argued that the tax consultant services definitely relate to the employees’ personal tax liabilities to SARS. The court stated that local employees would have had to pay their legal tax obligations from the tax consulting services to SARS themselves.
The overall cause of tax consultancy services is to help the taxpayer meet individual tax obligations. Consequently, the services have been for the employees’ private use, for their own benefit and advantage.
The Supreme Court of Appeal reached a final decision that gross income also includes rights in accrual, which are patrimonial and not simply just money or cash received. It is irrelevant on whether or not the tax consulting services led to improving the expatriate employees’ current financial position.
Paragraph 2(e) challenges whether a benefit is taxable, provided to the employees under the employer’s expense. If it is wholly for the purpose of private use, then Paragraph 2(e) is applicable. (3)
Since the tax consulting services were provided for the employees to enhance their tax knowledge and administration, this was for their private use. Although it was argued that this was implemented to uphold ABC(PTY) LTD’S reputation and business functionality, the tax consulting services were introduced mainly for the expatriate employees. This would have been challenged in a different legal perspective if the local employees also received the same tax consulting services provided to the expatriate employees. The employees are not meant to be biased.
The court concluded that SARS had the right and certainty to evaluate the tax consulting services as taxable benefits under paragraph 2(e). Therefore, it was no longer necessary to bear in mind paragraph 2(h).
Concerning costs, section 130 of the Tax Administration Act 28 of 2011 permits the court to award charges if the grounds of appeal have been unreasonable. (4)
SARS argued that the appeal became unreasonable and asked for charges. The court was not persuaded that the appeal was unreasonable.
The issue just was not delved into enough. ABC (PTY) LTD was justified in appealing.
Conclusion
This case remains an extensive precedent in South African law, influencing tax policies and their development. It dissects what ought to fall below Section 1 of the Income Tax Act 58 of 1962, specifically including the cash or cash equivalent of any benefit granted with felicitations to employment. This is determined under the Seventh Schedule. Paragraph 2, (7)(e) states that a service provided for the employee’s private use under the employer’s expense constitutes as a taxable benefit.
The Tax Court’s decision offers a clear suggestion on what gross income truly is and how it should be approached.
Bibliography
Case law:
- ABC (Pty) Ltd v Commissioner for the South African Revenue Service (IT 14305) [2021] ZATC 1; 83 SATC 429 (7 January 2021)
Legislation:
- Income Tax Act 58 of 1962
- Paragraph (2)(e) of the Seventh Schedule to the Income Tax Act No. 58 of 1962. 4.Section 130 of the Tax Administration Act 28 of 2011
