Legislative change addresses circumvention of donations tax

New section of Income Tax Act includes a ‘dangerous’ and ‘powerful’ addition to the definition of gross income.
Numerous allegations of senior people rendering a ‘service’ by ensuring that contracts went to particular parties in return for ‘gifts’ feature in the Zondo Report. Image: AdobeStock

The introduction of a new section in the Income Tax Act is aimed at nipping a scheme where taxpayers are able to circumvent the payment of donations tax in the bud.

The tightening of the act follows the continued drive by the South African Revenue Service (Sars) to restore the culture of tax compliance that has been eroded during the state capture era.

Diane Seccombe, head of tax training and seminars at Mazars, says one of the most “dangerous” and “powerful” sections of the act sits in the “boring” gross income definition.

One of the special inclusions in the definition makes provision for a taxpayer to include in gross income “any amount received or accrued in respect of services rendered, to be rendered or in respect of employment or the holding of any office”.

‘Income’ not limited to cash

Seccombe said during a tax and budget update webinar hosted by The Tax Faculty that the amount does not have to be in cash.

The Zondo Commission of Inquiry’s report contains several allegations that senior people in SA rendered a service by facilitating that contracts were awarded one way and not another.

In exchange for their ‘service’ they received security upgrades at their private homes or fancy handbags and overseas trips.

These amounts were paid either to a spouse or a third party to avoid paying taxes.

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The scheme

National Treasury says the scheme that was devised entails a service provider (an employee or independent contractor) ceding the right to receive or use an asset received from the person to whom the services are rendered or to be rendered. The right to receive or use the asset is generally ceded to a family trust before services are rendered.

“In these instances, the service provider may be able to circumvent donations tax as the right to receive an asset would have been ceded to the trust before the services are rendered and a value can be attached to it,” says Treasury.

Seccombe gives the example where an asset with a market value of R5 million will only accrue to a service provider once the service has been rendered.

The right to the asset exists, but has no value until the service is rendered. In terms of the scheme this no-value right is ceded to the family trust before the service is rendered and since the right has no value, there is no donations tax levied.

However, the proposed change will provide that on the date that the service is rendered, the amount that is due for the service must be included in the service provider’s gross income.

If the right to the asset has been ceded there will be a “deemed disposal” on which donations tax of 20% will be levied.

Read: Zondo commission: final report, focus must turn to acting on the recommendations

The effective date for the amendment is March 1, 2022, and applies in respect of the disposal of the right to receive an asset on or after that date.

Seccombe says it now understandable why Sars is working so closely with enforcement bodies and the reports about services rendered and amounts received.

Increased enforcement

She says at the end of the 2021 tax year the number of taxpayers in the top tax bracket of the individual tax tables increased by 20 000.

Tax collections from the 133 000 highest earning individuals went up by R50 billion.

“The additional taxpayers came from the increased enforcement capacity at Sars which ensured more disclosure. This gave a much more accurate picture of what taxpayers are actually earning in taxable income per year.”

Read: The taxman’s compliance drive yields R172bn for the fiscus

Sars Commissioner Edward Kieswetter says compliance levels remain low. “You can criticise us as much as you want and say that we are not working fast enough, but we have to balance the risk to Sars and the fiscus with providing a service to the taxpayer.”

Kieswetter responded to severe criticism that Sars does not adhere to timelines and that it continues to withhold legitimate refunds.

Unlawful claims

Sars has received claims for value-added tax refunds of R266 billion and has already paid R212 billion within 21 days (at the end of February). The value of refunds that were either incorrectly or unlawfully claimed amounted to R30 billion.

According to Sars figures 60% of the cases that have been chosen for verification in terms of the R334 million home office expense claims were incorrect or unlawfully claimed.

“We live in a country were the culture of compliance [has] declined. It has become fashionable to cheat the system. South Africans cannot expect Sars to sit by and be complicit in this crime.”

The Office of the Tax Ombud says it is aware of complaints about delays in the payment of refunds. Following its 2017 report and recommendations on refunds it continues to monitor issues that have as yet not been addressed by Sars.

Kieswetter adds that there is no justification for bad service. He admits that even if Sars doubled the current number of call centre agents it will never be able to deliver the level of service it would like to give taxpayers.

“The ultimate prize is not [to] improve the waiting or turnaround times to have a query resolved, but to make the service query go away,” he says.

“We do not want to have a better queue management system. We want to eliminate the need for queues.”

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