Editor’s Note:
In this seventh newsletter for 2024 we consider the following:
The Thistle Case finality – Concourt Judgment
Non-Submission of a Tax Return and Penalties: Administrative Penalties or the USP?
Tax Practitioners further Statutory Recognition
The Office of the Tax Ombud 2023/24 Annual Report
SARS Interpretation Notes (INs), Draft Ins, BGRs, BPRs, and Guides
Tony Davey – Editor | Duncan McAllister – Co-Editor
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On 2 October 2024 the Constitutional Court delivered its judgement in the matter of The Thistle Trust v C: SARS [2024] ZACC 19, having heard the appeal on 8 February 2024. The facts were that the Zenprop Group consisted of 10 vesting trusts which owned immovable property. Zenprop carried on the business of property developers and frequently bought and sold properties. During the 2014 to 2016 years of assessment the vesting trusts had sold certain properties and vested the resulting capital gains in their beneficiary, the Thistle Trust, which in turn passed those amounts on to its natural person beneficiaries who declared the capital gains in their tax returns and paid the resulting CGT. SARS taxed Thistle on the gains because para 80(2) required the capital gain to be accounted for by the beneficiary of the trust that disposed of the asset. Thistle argued that the gains were properly taxable in the hands of the beneficiaries of Thistle under s 25B, the conduit principle and on the wording of para 80(2).
SARS had also imposed a 50% understatement penalty on Thistle, contending that it had no reasonable grounds for tax position taken (s 223(1)(iii) of the Tax Administration Act). Thistle had succeeded in the tax court but lost in the SCA, although it did succeed in having the penalties remitted based on it having made a bona fide inadvertent error. In a 7/8 decision, the court dismissed Thistle’s appeal. However, it refused to entertain the cross appeal by SARS on the penalties because it did not want to be the court of first and last instance on whether Thistle had committed a bona fide inadvertent error. It also found that SARS had no prospect of discharging the onus of showing that Thistle had not taken reasonable care in completing its returns (s 223(1)(ii) [25% penalty]) or that it had no reasonable grounds for tax position taken.
The court traced the history of the conduit principle back to the 1914 Australian case of Sim v COT and various other commonwealth cases as well as the Armstrong and Rosen cases in South Africa. It noted that in 1991 the Income Tax Act had been amended to include a trust in the definition of ‘person’ following the Phillip Frame Will Trust case which had held that a trust was not a person for tax purposes. At the same time section 25B had been inserted into the Act. The result was that the issue was primarily now one of statutory interpretation rather than application of the common law conduit principle.
In 2008 the opening words of para 80(2) had been changed from ‘Where a capital gain arises in a trust’ to ‘Where a trust determines a capital gain in respect of the disposal of an asset by a trust’. The court noted that according to the explanatory memorandum (EM) the purpose of the amendment was to clarify that a capital gain could not be attributed through a multiple trust structure. The judgment contains a useful summary of the various cases in which SA courts have had recourse to explanatory memoranda to determine the purpose of amendments. It confirmed that this practice was acceptable.
The dissenting judge noted that legislation should not be irrational or arbitrary. Since SARS’s counsel was unable to explain why para 80 differed from s 25B, together with the fact that para 80(2) was not a model of clear legal drafting, full effect should be given to the conduit principle. When there was ambiguity, the contra fiscum principle should be applied.
The majority rejected these arguments. There may well have been a rational reason why para 80 differed from s 25B. For example, preventing a gain from flowing through multiple trusts would prevent it from being set off against an assessed loss. While the wording of para 80 could have been clearer, it was not that bad that its purpose could not be discerned, particularly having regard to the EM.
The judgment confirms our view expressed in Davey’s Locker 7.2022 dated 15 November 2022 that capital gains cannot be distributed through multiple discretionary trusts. From a tax policy perspective, however, it remains something of a mystery why income is permitted to flow through multiple discretionary trusts until it reaches natural person beneficiaries, while the same does not apply to capital gains. In the Davis Tax Committee report on estate duty, it was noted that whenever an amount is taxed in the hands of a person who is different to the person in whose hands the amount originated, the risk of non-disclosure increases.
ARS has taken steps to address this issue through the introduction of the IT3(t) return, which will eventually result in the prepopulation of beneficiary returns. Given these developments, it is perhaps time for SARS to consider amending para 80 to open the conduit pipe for capital gains. The rationale for encouraging distributions out of trusts is to ensure that they can ultimately be subject to estate duty. From 1 March 2024 attribution of income to non-resident beneficiaries is no longer possible under s 25B, thus bringing this aspect in line with the CGT position under para 80.
It is a pity that taxpayer still do not have certainty on whether penalties imposed for interpretation errors can be classified as bona fide inadvertent errors. For now, the SCA’s judgment on the Thistle Trust case 2023 (2) SA 120 (SCA), 85 SATC 347 leaves the door open for this argument.
NON-SUBMISSION OF A TAX RETURN AND PENALTIES:
ADMINISTRATIVE PENALTIES OR UNDERSTATEMENT PENALTIES (USP)
It is trite law that under S 102(2) of the Tax Administration Act (TAA), SARS bears the burden of proof in categorizing a taxpayer’s behaviour for purposes of the imposition of penalties. This was recently reinforced in the Thistle Concourt judgment, CC337/22, of 2 October 2024 in that the Court observed that a mere view by SARS of a taxpayer’s behaviour cannot be elevated to a justification of a penalty as required by s 102(2), which requires SARS to prove the facts that the taxpayer’s conduct falls within the correct penalty category as per s 223 of the TAA percentage penalty table.
An issue we are encountering in practice is that SARS is bypassing the lesser administrative penalties and applying the general USP table for non (or late) submission of a tax return and imposing a gross negligence behavioural category of 100%. (Administrative penalties would usually be less than 10%). We accept that the definition of ’understatement‘ in s 221 of the TAA includes a failure to render a return. However, an important principle (albeit on different facts) of the recent Thistle Concourt judgement is that there is a presumption against tautology, namely providing for the same thing twice. On this rationale, SARS should first apply the administrative penalties for non-compliance, being non-submission of tax returns, specifically provided for in ss 210 and 211 of the TAA, instead of bypassing this and proceeding to the more general USP table under ss 223 of the TAA.
TAX PRACTITIONERS FURTHER STATUTORY RECOGNITION
Government Gazette 51421 of 23 October 2024 is the most recent publication of the Tax Administration Laws Amendment Bill. Proposed amendments, inter alia, pertain firstly to permitting the right of appearance in the Tax Court by suitable tax practitioners, and secondly, the addition of a registered tax practitioner to the panel from which a chairperson of the Tax Board may be nominated.
We addressed the right of appearance in Newsletter 6.2024 being the proposed amendment to s 12 of the Tax Administration Act (TAA) to include tax practitioners, being in addition to the existing position of only legal practitioners.
The further proposed amendments to ss 110 and 111 of the TAA are now expanded to include registered tax practitioners as persons also eligible for Tax Board Chairperson appointments.
THE OFFICE OF THE TAX OMBUD (OTO) 2023/24 ANNUAL REPORT
The Office of the Tax Ombud (OTO) published its 2023/24 Annual Report on 6 November 2024 (www.taxombud.gov.za).
The OTO received 17 014 contacts of which 12 338 were queries and 6 476 complaints. 4618 complaints were validated during this annual reporting period and although the OTO’s recommendations are non-binding, SARS implemented 99,7% of them.
Bear in mind firstly that the OTO handles only complaints of a procedural nature, as distinct from the merits of a substantive tax dispute, and, secondly, that the SARS Complaints Monitoring Office (CMO) should in most instances, be approached first, before resorting to the OTO.