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11 NOVEMBER 2011 TAX ALERT TAXPAYER LOSES APPLICATION TO RESCIND JUDGMENT IN THIS ISSUE The recent winning streak of the South African Revenue Service (SARS) in the courts continued in the judgment of Joseph Gadifele Modibane v SARS Case No: 09/9651 (Modibane). Mr Modibane launched an application in the South Gauteng High Court for the rescission of judgment obtained by SARS on 5 March 2009, which was dismissed. A review of recent developments By way of background, SARS issued an income tax assessment of R22 million against Mr Modibane on 13 August 2007, which was not paid. Mr Modibane proceeded to lodge an objection to the income tax assessment which was dismissed by SARS on 30 January 2008. An appeal was lodged by Mr Modibane to the tax court on 7 March 2008 which, based on the reading of the case, is still pending. Transfer duty bonanza As a result of discussions with Mr Modibane relating to his tax liability proving to be fruitless, SARS obtained judgment of R25 million (incl. interest) against the taxpayer under section 91(1)(b) of the Income Tax Act (the Act). Mr Modibane's main argument was to the effect that it was wrong of SARS to proceed and obtain judgment against him as there was, at all material times, an appeal pending on the assessment. The taxpayer also advanced arguments that the judgment is wrong on procedural grounds and that on the merits of the case, the income tax assessment is incorrect. The court first dealt with the issue of whether the certified statement filed by SARS with the Registrar can in fact be referred to as a 'judgment'. In summary, the court held that the certified statement filed by SARS under section 91(1) of the Act is not a judgment in the ordinary sense of the word, agreeing with the court in Capstone 556 (Pty) Ltd v Commissioner SARS and Another [2011] ZAWCHC 297. In Capstone 556, the court stated that although a statement filed by SARS under section 91(1)(b) of the Act has all the effects of a judgment, it is nevertheless not in itself a judgment in the ordinary sense and does not determine any dispute or contest between the taxpayer and SARS. The effect of the aforementioned is that there is technically no 'judgment' to be rescinded, which in the court's view should dispose of the issue. continued EVERYTHING MATTERS Taxpayer loses application to rescind judgment From a taxpayer's perspective, this creates more uncertainty regarding the status of judgments obtained under section 91(1)(b) of the Act as many taxpayers have in the past successfully argued for judgments of this nature to be rescinded. Notwithstanding the above, the court proceeded to deal with the Modibane case on the basis that the Registrar issued 'judgment', in the ordinary sense of the word as understood by the applicant, which is susceptible to rescission. In order for the judgment to be rescinded, the applicant, in this case Mr Modibane, must show 'sufficient cause'. To establish 'sufficient cause', two elements must be considered: the party seeking relief must present a reasonable and acceptable explanation for his default; and that on the merits such party has a bona fide defence, which prima facie, carries some prospect of success. Mr Modibane failed to show 'sufficient cause' on both of the abovementioned elements. Firstly, the court found that there was wilful default on the part of Mr Modibane in that he refused to engage with SARS directly, or through his advisers, to fruitfully resolve his obligation to pay tax. Secondly, the court dismissed Mr Modibane's reliance on the earlier judgment of Mokoena v Commissioner South African Revenue Service 2011 (2) SA 556 (GSJ), also involving section 91(1)(b) of the Act, which held that no judgment can be obtained pending the outcome of an objection or appeal. In Mokoena, which provided short lived hope for taxpayers, the court held that it is self-evidently incompetent, having regard to the rights of objection and appeal, to obtain judgment in the interim. The court, in Mokoena, further stated that it is inconsistent with the framework of the Income Tax Act and its provisions, eg the express right to collect tax despite and objection and appeal would be unnecessary if judgment could be obtained in the interim. The court in Capstone 556 and Modibane disagreed with the decision in Mokoena, holding that it is not supported by a proper construction of the relevant statutes and relevant precedents. In Modibane the court confirmed that section 91(1)(b) of the Act entitles SARS to exact payment from a taxpayer pending an appeal. Ruaan van Eeden TRANSFER DUTY BONANZA The Taxation Law Amendment Bill (B19-2011) proposes changes to the rates of transfer duty from 23 January 2011. 2 l Tax Alert 11 November 2011 First, the rates are reduced. Persons who acquire immovable property pay transfer duty as follows: nil where the value or price is less than R600,000; 3% on the amount of the value or price between R600,000 and R1 million; 5% on the amount or value between R1 million and R1,5 million; and 8% on the amount of value above R1,5 million. Second, the above rates now apply to all persons. Before the proposed change, natural persons paid transfer duty on a sliding scale, while other persons (companies, close corporations (CCs) and trusts) paid transfer duty at a fixed rate of 8% from the first rand of value or price. What's the catch? Why did SARS grant this relief to persons other than natural persons? The reason is that, purely from a tax perspective, it may no longer be efficient to hold immovable property - particularly residential immovable property - in a company, CC or trust. First, a company, CC or trust does not qualify for the R1,5 million primary residence exclusion (which, simply put, provides that the first R1,5 million profit on the sale of a primary residence is free of capital gains tax). Second, if you sell the shares in company, or member's interest in a CC that owns residential immovable property, the sale of the shares or interest triggers transfer duty in any event. But, as SARS recognises, there may be reasons not related to tax why a person would place immovable property in a company, CC or trust. For instance, a person may place property in a company to enjoy the protection of limited liability. Further, a person may also buy an asset like a holiday home in a trust if the person wants to secure that asset for future generations - when the person dies, the trust continues and there is no tax event on his or her death (except, for instance, in respect of a loan account held by the person if it funded the trust to enable the trust to buy the property). The lower transfer duty rates for persons other than natural persons provide some planning opportunities. But take care to avoid tax headaches in future. Ben Strauss This information is published for general information purposes and is not intended to constitute legal advice. Specialist legal advice should always be sought in relation to any particular situation. Cliffe Dekker Hofmeyr will accept no responsibility for any actions taken or not taken on the basis of this publication. CONTACT US For more information about our Tax practice and services, please contact: Emil Brincker Alastair Morphet Johan van der Walt Director National Practice Head T +27 (0)11 562 1063 E emil.brincker@dlacdh.com Director T +27 (0)11 562 1391 E alastair.morphet@dlacdh.com Director T +27 (0)11 562 1177 E johan.vanderwalt@dlacdh.com Natalie Napier Ruaan van Eeden Director T +27 (0)11 562 1109 E natalie.napier@dlacdh.com Director T +27 (0)11 562 1086 E ruaan.vaneeden@dlacdh.com Ben Strauss Andrew Lewis Director T +27 (0)21 405 6063 E ben.strauss@dlacdh.com Associate T +27 (0)11 562 1085 E andrew.lewis@dlacdh.com BBBEE STATUS: LEVEL THREE CONTRIBUTOR JOHANNESBURG 1 Protea Place Sandton Johannesburg 2196, Private Bag X40 Benmore 2010 South Africa Dx 154 Randburg and Dx 42 Johannesburg T +27 (0)11 562 1000 F +27 (0)11 562 1111 E jhb@dlacdh.com CAPE TOWN 11 Buitengracht Street Cape Town 8001, PO Box 695 Cape Town 8000 South Africa Dx 5 Cape Town T +27 (0)21 481 6300 F +27 (0)21 481 6388 E ctn@dlacdh.com 5th floor Protea Place Protea Road Claremont 7708, PO Box 23110 Claremont 7735 South Africa Dx 5 Cape Town T +27 (0)21 683 2621 F +27 (0)21 671 9740 E ctn@dlacdh.com www.cliffedekkerhofmeyr.com EVERYTHING MATTERS 2011 Cliffe Dekker Hofmeyr is a member of DLA Piper Group, an alliance of legal practices