Please can you direct me to recent cases (if any) under the TAA where dividends issued to a working, salary earning shareholder was overturned by SARS and reclassified as income taxable under normal tax rates?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Whilst the Tax Administration Act provides for dispute resolution, the issue that you refer to is a question of law (the Income Tax Act).
From the facts provided it is clear that the issue is whether the amount in dispute was “received or accrued in respect of services rendered…” If this was the case the amount would be gross income, also remuneration and subject to employees’ tax. This of course is in terms of paragraph (c) of the definition of gross income in section 1(1) of the Income Tax Act.
In terms of the definition, in section 1(1) of the Income Tax Act, a “dividend” means “any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied by way of a distribution made by…”
In both instances the Act uses the term “in respect of”. Judge Howie (in the Stevens case) said “…there is no material difference between the expressions ‘in respect of’’ and ‘by virtue of’ in paragraph (c). They connote a causal relationship between the amount received and the taxpayer’s services or employment.” (The reference to paragraph (c) is to the paragraph in the definition of gross income).
We submit that the same principal will apply in this instance. In other words, if the amount accrued to the person in his capacity as a holder of a share (as opposed to an employee as above) the causal relationship between the share and the amount transferred exists and a dividend arises.
Note that the section 10(1)(k)(i)(ii) provides that the exemption (from normal tax) doesn’t apply where any dividend was “received by or accrued to a person in respect of services rendered or to be rendered or in respect of or by virtue of employment or the holding of any office”.
The neutral citation for the judgment that we referred to is Stevens v CSARS [2006] SCA 145 (RSA).