Tax Planning: A “Curse” or a “Necessity”?

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Tax Planning: A “Curse” or a “Necessity”?

• 03 September 2024
• Tax Administration
• Johan Heydenrych

The Supreme Court of Appeal (SCA) handed down judgement on 12 July 2024 in the highly publicised case of The Commissioner for Inland Revenue vs Messrs Wiese, Visagie, Viljoen and Hofmeyr.

SARS instituted action against the appellants in terms of section 183 of the Tax Administration Act 28 of 2011 (the TAA) for payment of R216.6 million. To understand the reasons for the dispute, the following chronological events are important: 

25 January 2007

Energy Africa (Pty) Ltd (“Energy Africa”) sold its shares and claims in Energy Africa Holdings (Pty) Ltd (EAH) to Tullow Overseas Holdings BV (TOH). The EAH disposal to TOH during 2007 was a disposal to a connected person not at market value. 

16 November 2012

 SARS issued a letter of findings stating that it will raise capital gains tax (CGT) of R453 126 518 on Energy Africa’s taxable income.

15 April 2013

Energy Africa submitted a letter disputing the SARS findings.

19 April 2013

Energy Africa transferred its only asset being a loan account claim it held in Titan Share Dealers Proprietary Limited (TSD) as a dividend in specie to Elandspad Investments Proprietary Limited (Elandspad), its holding company.

21 August 2013

SARS issued an additional assessment for CGT of R453 126 518 with interest and 150% Understatement Penalty. SARS also issued an original assessment of STC of R488 282 886 with interest and 150% Understatement Penalty.

1 November 2013

 Energy Africa objects against both assessments, but states that it has no cash and cannot pay the tax.

3 April 2014

The objection is partially successful in that the capital amount is reduced slightly, and the understatement penalty is reduced to 100%.

29 May 2014

Energy Africa informs SARS that it will not appeal the reduced assessments.

April 2016

Energy Africa is liquidated by order of court.

25 October 2016

Notices of personal liability were sent in terms of s 183 of the TAA, by SARS to the appellants. These notices stated that Messrs Wiese and Visagie had knowingly assisted the taxpayer in dissipating its only asset of value to obstruct the collection of a tax debt. 

16 January 2017

Written representations were addressed to SARS where Messrs Wiese and Visagie maintained that, because the dissipation of Energy Africa’s assets occurred prior to the raising of the STC and the CGT assessments, there existed no tax debt as defined in the TAA at the time.

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Section 183 of the TAA provides that: “If a person knowingly assists in dissipating a taxpayer’s assets in order to obstruct the collection of a tax debt of the taxpayer, the person is jointly and severally liable with the taxpayer for the tax debt to the extent that the person’s assistance reduces the assets available to pay the taxpayer’s debt.”

The SCA dismissed the cost of appeal from Messrs Wiese et al with the cost of two counsel.

This is a highly notable case since it illustrates the lengths to which SARS will go to recover unpaid taxes. In this case, the taxes were not recovered from the party who benefited from the dissipation of assets (i.e. Elandspad) but the taxes were recovered from the individuals who allegedly caused the dissipation in the assets in their personal capacities.

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Within this environment, the question arises how one should approach tax planning. In the writer’s opinion, the following basic concepts should be considered when doing “tax planning”:

• The term “tax planning” unfortunately has a negative connotation since it implies that the taxpayer obtains a tax benefit though aggressive tax schemes. This is far from the truth. Tax planning is about “tax certainty” and not about gaining an undue tax benefit. Tax planning is a “sense of awareness” of where things can go horribly wrong and the foresight to take pro-active steps to avoid these unnecessary surprises. 
• The wheels in the Wiese case seems to have come off on 25 January 2007 when assets were transferred to an offshore connected person at less than market value. The fact that the taxpayer did not appeal the imposition of a 100% understatement penalty means that “gross negligence” was present when the assets were sold to TOH in 2007 at less than market value and neither CGT nor STC was paid. With respect, the writer holds the view that even a 1st year tax student would be able to identify that adverse tax implications will arise if assets are transferred to an offshore connected party at less than market value! It is almost inconceivable that the 2007 transaction was concluded without due consideration of the transfer pricing risks. 
• This matter was made even worse when the company declared all its assets to its holding company as a dividend in specie a mere 4 days after responding to the letter of SARS audit findings! A basic knowledge of the TAA would have highlighted the personal risk that the directors and individuals are taking with such a dividend declaration.

The sequence of events resulting in the dispute between SARS and Wiese et al is in the writer’s opinion not a result of tax planning, but it is the result of an absence of proper tax planning. 

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Arguably, if the defendants in the SCA case were properly advised of the personal liability risks associated with the 2007 transaction and the 2013 dividend declaration, then these transactions may not have been concluded in this manner at all. 

Tax planning has the following characteristics: 

• Tax planning follows good commercial practice and not the other way round. Transactions should be concluded exclusively for sound business reasons. It is then the right of the taxpayer to implement the business transaction in such a way that the legitimate tax consequences are minimised. 
• Tax planning is based on the sovereignty of the law. Transactions concluded outside the law undermines democracy and undermines the profession as a whole. 
• There is a difference between a tax uncertain position and a tax illegal position. A taxpayer may never follow a “tax illegal” position which is contrary to the legislation. A tax uncertain position is one where a particular statute may be interpreted in different ways by a court of law resulting in an uncertain outcome. Part of the tax planning process is to identify tax uncertain positions and to support the chosen tax treatment by way of a formal tax opinion as envisaged in section 223 of the TAA. 
• Tax planning never rests on non-disclosure of material facts. The taxpayer should assume that SARS have exactly the same knowledge as the taxpayer including the motives of the transaction. The 2007 transaction concluded by Energy Africa arguably solely relied on an expectation that SARS will not become aware of the true market value of the EAH shares transferred to TOH. 
• Tax planning must be based on a realistic expectation that SARS is highly knowledgeable of the law and that SARS will not rest until all avenues to collect taxes are exhausted. Many taxpayers incorrectly believe that SARS is incompetent. As with any large organisation, there are different levels of competency at SARS, but the fact that SARS is winning more than 80% of Supreme Court of Appeal cases is evidence that SARS has highly competent professionals in their litigation and audit departments. 

In conclusion, tax planning would result in taxpayers avoiding costly disputes with SARS since the positions taken by the taxpayer will be properly recorded and substantiated. It is the absence of tax planning and a blasé approach to tax risks that leads to costly disputes with SARS and not the presence of tax planning.

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Join Johan on the 16th of September for "Strategies for Effective Tax Planning and Administration" where he will not only discuss the academic principles of legal and ethical tax planning but also provide practical examples from an Income Tax, VAT, and PAYE perspective.

• Click here to read more and book your seat.
• Click here to watch short introduction video.

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