XYZ CC v Commissioner for the South African Revenue Service

• Jurisdiction: South Africa
• Judge: Mbha J
• Judgment Date: 22 June 2012
• Citation: 2013 JDR 0352 (Tax)
• Docket Number: 12860
• Court: Tax Court

Mbha J:

INTRODUCTION

[1]

This is an appeal pursuant to the provisions of s 83A(13)(a) of the Income Tax Act No. 58 of 1962 (the Act), against the decision of the

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respondent disallowing the appellant's objection to the revised assessments issued on 13 March 2007, in respect of appellant's income tax for the years 2005 and 2006, and SARS's refusal to issue revised income tax assessments for the years 2003 and 2004. As this tax appeal has been referred from the Tax Board, the matter commenced de novo in terms of s 83A(14) of the Act.

[2]

The tax dispute between the parties originally covered the appellant's 2000-2006 years of assessment. However, after exchanges of correspondence between the parties, the appellant confines itself to the 2003, 2004, 2005 and 2006 years of assessment. The tax years of assessment for 2000, 2001 and 2002 have, by agreement, been removed from this appeal.

[3]

The appeal is based on the appellant's assertion that it meets all the requirements for classification as a small business corporation in terms of s 12E of the Act. On the other hand, SARS avers that the appellant does not qualify for such classification as it provides a personal service as defined in s 12E(4)(d) of the Act, and derives more than 20% of its receipts and accruals from the provision of that service and from investment income, as prescribed by s12E(4)(a)(iii). The appellant asserts that it does not derive any income from the provision of a personal service and that its investment income for the relevant years is minimal.

[4]

The issues to be determined in this appeal are:

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4.1

Whether the appellant qualified to be categorised as a small business corporation(SBC), as contemplated in s 12E(4)(a) of the Act, in which case it would qualify for a concessionary tax rate, and if so,

4.2

Whether the appellant is barred from using such categorisation on the grounds that s 12(4)(a)(iii) read with s 12(4)(d), operate against its categorisation as a small business corporation;

4.3

In respect of the 2003 and 2004 tax years, whether the appellant is barred from contesting the years I have referred to on the grounds that no proper objection and appeal process were followed, alternatively, whether prescription does not find application in respect of those tax years.

BACKGROUND

[5]

In its accounting financial statements accompanying its tax returns for the 2000-2004 years of assessment, the appellant described its business as one of "trade marketing consultancy". The revenue of the appellant is described in these financial statements as "consultancy fees". In respect of the 2000-2004 years of assessment, the appellant accepted, as reflected in its returns of income (IT14s) for those years, that it was not a small business corporation, and SARS properly assessed the appellant, for the 2000 to 2004

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years of assessment, as a company rendering a personal service and not as a small business corporation.

[6]

In respect of the 2005 and 2006 years of assessment, the appellant submitted its tax returns on the basis that it is a small business corporation in terms of s 12E of the Act. In the annual financial statements for these years, the main income of the company is described as "fees received, which … represents the invoiced value of services provided to clients", and in the tax returns the appellant's business is stated as "Marketing". The appellant was accordingly assessed for the 2005 and 2006 tax years, as a small business corporation. It is common cause that the assessed taxes were paid timeously.

[7]

On 13 March 2007, SARS issued additional assessments for the years 2005 and 2006 totalling R79 935,00. In so doing, SARS re-assessed the appellant as a company rendering a personal service and not as a small business corporation. As a result the appellant lost out on the concessionary tax rate accorded to small business corporations. On 23 August 2007 the appellant filed objections to the additional assessments on the grounds that the respondent had not provided any reasons for those assessments. On 19 October 2007 SARS issued a letter stating that the objection was disallowed as the appellant, inter alia, was not a small business corporation as contemplated in s 12E(4)(a)(iii) of the Act; renders a personal service as contemplated by s 12E(4)(d), and consequently was not eligible for the concessionary tax rates applicable to small business corporations. In

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amplification of the allegation that the appellant was rendering a personal service, SARS contended that this was in the form of broking, consulting and management as contemplated in s 12E(4)(d) of the Act and that the services in question were performed personally by a person who held an interest in the appellant, and who either acted alone or in conjunction with others.

[8]

In respect of the 2003 to 2004 tax years, SARS contends that these assessments have prescribed. In the alternative it contends that if they are found not to have prescribed, the appellant failed to follow the appropriate objection and appeal procedures in contesting those assessments.

THE LAW: RELEVANT PROVISIONS

[9]

S 12E(4)(a) deals comprehensively with what should be construed as a small business corporation.

[10]

The section provides that: 'Small Business Corporation' means any close corporation or any company registered as a private company in terms of the Companies Act 1973, the entire shareholding of which is at all times during the year of assessment held by shareholders or members that are natural persons where –

(i)

the gross income for the year of assessment does not exceed R5 million (2004-2005) or R6 million (2005-2006);

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(ii)

none of the shareholders or members at any time during the year of assessment of the company or close corporation holds any shares or has any interest in the equity of any other company as defined in section 1 …;

(iii)

not more than 20% of the total of all receipts and accruals (other than those of a capital nature) and all the capital gains of the company or close corporation consists collectively of investment income and income from the rendering of a personal service; and

(iv)

such company is not an employment company.

[11]

S 12E(4)(d) deals with a personal service as follows:

"Personal service" in relation to a company or close corporation means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, broking, commercial arts, consulting, draftsmanship, education, engineering, entertainment, health secretarial services, sport, surveying, translation, valuation or veterinary science, if –

(i)

that service is performed personally by any person who holds an interest in that company or close corporation; and

(ii)

that company or close corporation does not throughout the year of assessment employ at least… full time employees (other than an employee who is a shareholder or member of the close...