Two tax practices that have survived for nearly 30 years have been thrown a lifeline until current legislation is amended. The South African Revenue Service (Sars) wanted to withdraw both practices with effect from March, but this has been delayed until further notice.
Practice Note 31 allows taxpayers to deduct interest expenses even if they are not a business expense in terms of the legislative framework. Generally, expenses can be deducted only if they are incurred for the purpose of carrying on a trade.
The other practice, captured in Practice Note 37, entitles taxpayers to deduct fees for the completion of income tax returns by accountants, bookkeepers, and tax consultants.
In November last year, Sars issued a statement saying that both practices would come to an end by 1 March because of abuse (PN 31) and because PN 37 does not incorporate the requirements of the term “registered tax practitioner” contained in the Tax Administration Act.
Delay and review
However, National Treasury announced in the February Budget that it will delay the withdrawal of both practice notes to review public comments received and amend legislation. Sars gave interested or affected parties time to comment on the proposed withdrawal of the practice notes.
“Government will consider the impact of the proposed withdrawal and whether changes could be made in the tax legislation to accommodate legitimate transactions affected by such withdrawal,” Treasury said in Annexure C of the Budget Review.
Jacqueline Delport, tax manager at BDO, noted in her March tax alert that Sars did not consider the impact that the withdrawal will have on legitimate funding transactions. These are transactions implemented in the “regular course of business or though legitimate investment structures with no mala fide intention to obtain prohibited deductions”.
This thinking was echoed by several tax experts, who expressed concerns about the impact on back-to-back group loans in the absence of South African group tax rules.
Keith Engel, the chief executive of the South African Institute of Taxation, said at the time that it was problematic for small business owners who borrow funds from a bank to finance their small business companies and for holders of real estate investment units who acquired those units with borrowed funds. People have been making financial decisions based on this concession offered by Sars for many years.
Withdrawing them without legislative changes to accommodate existing and future arrangements would have left many in a difficult position, particularly in times of steep interest rate increases.
New legislation
Once Treasury has considered ways in which legitimate transactions can be accommodated, the plan is to withdraw the practice notes and introduce new legislation at the same time.
“They need to co-ordinate the timing of the withdrawal with the introduction of new legislation so that people are not left in the lurch,” Engel says.
Regan van Rooy, a boutique international tax and structuring firm, predicted that some concessionary practice will still apply, as on-lending will always be a commercial transaction, and it would be unfair to have punitive tax treatment.
Fee for services
Delport explains that PN 37 allows for the deduction of fees paid to accountants, bookkeepers, and tax consultants for the completion of income tax returns. It is limited to taxpayers earning commission or other income, or pensioners whose financial affairs are administered by a bank, board of executors, or a similar institution.
With the introduction of the term “registered tax practitioner”, only people who are registered could provide tax services in return of a fee. Therefore PN 37 in its current form does not cater for the concept of registered tax practitioners.
Sars indicated (in its reasoning for the withdrawal of the note) that its own electronic filing system (eFiling) has simplified the tax return submission process. It argued that taxpayers who struggle to file their tax returns have access to Sars officials for assistance, either in person or electronically.
However, says Delport, Sars wants to create the impression that eFiling is a “straightforward user-friendly platform” rendering the tax return filing services offered by registered tax practitioners redundant.
“It is evident that Sars, in its withdrawal proposal, has failed to recognise the vital role tax practitioners perform in the filing of taxpayers’ tax returns. Prohibition of a deduction in respect of tax return fees would be prejudicial to both the taxpayer’s tax affairs and the tax practitioner’s pocket,” she adds.
There is no doubt that most taxpayers appoint tax practitioners to assist them in ensuring that their tax returns are filed correctly and timeously with Sars, Delport says.
National Treasury did not indicate when it will introduce legislation arising from its rethinking of the current practices. Until such time, the two practice notes remain in effect.
“Only time will tell whether the potential amendments to the tax legislation will equate to the same relief experienced by taxpayers currently afforded by the practice notes,” Delport says.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
