TAXING TIMES INDEED
Two recent appeal court decisions have been a boon to Sars. They also serve as a reminder of the expertise that has been lost at the revenue service
The SA Revenue Service (Sars) has had a windfall, courtesy of two decisions by the Supreme Court of Appeal. They represent complex legal work by Sars before its “capture”, back when key investigation and assessment units were working optimally. They are another reminder of the expertise that the revenue service has lost.
One case concerns Amawele Joint Venture CC, whose sole client is the Kwazulu-natal department of human settlements. The other relates to Volkswagen.
After a protracted legal struggle, the court has ruled that Sars will keep VAT that Amawele claimed it had paid in error. It has also upheld an additional assessment by Sars that found Amawele owed it R38m for the 2008-2010 period.
In the case of VW, the carmaker must pay tax on additional assessments of about R102m for the years 2008-2010.
Amawele, which was involved in provincial housing rehabilitation projects between 2008 and 2010, contested whether it was liable to charge, collect and pay VAT on the amounts it was paid for this work. According to Amawele, the services it supplied were zero-rated and so the VAT payments it had made were paid in error.
But a Sars audit of the company resulted in an additional assessment of R38m. Amawele appealed to the tax court, which found against Sars and ordered the R38m be refunded. A full bench of the high court was also unimpressed with Sars’s argument.
However, the appeal court has now found that it was Amawele that erred. After examining the legislative history, the court has concluded that the zerorating provision on which Amawele relied does not cover payments for the rehabilitation of existing housing stock.
The VW case concerns the trading stock held by the manufacturer at the end of each tax year, and the status of these unsold vehicles as far as Sars is concerned.
In accordance with accounting standards, the company calculated its returns between 2008 and
2010 using the net realisable value (NRV) of its stock — the expected selling price less the costs that would be incurred in selling it. This led to a value rather lower than the cost price of the trading stock. VW then claimed a tax deduction based on the difference between the cost price and the NRV.
After a lengthy, in-depth audit of VW’S tax affairs for the three years, Sars rejected VW’S position that the NRV represented the diminished value of its trading stock. The total difference between the NRV and the cost price over the three years came to R102m. Sars then issued revised assessments, levying additional tax for that period.
Consequences
On VW’S appeal, the tax court, persuaded by the company’s arguments, set aside the revised assessments. Had this judgment been left to stand, it would have meant that where NRV calculations reflect a value lower than the cost price, Sars would have to make an allowance for the reduction in the value of the trading stock. But as the appeal court has now pointed out, this would have consequences far beyond VW.
The appeal court has found that while the principles behind NRV calculations may be valid for particular accounting purposes, they do not necessarily apply when deciding tax liability, as the tax laws “do not necessarily accord with current accounting principles”.
The fiscus is concerned with trading stock as a whole. So the true question for tax purposes revolved around whether, as a whole, VW’S trading stock had diminished in value to the extent that Sars had to make an allowance in favour of the taxpayer.
For VW, this must be something of a swings-and-roundabouts outcome, as it follows a substantial victory in another battle with Sars. That matter was finalised in December, when the court found the accrual of rebates, paid to carmakers to encourage the rationalisation of models, is not taxable.