Tax due on pay­ment for in­for­ma­tion, ser­vices

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

Case shows tax­man will take his share of your spoils, even when you do what you per­ceive as your civic duty

THE Wash­ing­ton Post re­ported on March 5 this year that NBC News had agreed to pay the fam­ily of the late Reeva Steenkamp, the woman killed by Os­car Pis­to­rius, for its co-op­er­a­tion in a se­ries of in­ter­views.

The ques­tion that arises in this re­gard is the na­ture of such pay­ments for tax pur­poses; that is, whether such amounts re­ceived by a per­son sup­ply­ing in­for­ma­tion con­sti­tutes gross in­come and there­fore li­able to in­come tax un­der the pro­vi­sions of the In­come Tax Act, No 58 of 1962, as amended or falls out­side of the tax­ing statute.

It is ap­pro­pri­ate to re­fer to the case of the Com­mis­sioner for South African Rev­enue Ser­vice v Kotze, [2002] 64 SATC 447 where Kotze re­ceived a re­ward from the po­lice for in­for­ma­tion lead­ing to the ar­rest and con­vic­tion of per­sons in­volved in il­licit di­a­mond buy­ing. In that case, the tax­payer in­di­cated the rea­son for sup­ply­ing the in­for­ma­tion to the po­lice was to pro­tect him­self against any ap­pear­ance of in­volve­ment in crim­i­nal ac­tiv­ity and to pro­tect his good name, his business and stand­ing in the com­mu­nity of Spring­bok. Kotze re­ceived an amount of R200,000 from the South African Po­lice Ser­vice for the in­for­ma­tion sup­plied by him, which con­trib­uted to the crim­i­nals be­ing charged and ul­ti­mately con­victed.

The Tax Court, in ITC 1683 [2000] 62 SATC 406, ac­cepted that there was no re­la­tion­ship of em­ployer and em­ployee be­tween the po­lice and Kotze and it held that the amount did not con­sti­tute gross in­come and there­fore was not li­able to tax. The Com­mis­sioner was dis­sat­is­fied with the decision of the Tax Court and the mat­ter pro­ceeded on ap­peal to the Cape High Court.

The High Court con­sid­ered the def­i­ni­tion of “gross in­come” in the act and par­tic­u­larly para­graph (c) of the def­i­ni­tion thereof which pro­vides as fol­lows: “Any amount, in­clud­ing any vol­un­tary award, re­ceived or ac­crued in re­spect of ser­vices ren­dered or any amount … re­ceived or ac­crued in re­spect of or by virtue of any em­ploy­ment or the hold­ing of any of­fice.”

The court ac­cepted that Kotze was not em­ployed by the SAPS and it was there­fore nec­es­sary to de­ter­mine whether the amount was re­ceived by him in re­spect of “ser­vices ren­dered”. In Kotze, the tax­payer’s coun­sel con­tended that the amount was for­tu­itously re­ceived and that it was un­rea­son­able to tax the re­cip­i­ent on such an amount be­cause he was per­form­ing what he had per­ceived as a civic duty.

The court in­di­cated that where a per­son res­cues a drown­ing child and is re­warded by a grate­ful par­ent, such amount would be re­garded as an ac­co­lade and would not be re­garded as a re­ceipt re­ceived by the tax­payer in re­spect of ser­vices ren­dered.

The court con­cluded that Kotze was re­warded for hav­ing pro­vided in­for­ma­tion which lead to the ar­rest and con­vic­tion of the per­sons who had ap­proached him. The court there­fore de­cided that had Kotze not pro­vided the in­for­ma­tion in ques­tion, he would not have re­ceived the re­ward from the po­lice. The court unan­i­mously con­cluded the pay­ment re­ceived by Kotze, which amount he kept and did not give back to the po­lice, was re­ceived for in­for­ma­tion which had been pro­vided.

The court ac­cepted that the po­lice ex­er­cised a dis­cre­tion in mak­ing pay­ment to Kotze but once that dis­cre­tion had been ex­er­cised, the amount paid to him was in re­spect of ser­vices ren­dered and not as a re­ward for good con­duct in the ex­er­cise of a civic duty.

The High Court there­fore came to the con­clu­sion that there was an ad­e­quate link be­tween the ser­vice ren­dered and the pay­ment of the re­ward. In the re­sult, the High Court con­firmed the as­sess­ment is­sued by the Com­mis­sioner to sub­ject Kotze to tax on the amount re­ceived from the po­lice for the in­for­ma­tion sup­plied re­gard­ing the il­licit di­a­mond trans­ac­tions, which re­sulted in the ar­rest and con­vic­tion of the per­pe­tra­tors thereof.

Thus, where a per­son re­ceives pay­ment from a jour­nal­ist for in­for­ma­tion sup­plied, it is sub­mit­ted that such amount will con­sti­tute in­come fully li­able to tax based on the decision of the court in Kotze’s case. The gross in­come def­i­ni­tion is ex­ten­sive and ap­plies even though there may not be an em­ployer/em­ployee re­la­tion­ship be­tween the par­ties con­cerned. Thus, pay­ment for in­for­ma­tion sup­plied by

In Kotze, the tax­payer’s coun­sel con­tended that the amount was for­tu­itously re­ceived and that it was un­rea­son­able to tax the re­cip­i­ent on such an amount

one party to another will gen­er­ally con­sti­tute gross in­come li­able to in­come tax at the rate ap­pli­ca­ble to the re­cip­i­ent con­cerned.

In ad­di­tion, where pay­ments are re­ceived for the use of ma­te­ri­als such as when the press or ad­ver­tis­ing agen­cies pay an amount for the priv­i­lege of film­ing in a per­son’s home, those amounts will con­sti­tute in­come on the ba­sis that the amounts are paid for the use of the tax­payer’s as­sets. Where a tax­payer dis­poses of an as­set and is not a dealer in such as­set, the amount re­ceived will con­sti­tute pro­ceeds for the pur­poses of cap­i­tal gains tax which will re­sult in the gain re­alised on that dis­posal be­ing sub­jected to tax at a favourable rate, cur­rently a max­i­mum of 13.3% for nat­u­ral per­sons.

How­ever, where a per­son re­ceives con­sid­er­a­tion for in­for­ma­tion sup­plied or for the use of their as­sets, such amounts will con­sti­tute gross in­come fully li­able to in­come tax at the rate ap­pli­ca­ble to the per­son con­cerned, such that the rate could amount to 40%. Where the re­cip­i­ent of the con­sid­er­a­tion can show that ex­penses were in­curred re­lat­ing to the in­come gen­er­ated for the in­for­ma­tion re­ceived or other sim­i­lar pay­ments, such ex­pen­di­ture should be de­ductible un­der the act’s gen­eral de­duc­tion for­mula.

Tax­pay­ers must re­mem­ber when they com­plete their tax re­turns that they make full dis­clo­sure of all amounts re­ceived by them, fail­ing which they would be sub­jected to the im­po­si­tion of penal­ties un­der the Tax Ad­min­is­tra­tion Act, which can range from 0% to 200% of the tax that would oth­er­wise have been payable, de­pend­ing on the cir­cum­stances and when the amount that should have been sub­jected to tax is iden­ti­fied by SARS.

Dr Beric Croome is a tax ex­ec­u­tive at ENSafrica.

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