March 2020 monthly compliance update: Audit in the time of coronavirus, and other regulatory news

The month of March 2020 will not easily be forgotten. It was the month that we came to terms with the novel Coronavirus and the lockdown that was initiated to contain its spread. The consequences of this will be felt for months, if not years, to come. Here are the main developments for the month of March.

  • The virus that changed everything. It’s no longer business as usual as companies and individuals come to grips with a virus that has upended their lives
  • The SEC won’t let a good crisis go to waste, lowers audit standards for smaller companies
  • Proposed audit reforms should rebuild trust in the profession
  • Sars didn’t follow correct procedures in levying understatement penalties (USPs).
  • Does your fast food delivery service have to pay VAT on petrol used by third-party drivers? Yes, says Tax Court.

And other news.

SA goes into lockdown to contain spread of Covid-19

President Cyril Ramaphosa this week announced that SA is to go into a 21-day lockdown from 26 March 2020 in an effort to combat the spread of the Covid-19 virus.

The President announced a number of interventions that place accountants and tax practitioners at the centre of the response to fight COVID-19. Here are some of the interventions announced (a full list is available here)

  • National Disaster Benefit Fund: R 30 Billion has been allocated to a special National Disaster Benefit Fund, which will pay Unemployment Insurance Fund benefits for up to three months to qualifying workers whose income has been impacted by the coronavirus pandemic. This fund will address the coronavirus related job losses, support job retention, illness payouts and reduced time claims.
  • Informal sector support: A safety net is being developed to support persons in the informal sector.
  • SASSA: The South African Social Security Agency (Sassa) grants for pensioners and people with disabilities to be paid early.
  • Temporary Employee Relief Scheme: A special dispensation for companies that are in distress, through this employees will receive wage payment through the Temporary Employee Relief Scheme, which will enable companies to pay employees directly during this period and avoid retrenchment.
  • Banking sector: The Department of Trade and Industry has passed new regulations in the banking sector. The exemptions will allow banks to work together which will help small businesses, consumers and firms in distress.
  • Tax subsidy: A new tax subsidy of up to R 500 per month for the next four months for employees earning below R 6 500 per month.

Read more here.

The SEC won’t let a good crisis go to waste, lowers audit standards for smaller companies

The Securities Exchange Commission in the US has bowed to pressure from companies, some of them already experiencing “accounting problems” to ease audit requirements for smaller companies. Those pushing for the change say it could allow smaller firms to cut costs and invest in new products and technology. The rule was recently approved and applies to companies with less than $700 million in annual revenue. They will no longer need to have an auditor examine their internal controls, a rule that has been in place since the days of Enron and WorldCom.

As Zerohedge recently reported, the easing in audit requirements will allow bio-technology firms to use the money saved on internal audit controls to, say, develop vaccines. Which is pretty convenient in the age of coronaviruses.


Proposed audit reforms should rebuild trust in the profession

The Independent Regulatory Board for Auditors (IRBA) says it is involved in more than 40 projects aimed at restoring public trust in the audit profession. A key proposed reform will be to bring the entire accounting profession under IRBA’s regulatory remit (currently, only auditors – accounting for about 4,500 of an estimated 200,000 accountants) are subject to professional legislation.

The UK government has further recognised that it is not only the auditors who should be regulated but also directors and audit committees. The proposed Auditing Reporting Governance Authority (ARGA) will have a broad mandate to have oversight over the broader financial reporting chain.

Locally, the Auditing Profession Act amendments process is underway. While this only addresses regulation of auditors, it provides the IRBA with increased powers at the investigation stage which will help to speed up investigations into improper conduct. The amendments also simplify the requirements for the disciplinary hearing process, which will increase the pool of members on which to draw to establish hearing panels, and reduce the hearing panel from six to three members. This will ensure the IRBA can set down more matters and run hearings concurrently with multiple panels, far more cost effectively and quickly. These improved and simplified processes will ultimately lead to better investor and public protection.

Not every business failure is an audit failure, and auditors are not trained to detect fraud. Part of the regulatory response is to review the fraud risk standards to see whether auditors should be expected to do more work around fraud. It will therefore be important for the IRBA to review auditor competencies in respect of public expectations, says IRBA CEO Bernard Agulhas.


Recent tax cases

Capital gains tax case goes (mostly) against taxpayer

An unnamed taxpayer had understatement penalties of R2.27 million imposed by SA Revenue Services reversed, but lost two other appeals for disallowed certain capital losses accumulated in an employee share incentive scheme. The taxpayer claimed to have suffered substantial capital losses in the scheme between 2007 and 2013, but these losses were disallowed by Sars. The Tax Court ruled that the taxpayer is not entitled to claim a capital loss on the basis of the difference between the ‘base price’ of the shares and the price at which they were sold to the employees. There was no dispute about this.

The taxpayer claimed it was entitled to claim capital losses for capital gains tax (CGT) purposes in circumstances where the Trust granted share options to selected employees of the taxpayer. The Trust was established in order to enable the taxpayer to provide financial assistance to employees of the taxpayer for the acquisition of shares in the taxpayer. This was done and the employee share incentive scheme was structured in the way it was in light of the provisions of section 38 of the Companies Act, which prohibited the giving of financial assistance by a company for the acquisition of its own shares, but which permitted the use of a trust as a means of providing financial assistance for employees to acquire shares. The Trust was also established in order to satisfy the listing requirements of the Johannesburg Stock Exchange.

It was always understood by all concerned that the Trust would make losses as a result of the granting of share options to selected employees, which losses would be made good by the taxpayer. After all, so it was contended on behalf of the taxpayer, it was the taxpayer who wished to make shares available to its employees as a performance incentive and not the trust, hence the arrangement that the taxpayer would bear any losses resulting from the implementation of the scheme. The taxpayer determined the identity of the employees it wished to incentivise by offering them share options. Thereafter the instruction would be issued by the taxpayer to the trustees of the Trust to offer share options to the relevant employees, which the trustees of the Trust were then obligated to do by virtue of the terms of the Trust Deed.


Does your fast food delivery service have to pay VAT on petrol used by third-party drivers? Yes, says Tax Court

A fast food delivery service contracted outside drivers to deliver food on its behalf. The drivers would receive a delivery fee, which appeared on the tax invoice presented to the customer as “petrol money”. The company’s tax invoices charged VAT for the food, but not for the drivers’ petrol money. Sars assessed the taxpayer on the basis that the delivery of food orders to the customers constituted the supply of a service by the taxpayer (rather than the drivers) for consideration in the course or furtherance of an enterprise, as contemplated in section 7(1) of the Value-Added Tax Act. The taxpayer objected to this assessment on the basis that the supply of delivery services was made by independent contractors rather than by itself. The taxpayer claimed that it simply acted as agent in respect of the collection of remuneration due to the independent contractors.

The taxpayer required the independent contract drivers to present themselves as the public face of the taxpayer, and that the customers expected delivery to be effected by the taxpayer, and not by a third party. On this basis, the Tax Court found that regardless of the fact that the taxpayer may have outsourced the performance of the delivery, the taxpayer had made supplies of delivery services for consideration in the course of its enterprise and it was liable to VAT on such supplies. The taxpayer’s appeal was dismissed.


Sars didn’t follow correct procedures in levying understatement penalties (USPs)

Cliffe Dekker Hofmeyr reports on a number of tax disputes heard by the Tax Court and the Supreme Court of Appeal (SCA) have dealt with the issue of USPs, such as the SCA judgment in Purlish Holdings v The Commissioner for the South African Revenue Service.

In a recent case, a taxpayer appealed against the imposition of an understatement penalty by Sars in that it did not comply with Rule 31 under the Tax Administration Act. Rule 31 requires Sars to spell out the legal reasons for opposing an appeal, something the taxpayer in this case claimed Sars had omitted to do. The taxpayers filed an exception to Sars Rule 31 statement, arguing that it lacked averments necessary to sustain a finding of gross negligence and the imposition of an understatement penalty at the rate of 100%. In the alternative, the exception complains that the Rule 31 Statement is vague and embarrassing as it failed to explain the basis upon which SARS opposes the Taxpayer’s appeal against the imposition of the understatement penalty (USP) at the rate of 100%.

The Tax Court found in favour of the taxpayer and gave Sars 15 days to remedy the defect in its Rule 31 statement.

Louis Botha of Cliffe Dekker Hofmeyr comments: The key principle derived from this judgment is that once a taxpayer has received SARS’ Rule 31 Statement in a particular matter, it can consider taking an exception if the taxpayer believes that the Rule 31 Statement lacks averments necessary to sustain a particular finding, including a finding regarding the USP to be imposed. It is important to note that if the exception is allowed, the Tax Court would likely give SARS an opportunity to remedy the defect. The taxpayer would then have to file a Rule 32 Statement in response to the amended Rule 31 Statement.


PwC’s Elle-Sarah Rossato comments as follows on the same case: The takeaway Although the taxpayer won the battle in this instance, he might not have won the war, as SARS now had the opportunity to amend its Rule 31 statement and specify the behaviour on which it placed reliance, which hopefully then provides a basis for a genuine dispute. From the viewpoint of dealing with SARS, the imposition of a penalty is an instance in which the burden of proof falls on SARS to establish that it has acted reasonably. Taxpayers should exercise their right to test the assertions. If SARS asserts that the taxpayer’s behaviour reflects a certain level of culpability, then the taxpayer would be advised to obtain reasons for the level of penalty imposed and be prepared to contest the assertions.


How much can you deduct for installing solar panels?

Section 12B(h) of the Income Tax Act spells out what deductions are allowed for renewable energy installations. Specifically, deductions re allowed on the costs incurred in respect of plant, machinery, implements and articles owned by it, that are first brought into use by that taxpayer in the course of its trade in the generation of electricity from various renewable energy resources (including specifically photovoltaic solar energy). Three of the critical requirements must be met:

  • that the plant, machinery, implement, utensil or article is owned by the relevant taxpayer claiming the deduction (or purchased by it under an instalment credit agreement);
  • that such plant and machinery is brought into use for the first time by that taxpayer; and
  • that such plant and machinery is utilised by the taxpayer in the course of its trade in the generation of electricity from specific renewable energy resources.

In a recent case, a taxpayer wished to deduct the usual costs incurred in respect of plant and machinery (and related equipment) required to erect the solar installation, the taxpayer also wished to deduct (as part of the cost of the installation of the solar system) the following related expenditure:

  • installation planning costs;
  • panels delivery costs;
  • installation costs; and
  • installation safety officer costs.

In a private binding ruling, SARS determined that the taxpayer would be entitled to claim deductions in respect of the direct costs of the installation and erection of each of the plants, consisting of the installation planning costs, panel delivery costs and the cost of the installation safety officer to be appointed, under s12B(3).

Pretoria High Court rules against Sars in Glencore fuel case

In brief, Sars rejected a claim by Glencore operations for diesel fuel rebates since some of this fuel was not used for primary production activities in mining, as required under the rebate scheme introduced in 2001. Sars contended that the fuel was used in “post-mining” activities and therefore did not qualify for rebate. The court found in favour of Glencore and determined that it was entitled to the rebates claimed.


Gold dealers win VAT case against Sars over audit documentation

Four dealers who buy jewellery containing gold brought an urgent application against Sars after it had conducted raids to seize documents from the traders for the tax years 2012 to 2015. In October Sars completed its VAT audit and concluded that all the transactions were fictitious and that all input VAT which they had claimed over the five year period from 2012 to 2017 should be written back. Having removed all the documents from the traders’ premises, they were unable to reply meaningfully to the audit findings. “In my judgment the applicants have the right to request from the respondent the required documents if regard is had to provisions of the s 42 of the Tax Administration Act. Moreover, the applicants have the right in terms of s 32 of the Constitution to access information in possession of the respondent,” reads the judgment.




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