During November 2022, the South African Revenue Service (‘SARS’) issued a notice informing the public of its intention to withdraw Practice Note 31 of 1994 and Practice Note 37 of 1995 with effect from years of assessment starting on or after 1 March 2023, apparently due to the increasing abuse of the provisions contained therein.
Practice Note 31 is titled ‘Interest Paid on moneys borrowed’ and indicates that SARS allows a deduction of interest incurred to earn investment income in certain circumstances, despite failing to meet the ‘carrying on of a trade’ requirement. This requirement is contained in section 24J of the Income Tax Act 58 of 1962 (‘The Act’), which deals with the deductibility of interest, and must be met unless Practice Note 31 can be applied.
This deduction is, however, limited to interest income produced, with losses not being claimable in respect thereof. The Practice Note does not deal with the deduction of other expenses incurred in the production of the interest income and it has been seen in practice that SARS does not generally raise issue with the type of expense deducted against the interest income, provided that no loss is created.
SARS indicated in its withdrawal notice that it is alert to the fact that taxpayers have structured transactions in such a way to maximize the deduction of interest or other expenditure incurred by utilizing Practice Note 31 while there is no corresponding inclusion in the gross income for the recipient.
It is submitted that SARS, in its proposition, has not considered the impact that the withdrawal will have on legitimate funding transactions that are implemented in the regular course of business or though legitimate investment structures with no mala fide intention to obtain prohibited deductions.
Practice Note 37 is titled ‘Deduction of Fees paid to Accountants, Bookkeepers and Tax Consultants for the completion of Income Tax Returns’ and provides that fees paid to accountants, bookkeepers and tax consultants for the completion of income tax returns may be deducted. Such deductions are limited to taxpayers earning commission or other income from which he is claiming section 11(a) or section 11(e) deductions or taxpayers who are pensioners whose financial affairs are administered by a bank, board of executors, or similar institution. Instances in which the taxpayer receives income from exempt interest, other interest, or dividends will require the allocation of tax practitioner fees proportionally between the various sources of income.
SARS indicated in its withdrawal notice that the Tax Administration Act 28 of 2011 (‘TA Act’) introduced the term ‘registered tax practitioner’ which meant that only persons who are registered tax practitioners as defined could provide tax services in return for a fee. SARS states that Practice Note 37 in its current form does not cater for the concept of registered tax practitioners.
Further to this, SARS indicates that its e-filing system has simplified the tax return submission process and assistance by SARS in relation to tax return queries is readily available to taxpayers in person or electronically who may experience difficulties in filing their tax returns.
SARS creates the impression that e-filing is a straightforward user-friendly platform, rendering the tax return filing services offered by registered tax practitioners redundant. 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.
It is evident that SARS, in its withdrawal proposal, has failed to recognize 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 taxpayers tax affairs and the tax practitioner’s pocket.
After review of the public commentary received, National Treasury in Annexure C to the National Treasury Budget, indicated that it would consider whether changes could be made to the existing tax legislation to accommodate legitimate transactions affected by the proposed practice note withdrawal. As a result, SARS intends to delay and align the withdrawal of the practice notes with the effective date of any legislation arising from the proposed public considerations.
Until such time, Practice Notes 31 and 37 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.
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