WELCOMING TAX NEWS FOR FRANCHISE OWNERS

B2The Tax Court has upheld a decision that a tax deduction allowed by section 24C of the Income Tax Act may be applied to franchisee costs. Section 24C permits the deduction of certain expenses in the current tax year assessment, where those expenses are not yet incurred, on the basis that these expenses will contractually be incurred in future years. This tax allowance protects businesses from being taxed on earmarked funds that bloat their annual earnings.

Where did this decision come?

The appeal involved the taxpayer (restaurant chain) against additional assessments raised by SARS for its 2011 to 2014 years of assessment. They arose from SARS’ refusal of deductions claimed by the taxpayer as allowances in respect of future expenditure in terms of section 24C of the Income Tax Act.

The crux of the dispute lies in whether or not the income received by the taxpayer from sales of meals to its customers can properly be regarded as arising directly from – or put differently, accruing in terms of – the franchise agreement itself. The taxpayer maintains that it can whereas SARS maintains it cannot.

However, as far as franchisees are concerned, it is clear that where a franchise agreement sets out an obligation to incur future expenditure, such expenditure may very well fall within the beneficial parameters of section 24C of the Act.

The Court’s decision

The Tax Court held that there need not be one physical contract document to give rise to section 24C’s benefit. Furthermore, while different parties were involved (the franchisor and the restaurant’s customers), the franchisee’s agreements with each were “inextricably linked” and “not legally independent and separate”.

The income deducted was, therefore, regarded as earned under the same contract as the taxpayer’s future expenditure, fulfilling the requirements of section 24C.

Reference:

  • B v Commissioner for the South African Revenue Services (IT14240) [2017] ZATC 3 (3 November 2017)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

THE CALCULATION OF INTEREST DUE BETWEEN TAXPAYERS AND SARS

a4bThe Tax Administration Act (TAA) introduces general principles to be applied when calculating interest due to or due by SARS. The aim is to create a fairer, more uniform calculation of interest for both the taxpayers and SARS. As with most things in life, there are exceptions. This article will discuss the general interest rules and some of their exceptions.
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The following general concepts are laid down for the calculation of interest due between taxpayers and SARS:

  1. Interest is compensation for the lost opportunity to use money.
  2. Interest will be calculated daily on the outstanding balance and compounded monthly.
  3. Interest accrues from the effective payment date until the actual payment date of an outstanding amount. The effective payment date is the date when a tax becomes due and payable under a tax Act.

The following section explains four of the exceptions to the general concepts above:

Refunds due by SARS

If SARS must refund a taxpayer, interest on the refund is calculated from the date that SARS receives the excess amount which must be refunded to the date that SARS pays the refund to the taxpayer.

Where SARS sets off a refund against other tax owing by a taxpayer, the deemed date of payment of the refund is the set off date.

Provisional tax

In the case of the compulsory first provisional tax payment the effective date is the last business day of the sixth month after the end of the tax year. Interest will be calculated from the effective date, until the payment date or the effective date of the second provisional tax payment, whichever of the latter two comes first.

For the second provisional tax payment (also compulsory) the effective date is the last business day of the tax year. Interest is calculated from the effective payment date until the earlier of the actual payment date or the effective date (as prescribed) of the optional third provisional tax payment.

Delayed VAT refunds

No interest will be calculated on the refund for the period of the delay if the delay is caused by the taxpayer. The period of the delay is determined from the date that the taxpayer was required to submit information to SARS (e.g. bank details for the account into which SARS must pay the refund) until the date by which the taxpayer actually submitted the requested information.

Amounts refunded by mistake

If SARS refunds a taxpayer by mistake, the refund is deemed to be tax due and payable by the taxpayer. Interest will be calculated on the refund from the refund date until the date that the taxpayer pays the refund back to SARS.

A senior SARS official may remit imposed interest if he/she is satisfied that the interest was imposed as a result of circumstances beyond the taxpayer’s control. There are only three cases where circumstances might be regarded as beyond the control of the taxpayer: serious illness or accident, natural or man-made disaster, or civil disturbance or disruption of services.

The TA Act strives to provide for an equal number of days to be used for calculating any interest due between taxpayers and SARS, and to create an opportunity to apply the same rules for the calculation of interest on all the different types of tax administered by SARS.

Reference List:

  • Accessed on 21 June 2015:
  • SARS Short Guide to the Tax Administration Act, 2011 (Act No. 28 of 2011), Chapter12

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)