011 463 5566 tonyd@harding.co.za

Editor’s Note:
In this third newsletter for 2023 we consider the following:
Stop Press – Revised Dispute Resolution Rules published.
USP Penalties revisited: Thistle & Coronation SCA Judgments
Domestic solar PV panels tax rebate and Business Deduction – Budget proposal
Update: Practice Note 31 of 1994 and Practice Note 37 of 1995
Taxation of non-resident beneficiaries of RSA trusts: Proposed Alignment of Income tax to CGT principle
SARS Interpretation Notes (INs), BGRs, BPRs Noter-Up

Tony Davey – Editor
Duncan McAllister – Co-Editor
tonyd@harding.co.za / www.tonydavey.com

SARS has gazetted revised Dispute Resolution Rules (pertaining inter alia to Reasons for Assessment, Objections, Appeals, ADR, Tax Board and Tax Court) which replace the existing Rules, effective 10 March 2023 and apply also to existing disputes with limited exceptions.

At first glance, various changes include:
The period for lodging an Objection under Rule 7 to a tax assessment is now 80 days instead of the previous 30 days. As regards Rule 10(3) (amending the grounds of Appeal) we’ve compared the old Rule 10(3) with the new one but prima facie, struggle to see the difference. The old Rule was expressed in the negative, but the new Rule, albeit expressed in the positive in that it permits a new ground on Appeal, then restricts the ground if it constitutes a new Objection!

We shall analyse material changes in the revised Rules in future Newsletters.


Two defences available to a taxpayer to mitigate all tax penalties are bona fide inadvertent error (section 222(1) of the Tax Administration Act (TAA)) or alternatively a favourable tax opinion obtained in advance from an independent registered tax practitioner (section 223(3) of the TAA). These independent defences appear to have been conflated by the SCA in two recent judgments.

Section 223 Criteria
The section 223 tax Opinion must have been favourable to the taxpayer in order to mitigate USP. Specifically, the section 223(3)(b) criteria requires that the taxpayer was in possession of an Opinion by an independent registered tax practitioner that –
(i) was issued by no later than the date that the relevant return was due;
(ii) was based upon full disclosure of the specific facts and circumstances of the arrangement, and
(iii) confirmed that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.

As the tax Opinion was not produced to SARS or the Court in the Coronation SCA case, how does one determine if the Opinion held that the tax position of the taxpayer was more likely than not to be upheld? If one has regard to paragraphs 60 to 64 of the judgment including a reference to the Thistle SCA case, it seems that the ‘bona fide inadvertent error’, defence prevailed, merely on the basis that an Opinion was obtained.

This undermines the section 223 criteria which becomes redundant and pointless, if one merely concludes that obtaining an Opinion equates to a ‘bona fide inadvertent error’.
In any event, as per our article in issue 1.2023, how can a deliberate course of action (acting on an Opinion) be classified as ‘inadvertent’. The Oxford Dictionary defines ‘inadvertent’ as ‘unintentional’, so surely it is self-evident that the action by the taxpayer, in relying on an Opinion, is intentional.

As an aside, SARS Guide to Understatement Penalties adopts a narrow interpretation of ‘bona fide inadvertent error’ as meaning an involuntary mistake as distinct from a deliberate cause of action.
We understand that the taxpayer in the Thistle case has lodged appeal to the Constitutional Court while SARS has cross-appealed the waiver of the penalties. The Constitutional Court has yet to indicate whether it will entertain the appeal.

It is proposed that a tax rebate (that is, a deduction from actual tax payable) be allowed to individuals of 25% of the cost of new or unused panels purchased and installed at a private residence from 1 March 2023. (This, however, excludes the cost of installation, fittings, inverters and batteries). Portable panels will also not qualify. Only solar PV panels with a minimum capacity of 275W per panel (design output) qualify for the rebate. Solar PV panels must be installed at a residence that is mainly used by an individual for domestic purposes. The installation will have to be proved with a certificate of compliance under the Electrical Installation Regulations, 2009 to ensure safety of the installation and compliance. The solar PV panels must form part of a system that is connected to the mains distribution of the private residence. The rebate is capped at R15 000 per individual.
The current wording of the 2023 Budget Review pertaining to Tax Proposals (part 4) states that the qualifying period for the solar panel tax rebate is 1 March 2023 to 29 February 2024. Thus, the current wording of the proposal allows the tax offset only in the 2023/24 tax year.

This, in our view is unfair, as persons who were proactive in installing solar in the 2023 tax year are disadvantaged. Our recommendation is that the actual legislation still to be enacted, be retrospective to 1 March 2022. We await the outcome.
Further to this, the limitation of the relief to exclude an inverter (which we accept must be linked to solar panels as distinct from stand-alone in order to be part-independent from Eskom for electricity) is not aligned with practical engineering and economic reality.
From a business perspective, when the taxpayer is carrying on a trade, under the proposed expanded incentive, businesses will be able to claim a 125 percent deduction under an amended Section 12B, in the first year, for all renewable energy project assets with no thresholds on generation capacity. (The previous deduction was 100 percent and the photovoltaic (PVP) solar energy generation could not exceed one megawatt). The adjusted incentive will be available only for assets brought into use for the first time between 1 March 2023 and 28 February 2025. For example, a renewable energy investment of R1 million would qualify for a deduction of R1.25 million. Using the current corporate tax rate, this deduction could reduce the corporate income tax liability of a company by R337 500 in the first year of operation.

In Newsletter 1.2023 we canvassed the proposal by SARS to withdraw these Practice Notes. To recap, SARS issued Practice Note 31 of 1994, ‘Interest paid on moneys borrowed’, and Practice Note 37 of 1995, ‘Deduction of fees paid to accountants, bookkeepers and tax consultants for the completion of income tax returns’. On 16 November 2022, SARS issued a notice informing the public of the intention to withdraw both Practice notes with effect from 1 March 2023, owing to the alleged abuse of the tax deduction concession provided for in Practice Note 31 (interest paid on borrowed monies and on-lent to earn interest, not in the course of trade) and the fact that Practice Note 37 does not incorporate the requirements of the term ‘registered tax practitioner’ contained in the Tax Administration Act (2011). After reviewing the public comments received on the withdrawal of the practice notes, Treasury will consider the impact of the proposed withdrawal and whether changes could be made in the tax legislation to accommodate legitimate transactions. The matter is thus deferred.

The gradual relaxation of exchange control regulations has led to an increase in applications to SARS for confirmation of tax-compliance status of a person for purposes of transferring funds offshore via authorised dealers. There are differences between the rules covering the normal tax treatment of income awards vested in beneficiaries of trusts in section 25B of the Income Tax Act and the rules covering the tax treatment of capital gains vested in beneficiaries in paragraph 80 of the Eighth Schedule to the Act. Paragraph 80(1) and (2) make provision for capital gains to be attributed only to beneficiaries who are South African tax residents. The paragraph does not allow capital gains to flow through to non-resident beneficiaries, for CGT purposes. Such capital gains, even if vested in non-resident beneficiaries, are thus taxed in the RSA trust. The trust is taxed at the higher effective CGT rate of 36% (45% of 80% gain) instead of the maximum CGT natural person rate of 18% (45% of 40% gain). In contrast, section 25B does not distinguish between beneficiaries who are and are not South African tax residents. The flow through of amounts from South African tax resident trusts to non-resident beneficiaries makes it difficult for SARS to collect income tax from those non-resident beneficiaries as it is more complicated to enforce recovery actions against non-residents. To address this difficulty, it is proposed that changes be made to section 25B to align it with the provisions of paragraph 80. Thus, the RSA trust will bear the tax on income, albeit vested in non-resident beneficiaries, at its flat rate of 45%.