By now most of us would have heard and got talking about this court case, whose judgement was handed down on the 17th of April 2019. The case is between A Company v The Commissioner For The South African Revenue Service. Some of the important facts of the case where as follows:
- The taxpayer carries on business as a high street retailer of clothing, comestibles and general merchandise.
- As part of it’s offerings, the store sells gifts cards
- The gifts cards can be redeemed for good at any of the taxpayer’s stores.
- If not redeemed, the gift cards expire after a certain time has passed.
- The Revenue collector issued an additional assessment for the 2013 year of assessment.
- In it’s finalisation letter, on 22 May 2017, SARS determined that an amount of R140 984 321 (which was the taxpayer’s receipts in that year from unredeemed gift cards), was part of the taxpayer’s taxable income. SARS recognised a related Section 24C allowance in the amount of R94 123 389, which resulted in the taxpayer’s tax liability going up by R13 121 060.
The question the court sought to answer was whether the revenue from the “sale” of the gift cards during that tax year constituted part of the taxpayer’s “gross income” (as defined) as soon as it received by the taxpayer (the view of the revenue collector) or if it would only be included in gross income when the gift cards were redeemed or if not redeemed, when the gifts cards expire (the view of the taxpayer).
In other words, the real issue here was whether the monies received by the taxpayer from its customers (from the issuance of the gift cards) were “received” by the taxpayer within the meaning of that word in the definitions of gross income at the time the transaction happened and was concluded or when the gift card was redeemed or when it expired.
For the purposes of this article, I will focus on the taxpayer’s defences (Please refer to the full judgment for the Revenue Collector’s defences.) The taxpayer’s argument was advances at two levels:
- The taxpayer argued that the monies received for the unredeemed gifts cards were held in a separate bank account. These funds were then not applied in the day to day running of the business until such a time the gift cards were redeemed or when they expire. They also accounted for these funds as a liability on the balance sheet, which renders it inconsistent with it being income until such a time it is recognised as such on the profit and loss. Also, even though the monies may be mixed at the tills with other receipts, their financial systems where able to trace the monies received for gifts cards. They would, after reconciliations, allocate these funds to the designated bank account.
Although this is a good cash flow management practice, already you can start to see that this argument does not help answer the question of whether the funds are received for the benefit of the taxpayer and/or if the funds are held in trust for the customer. Thus the judge rejected the argument on the basis that the mere segregation of receipts not necessarily give rise to a legal context that would sustain a determination that the funds had not been received by the taxpayer for itself and its own benefit.
- The second argument of the taxpayer, which later stood, was based on the provisions of the CPA (consumer protection act). These required that the taxpayer treat the funds so received as “trust money” and not as it’s own property. The treatment of funds as trust money would apply until such a time the gift cards are redeemed or expire. This means that the taxpayer was not entitled to treat the prepayment as its own property or apply it for its own benefit until the card had been redeemed or expired. Also, in the event of the taxpayer being liquidated before the cards were redeemed or expire, the receipts would not be available for settlements to the taxpayer’s creditors. This is because the liquidators would be bound to regard them as the card bearers’ property. This would be the case even if the receipts have not been segregated (kept in a separate bank account), as long as they could be traced (the liquidators would be bound by the provisions to do so). In this case, as earlier noted, the taxpayer was able to easily trace these funds and would be able to do so even if there had not been a segregated bank account to keep these receipts.
The appeal was upheld and the additional assessment was set aside.