Sars´s nasty tax demands

- Steven Jones - Moneyweb Tax

If services are rendered that income will be taxed whether it is a tip for waitressing, voluntary bonuses or rewards for information.

Sub-paragraph (c) of the definition of “gross income” as contained in Section 1 of the Income Tax Act stipulates that gross income includes “any amount, including any voluntary award, received or accrued in respect of services rendered”. In simple English, this means that any amount that you receive is potentially subject to tax if it can in any way be linked to a service that you render.

It also makes no difference whether there is a contractual obligation for payment in respect of such services, or whether the payment is voluntary - the fact that an amount is received is sufficient for it to fall within this section. The defining criterion is the rendering of services.

Now on the face of it, this topic may seem obvious and not worthy of further discussion. After all, you render services, you are paid for those services, and therefore you should be taxed on such payment received. End of discussion.

Well ... not quite.

In a 2002 court case, Commissioner: South African Revenue v Kotze [64 SATC 447], the taxpayer provided information to the South African Police Service with information regarding illegal diamond dealings, for which a reward of R200 000 was paid. While the Special Tax Court held that such amount did not relate to services rendered and was therefore not taxable, the Cape High Court decided otherwise and the amount did indeed form part of the taxpayers gross income.

The judgement indicated that while the motivation for the taxpayer making the telephone call to the police may well have been to avoid being implicated in the crime and thereby suffering damage to his reputation, the payment had nothing to do with this motivation. It was paid directly as a result of the service rendered, ie, the information provided. The link is straight-forward: No information, no reward.

Other situations that fall within this paragraph include voluntary bonuses, gratuities received by waiters, and similar payments. The question one needs to ask here is: Would the payment have been received if a service had not been rendered? In the case of tipping waiters, clearly one would not tip a waiter unless they were a restaurant patron, and then only to the person who waited upon them. Clearly the waiter cannot expect a gratuity if they havent actually provided any service.

However, the situation is not always cut and dried, and the following example hits somewhat close to home, considering my current position as a minister in the Methodist Church. This situation concerns payment to clergy, but can also apply to internships whereby the amount paid is intended to cover ones cost of living, rather than a salary in the regular sense of the word.

A long-held argument is that since ministers receive a stipend (living allowance), and not a salary per se, such amounts should not form part of gross income. This argument has long been settled on the basis that such payment would not accrue unless the recipient actually rendered services as clergy. Clearly there is a direct link between the stipend paid and the services rendered, and (unfortunately for me) calling it a stipend instead of a salary does not change its nature as far as tax is concerned.

Fair enough, one may say - “render unto Caesar that which is Caesars”, and all that. However, as many a minister has found, congregations include quite generous folk who want to care for their minister. The question is where that fine line is between payments for services rendered, and acts of generosity? In this case, the link between services rendered and amounts received is less clear-cut.

Let me say at the outset that I dont believe that Sars is too concerned that Aunty Mabel blesses her minister with a chocolate cake every second week. Nor, for that matter, would I imagine that Sars Commissioner Pravin Gordhan would lose any sleep over the fact that a minister may be invited for lunch from time to time by one of their congregants. However, payments for funerals and weddings may be another matter entirely, since the minister has clearly rendered a service by conducting such wedding or funeral. Where these amounts are nominal, there may not be too much hassle, but if they were to become substantial...

The counter-argument, of course, is that people often give gifts as an expression of gratitude. This is not only limited to the ministry, either - I once received a wonderful fruit basket from a client for whom I managed to sort out a long-standing query with Sars. My fee for time spent in sorting out the query was naturally raised in my books and declared, but should I have declared the value of the “thank-you” gift?

Of course, such a situation can be abused, and a situation whereby the service provider arranges to charge, say, R50 for the service plus a cash “gift” of R5 000, would be a clear-cut case of tax evasion. However, when it comes to the normal courtesies extended between people, one cant help wondering how far Sars would want to take it if push came to shove?