Structure your affairs to pay the least tax

2010-09-16 00:00

IN a well-known quote from a decision of the British tax court, Lord Clyde emphasised that a taxpayer does not have “the smallest obligation, moral or other, so to arrange his legal relations to his business or his property as to enable the Inland Revenue to put the largest shovel into his stores”.

South African and overseas courts alike have endorsed this view in subsequent decisions to the effect that a taxpayer is entitled to arrange his affairs legally so as to pay the least amount of tax.

In a recent decision of the Supreme Court of Appeal in Bloemfontein, this position was once again confirmed.

The appellant was an electronics company that imported plasma screens and TV tuners from South Korea. The components were imported separately, but when combined they would function as a television set.

Plasma screens imported without TV tuners can be regarded as video monitors for tariff classification purposes, and so attract import duties of 25%, which are subject to a full rebate.

A plasma screen with a TV tuner installed would be classified as a television reception apparatus, which also attracts import duty of 25%, but without the benefit of a rebate.

The SA Revenue Service argued that the appellant was importing “incomplete” television sets rather than video monitors. It also argued, as an alternative point, that the appellant was involved in a scheme of importing the screens and tuners separately to disguise the reality that it was in fact importing complete television sets.

At stake for the appellant as a result of this dispute was more than R43 million in duties.

On the first issue, the court found that the nature of a product must be determined at the time of importation and not based on what the product is going to be after importation. It was noted that the appellant was importing some video monitors, which could be used without incorporating the TV tuner. The plasma screens could therefore not be seen as “incomplete” televisions sets.

The court ruled that the appellant was entitled to the rebate of duty regardless of whether these screens were later converted into a television set by the incorporation of a TV tuner.

On the second issue the court found that the appellant did not try to hide the fact that it was importing two separate items that would more than likely be combined by retailers to form a complete television set.

There was also no evidence to support SARS’ view that the appellant had “manipulated the design, manufacturing or importation process to avoid the payment of duties”. Rather, the court held that the appellant was legitimately ordering his affairs in order to pay the least amount of tax.

The second part of the court’s decision confirms the widely held view that no taxpayer is legally or morally obliged to pay more tax than is required by tax legislation.

A taxpayer can structure his affairs within the letter of the law to pay as little tax as possible. However, a taxpayer should always exercise extreme caution when structuring his affairs to ensure that he is falling on the correct side of the law.

To quote the former UK chancellor of the exchequer Denis Healey, “the difference between tax avoidance and tax evasion is the thickness of a prison wall”.

For more information, call KPMG at 033 347 7600.

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