Advance tax rulings, tax opinions and non-binding private tax opinions

It has been said that some of the only absolute certainties in life are death and taxes. While this is indisputably true for death, one might fairly ask if it is time for this expression to be revisited insofar as tax is involved. Tax law is tremendously complex and taxpayers often find themselves overwhelmed by the lack of clarity about how a transaction will be taxed or even taxed at all. Very little about tax law is black or white. Most provisions and transactions fall into what can be termed a “grey area” where the issues are open to interpretation. Quite aptly so named given that these are also often the cause of grey hair for taxpayers.

With the right strategic guidance, however, it does not have to be. Taxpayers who face these uncertainties have various options available to them to find certainty and mitigate the risk associated with uncertainty. We have set out below four options for taxpayers to assist in these difficult situations. While there may be other options depending on the facts of the matter, these are the most commonly used.

Tax opinions

While a formal tax opinion from a tax professional is merely that professional’s interpretation and professional view on a tax matter, it does have its advantages. Where a taxpayer relies on an opinion from a registered tax professional it gives the taxpayer protection against understatement penalties if correctly drafted. While the legislation is clear that taxpayers who rely on an opinion from a registered tax professional is only protected against penalties for substantial understatements (meaning, according to SARS, the prejudice to SARS is more than R1 million) we submit that a recent court judgment allows for wider application of the protection offered by a tax opinion.

Non-binding private opinions

While tax opinions have their place in tax risk management, the opinion remains merely an opinion. SARS, of course, will also have an opinion and which may differ from that of a tax professional/taxpayer. Therefore, a taxpayer may seek an additional layer of protection. This can, in appropriate cases, be found in what is called a “non-binding private opinion”. A non-binding private opinion essentially involves having an opinion vented by SARS, after which SARS issues a formal opinion on the specific facts and tax consequences. While non-binding private opinions issued by SARS are, as the name suggests, not binding on SARS, it is unlikely that SARS will later come to conclusion in conflict with the conclusion reached in the in the non-binding private opinion.

Taxpayers may feel some constraint against disclosing a transaction to SARS in the form of a non-binding private opinion as they may feel that SARS will be biased in their conclusion. In the numerous applications that we have been involved in we have not come across any bias in SARS’ views.

Advance tax rulings

At a principle level, an advance tax ruling achieves the same result as a non-binding private opinion – i.e. a formal opinion issued by SARS after having vented the opinion of a taxpayer/tax professional. The difference between an advance tax ruling and a non-binding private opinion, however, is that an advance tax ruling is binding on SARS. I.e. advance tax rulings secure absolute certainty for a taxpayer on how a transaction will be taxed. While some might label advance tax rulings expensive in light of application fees that need to be paid to SARS, these fees are often nominal when considered in light of the certainty the ruling creates.

There various requirements that must be satisfied before an application can be made for an advance tax ruling, the most important of which is that the transaction must be proposed at the time of application (certain rulings on Value Added Tax being an exception to this rule).

Declaratory order

Taxpayers can, as did the taxpayer in the case of Respublica v Commissioner for the South African Revenue Services (864/2014) [2016] ZAGPPHC 155 (29 February 2016), seek a declaratory order from the High Court on the correct interpretation of tax law in certain cases. This option is often discarded in light of the high costs associated with litigation. It does not, however, have to be a such an expensive option and is not as inaccessible as taxpayers might think. Declaratory orders issued by the High Court, off course also creates absolute certainty.

For the very few tax issues that are not open to interpretation and that fall into the black or white category, the expression that nothing other than death and taxes still holds true. For the grey areas, tax (or the absence of tax) can be certain provided taxpayers employ the services of expert tax professionals who can give them the strategic guidance to achieve certainty.

Author: N Theron