It is by now well known by many large corporate taxpayers, their tax law advisors and tax structured financiers that the proposed changes to section 45 of The Income Act No. 58 of 1962, as amended (the “Act”) have been amended, following 30 consultations relating to more than 50 transactions (as per Background Note issued on 3 August 2011). A discussion on these issues is beyond the scope of this article. The sole purpose of referring to the above is to highlight the extent to which taxpayers and their tax law advisors can and do influence tax policy.
Unless the author is mistaken and very much open to correction, the considerable changes made to section 18 of the Act over the past four years have, in the writer’s opinion, largely gone unnoticed (based on what the writer has seen in the public domain and on every new client of Bendels Consulting).
A chronological sequence of the many substantial changes that have been made and many further proposed changes in the future is a matter for discussion under separate cover.
The purpose of this article is to address the issue, as the title suggests, whether Parliament have, by default or otherwise, Carte Blanche over the tax deductibility of expenses under section 18 of the Act. To broadly put the position into perspective, all section 18(1) “qualifying expenses” are fully tax deductible of the whole family where a disability exists within (for the sake of simplicity) a family unit. A disability is defined in section 18(3) of the Act.. Where a disability exists, section 18(1)(d) is in the writer’s experience where the majority of tax deductions are allowable. Broadly, section 18(1)(d) of the Act provides for the deduction of expenses where such expenses are necessarily incurred in consequence of a physical impairment or disability.
Broadly, there are three categories of “qualifying expenses”:
1. section 18(1)(a) – contributions to a medical scheme,
2. section 18(1)(b) – medical expenses not recovered from a medical scheme and
3. section 18(1)(d) – being expenditure as referred to above and the crisp and concerning issue of this article.
SARS statistics show that for the 2009 tax year only 37 000 claimed under the disability code. The total tax deduction for these taxpayers was staggeringly low of only R1.5 billion at a tax cost of R389 million. Accordingly, the figures imply an average tax deduction of R40 540 and tax saving per taxpayer of only R10 513. Notwithstanding the fact Bendels Consulting specialises in this complex area of law (the complexities arises due to having knowledge of the tax law issues, having knowledge of many different disabilities and the interventions and treatments related thereto), the statistics are out of all proportion to the reality of the facts. The writer’s day-to-day experience factually shows that a minimum successful tax deduction is an average of about R150 000 (or put another way nearly four times the countrywide average of R40 450, as noted above). As specialists in this area of tax law, we would be failing in our duties as tax law advisors if we did not add-value to our clients by achieving substantially higher tax deductions.
By even remotely suggesting, respectfully submitting, or directly or indirectly implying that the expertise of Bendels Consulting in this area of tax is worth four times the average would be nothing short of unrealistic, inappropriate and plainly arrogant. But the extraordinarily low figures speak louder than words so many serious questions need to be asked as to what has and is going wrong.
1. Are we as tax professionals aware that our clients have a disability within the family?
2. What are the tax law requirements in order to prove that a disability exits?
3. Are we aware of all items of expenditure which may be tax deductible under section 18(1)(d) of the Act?
4. Are tax professionals asking all the right questions in order to extract the expenses referred to in 3 above?
5. Are appropriate objections being made to prior-year’s (in full accordance with section 81(2)(b) of the Act) in order to remedy the position once tax professionals become aware that a disability exists?
6. Are tax professionals making their clients fully aware of the tax law relating to disabilities?
7. What training have employees obtained in order to empower them with the necessary intellectual capital in order to advise and opine on their client’s own specific facts and circumstances?
In closure, therefore, the apparent lack of a cohesive approach by tax professionals has (in the writer’s opinion, which is supported by evidence) resulted in a loss of tax (or gain in tax to the fiscus) for taxpayers of conservatively R5 billion in the last 3 years. With such astonishing gains by the fiscus it is clear that Parliament have had Carte Blanche at the expense of a most vulnerable group of taxpayers. The proven first hand figures speak for themselves – is it thus not time for the writer’s colleagues to “come to the party”? Experience has shown that raising awareness among taxpayers is the first step…