Zuma not exempt from tax on Nkandla

Exemption for national key points doesn’t apply, but work-related expenses exempt.

An exemption in the Income Tax Act for security expenditure at national key points is not going to help President
Jacob Zuma to avoid paying taxes on expenditure at his Nkandla residence.
There are however other arguments he can put forward to avoid paying more than R80million fringe benefit tax
on the upgrades said to total R206 million.
On the face of it Zuma can invoke section 24D of the Income Tax Act. It allows a taxpayer to deduct security
related costs at national key points for tax purposes.  Nkandla has reportedly been declared a national key point.
The expenditure was however done by government and not by Zuma himself.
A tax practitioner who asked not to be named says even though an employee did not incur the costs himself,
costs incurred by an employer that the employee is being taxed on, are in some instances considered as costs
incurred by the employee.
He says that in terms of section 23(m) a natural person can however not make a deduction against remuneration
income in respect of certain expenses such as those relating to national key points.
He says to avoid tax liability on fringe benefits a person will have to prove that the benefits are work-related. “If
your employer sends you to London for work, it does include an element of personal benefit, but you won’t be
taxed on it, because it is primarily for work.”
If Zuma cannot prove that the benefit, or elements of it, is work-related he will however be liable for tax like any
other taxpayer receiving personal benefits from his employer. “It was under the leadership of former, late
President Nelson Mandela that the tax legislation was changed in 1994 to ensure that state presidents and their
deputies are taxed just like any other taxpayer in South Africa,” he says. “It is only the pension of retired state
presidents and deputy state presidents that [is] still exempt.”
As the law stands, even security services to a state president and deputy state president after retirement are
taxable, he says.
He agrees with Pretoria auditor Rudie van Zyl (see ‘Zuma’s Nkandla tax headache’) that Zuma will have to pay
fringe benefit tax on any personal benefit derived from the upgrades.
According to a calculation by Mail & Guardian (M&G), based on a leaked preliminary report on Nkandla by Public
Protector Thuli Madonsela, Zuma personally benefitted to the tune of R20 million, which would land him a tax bill
of R8 million. See the original M&G article here.
Van Zyl added that improvements to Zuma’s immovable property, the value of movable property like furniture
bought for his benefit and the value of obligations paid on his behalf like municipal accounts are taxable if he
personally benefitted from it.
In terms of paragraph 16(1) of Schedule 7 of the Income Tax Act any benefit enjoyed by any other party on
Zuma’s behalf, can be regarded as a taxable benefit to him, Van Zyl said. That may apply to a tuck shop that was
allegedly build for one of his wives and the R90 million that was allegedly paid to his “team”, including the
architect, quantity surveyor and builder.
Taxed at a rate of 40% this element might add R36 million to Zuma’s tax bill.
The tax expert says it is the obligation of the employer to do the tax deduction from the employee, but state
employers seldom think about tax implications when they bestow benefits on employees.
An example outside of the state itself is that of Julius Malema. It was widely reported that he did not pay any
income tax, but the question is seldom asked why the ANC Youth League (ANCYL) did not deduct the
employees’ tax as was its obligation as an employer to do.
Van Zyl said the obligation for declaring Zuma’s tax benefit does not rest with Zuma alone. His employer has to
declare the benefit within 30 days after the end of the tax year and show it on his IRP5. If the employer fails in
this, the Commissioner has to determine the taxable benefit and instruct the employer to collect it.
South African Revenue Service (Sars) spokesperson Adrian Lackay earlier said to Moneyweb: “Once the facts
around the expenditure on the matter have been finalised and published, Sars will be in a position to determine
whether any tax consequences may arise. Sars will then apply its legal mandate.”
It seems if the argument that the Nkandla pool is indeed a fire pool is upheld, it may save Zuma from a hefty tax
bill.

Political economy

Author: Antoinette Slabbert
15 January 2014 00:33