In a follow up to his article covering the loose ends over Nkandla, financial wordsmith Allan Greenblo, is unpacking the personal tax implications. Greenblo simply states it’s another test for the country’s rule of law over President Jacob Zuma’s tax liability for the gift of Nkandla. And he says the indemnity provided by the National Assembly doesn’t apply. The next big question is how much is he liable for, and can he really afford to pay back the money he’s promised to1. – Stuart Lowman

By Allan Greenblo*

Has President Jacob Zuma complied with his income-tax obligations over all the state-funded improvements at Nkandla? Almost certainly not, a leading SA tax authority argues:

There’s a reported case law that the liability for tax, incurred in a particular year, is not reduced or defeated by the taxpayer (employee) having to repay the benefit in a subsequent year. A relevant case is reported as Income Tax Case 1346 44 SATC 31.

Here the taxpayer was a Wits University professor who received a long-service bonus in the December of a particular year on the basis that he would have to repay part of it if he failed to return to service for a stated minimum period in the next year. As it happened, he died after February during the next tax year. Nevertheless, SA Revenue Services taxed him on the full amount of the bonus received in the tax year prior to his death.

The objection that he had to repay most of the bonus in the following year was dismissed. The court ruled that the claim of the University, for repayment of part of the bonus in one year, cannot operate to reduce the professor’s tax liability arising from his receipt of the bonus in the previous tax year. This principle is well established and there are several reported cases that confirm it.

Now apply the principle to Zuma. He received the benefit of the improvements to his private residence during the tax year when the improvements were made. In a subsequent year he was indeed exonerated by the National Assembly from any liability for those improvements. Then, in an even later year, the ConCourt held that he was obliged to pay for at least some of those improvements.

The established principle, however, is that he has to be taxed on the cost of the improvements in the earlier year i.e. when he received the benefits of those improvements. The fact that he must reimburse the employer in a later year is irrelevant to his liability for the year during which the improvements were effected.

In the reported ITC 1346, it was debated whether the professor would be entitled to deduct the amount of the repayment to Wits for purposes of calculating his income-tax liability for the later year during which the repayment was made. The court did not have to decide this question but it expressed doubt as to whether any deduction would in fact be available.

So far as Zuma is concerned, should he indeed “pay back the money” to the state for the Nkandla improvements, he would not be entitled to any tax deduction in the year of repayment. Further, the repayment would not reduce his liability for the tax incurred during the year when the improvements were effected. The deduction is not allowed because it does not comply with the Income Tax Act requirements for deductible expenditure.

Note also that the ConCourt dealt only with the repayment obligation in respect of some improvements such as the swimming pool. But all the improvements to Zuma’s private residence (Nkandla), paid for by his employer (the state), are fringe benefits in terms of the Income Tax Act. As such, they are subject to full taxation in the hands of Zuma.

It doesn’t matter that Zuma did not ask for the improvements to be effected. Neither does it matter that he might not like the improvements; nor whether the improvements were correctly considered as being required for security purposes. All improvements to the private residence of an employee, which are paid for by the employer, are taxable as fringe benefits in the hands of the employee.

Read also: Zuma’s business friends incl Mkhwanazi, Reddy: “We’ll pay the Nkandla bill”

The Remuneration of Public Office Bearers Act (No 20 of 1998) specifically refers to the taxation of remuneration and allowances granted to the President. At section 2(2) it provides that the National Assembly may by resolution decide what portion of the President’s remuneration shall be exempt from tax as an allowance under section 8(1)(d) of the Income Tax Act.

The National Assembly did not pass any resolution of this nature in respect of the Nkandla improvements. And it will be of no avail to the President if the National Assembly, at this late stage, were now to pass such a resolution. The tax liability was incurred in an earlier year, so the passing of a National Assembly resolution in a subsequent tax year will not benefit Zuma’s tax position.

The collection powers of the SARS commissioner are not discretionary. He is obliged to exact all the taxes due by all taxpayers, and the President is not above the law.

The only possible escape for Zuma would be for the National Assembly to amend the Income Tax Act in order to grant him a specific tax exemption for Nkandla. But as all people are entitled to equal treatment before the law, such an amendment might well be open to constitutional challenge.

Will SARS do its duty and collect from Zuma the tax due on the full cost to the state of the Nkandla improvements? A joint statement by Finance Minister Pravin Gordhan and SARS commissioner Tom Moyane would provide assurance.

• Allan Greenblo is editorial director of Today’s Trustee (totrust.co.za), a quarterly magazine mainly for principal officers and trustees of retirement funds.