/ 5 June 2014

Tax laws shield Zuma, Malema

Trust me: Julius Malema's party affiliates are raising funds to pay off his tax debts.
Trust me: Julius Malema's party affiliates are raising funds to pay off his tax debts.

Julius Malema strikes a last-minute deal with the tax authority, and President Jacob Zuma comes under new scrutiny for the funding of assets on the Nkandla property.

The two issues highlight the murkiness around trust funds, donations tax and fringe benefits.

It all makes this a good week to ask: Just how much money do these two politicians owe the South African Revenue Service (Sars)?

Zuma’s and Malema’s cases are vastly different, but they share certain similarities. Some people speculate that they owe Sars similar amounts. And both are protected by South African law from divulging the real nature of their interactions with the tax authorities.

On Zuma’s list of potential tax liabilities, Nkandla rears its head. The question of how much tax he owes for the home replete with luxuries is rather blurry.

According to a report released by the department of public works, all Nkandla upgrades formed part of the required security features. By that line of argument, the president is not liable for any tax payments at all.

In her report, public protector Thuli Madonsela indicates that Zuma derived a “substantial” personal benefit from works that exceeded his security needs. But she did not place a rand value on this.

Instead, she said that the president is to “determine the reasonable cost of the measures implemented … at his private residence that do not relate to security”. Tax law requires the president to pay fringe benefit tax for the costs that he personally benefited from.

Earlier estimates by the Mail & Guardian pitched this at R20‑million. Assuming that Zuma falls into the highest tax bracket, this reckoning means that Zuma’s personal Nkandla-style enjoyments could get him hit with an extra tax bill of R8‑million.

According to the Democratic Alliance, Zuma’s personal benefit from Nkandla was double the M&G‘s initial estimate, coming to a “conservative R42.4‑million”, taking into account things such as improvements to property, furniture expenses and municipal accounts.

“If this were the case, then the president’s tax liability for Nkandla would be R16.8‑million,” said a DA report in March.

The DA’s former spokesperson on finance, Tim Harris, alerted Sars to the calculations and called for an investigation into the matter in April.

When asked for an update on this, Sars deputy spokesperson Marika Muller told the M&G: “Sars does not and cannot comment publicly on the affairs of any taxpayer … Taxpayer confidentiality extends to whether or not a taxpayer is under investigation. [It] ends only when a matter is formally brought before a court of law other than a tax court. It then becomes a matter for public record.” Harris has also called on Zuma to draft and publicise his plans to repay Sars.

Presidential spokesperson Mac Maharaj said that the DA would need to follow the correct protocol for requesting such an action from the president. “Since when are people disclosing their tax status?” Maharaj asked the M&G.

The DA’s new spokesperson on finance, David Ross, said he would be pursuing the matter. “I will write a letter regarding this to [newly appointed Finance Minister Nhlanhla] Nene.”

Court documents show that Economic Freedom Fighters (EFF) leader Malema owes R16‑million plus interest for failing to submit tax returns between 2006 and 2010. That amount is nothing to sneeze at, but when one factors in interest charges, Malema is probably liable for significantly more.

Assuming that interest only kicked in from 2010 (a generous and unlikely assumption, made on the basis that the details of the debts are not publicly known), Malema’s R16‑million would have accrued roughly R5.6‑million in interest, meaning he owes Sars at least R21.6‑million.

In April, Malema’s EFF affiliates launched the “JSM Trust Fund” to attract donations to cover his hefty tax obligations.

Recipient of donations
The layperson may wonder: Would Malema not become liable for some form of income tax as the recipient of donations flowing to his cause?

According to one tax expert, no. “They set up the trust and made him the beneficiary,” said the expert, who asked not to be named. “If another legal person gives you money, if it’s not for services rendered or to buy an asset, then there’s no income tax or capital gains tax required.”

But what about donations tax? Duties for donations are levied at 20% of their value. If Malema received R22‑million and was liable for donations tax, his total outstanding bill would ratchet up to almost R26‑million.

But Malema will likely sidestep this extra expense. Trusts can be structured in such a way that no donations tax is payable on money that flows in.

“Normally, if a trust beneficiary gets money, then that is not a donations tax equivalent,” said the expert. “There’s nothing untoward about it. It falls within the purpose of a trust.”

The JSM Trust has not indicated how much has already been raised towards Malema’s bills. But last week’s conditional compromise agreement with Sars means he now has more time to get the cash together. That Sars has agreed to it, seems to indicate it is reasonably confident he will.