South Africa: Taxability Of Amounts Received For Information Supplied

Last Updated: 16 October 2014
Article by Beric Croome

Most Read Contributor in South Africa, September 2016

The Washington Post reported on 5 March 2014 that NBC News had agreed to pay the family of the late Reeva Steenkamp, the woman killed by Oscar Pistorius, for its co-operation in a series of interviews.

The question that arises in this regard is the nature of such payments for tax purposes, that is, whether such amounts received by a person supplying information constitutes gross income and therefore liable to income tax under the provisions of the Income Tax Act, No. 58 of 1962 ('the Act'), as amended or falls outside of the taxing statute.

It is appropriate to refer to the case of the Commissioner for South African Revenue Service v Kotze, [2002] 64 SATC 447 where Mr Kotze received a reward from the police for information leading to the arrest and conviction of persons involved in illicit diamond buying. In that case, the taxpayer indicated that the reason for supplying the information to the police was to protect himself against any appearance of involvement in criminal activity and to protect his good name, his business and standing in the community of Springbok. Mr Kotze received an amount of R200,000 from the South African Police for the information supplied by him, which contributed to the criminals being charged and ultimately convicted.

The Tax Court, in ITC 1683 [2000] 62 SATC 406, accepted that there was no relationship of employer and employee between the police and Mr Kotze and it held that the amount did not constitute gross income and therefore was not liable to tax. The Commissioner was dissatisfied with the decision of the Tax Court and the matter proceeded on appeal to Cape High Court.

The High Court considered the definition of "gross income" in the Act and particularly paragraph (c) of the definition thereof which provides as follows:

"any amount, including any voluntary award, received or accrued in respect of services rendered or any amount...received or accrued in respect of or by virtue of any employment or the holding of any office."

The court accepted that Mr Kotze was not employed by the South African Police Service and it was therefore necessary to determine whether the amount was received by him in respect of "services rendered". In Kotze, the taxpayer's counsel contended that the amount was fortuitously received and that it was unreasonable to tax the recipient on such an amount because he was performing, what he had perceived as a civic duty.

The court indicated that where a person rescues a drowning child and is rewarded by a grateful parent, such amount would be regarded as an accolade and would not be regarded as a receipt received by the taxpayer in respect of services rendered.

Foxcroft J came to the conclusion that Mr Kotze was rewarded for having provided information to the police which lead to the arrest and conviction of the persons who had approached him. The court therefore decided that had Mr Kotze not provided the information in question, he would not have received the reward from the police.

The court unanimously concluded that the payment received by Mr Kotze, which amount he kept and did not give back to the police, was received for information which had been provided.

The court accepted that the police exercised a discretion in making payment to Mr Kotze but once that discretion had been exercised, the amount paid to him was in respect of services rendered and not as a reward for good conduct in the exercise of a civic duty.

The High Court therefore came to the conclusion that there was an adequate link between the service rendered and the payment of the reward. In the result, the High Court confirmed the assessment issued by the Commissioner to subject Mr Kotze to tax on the amount received from the police for the information supplied regarding the illicit diamond transactions, which resulted in the arrest and conviction of the perpetrators thereof.

Thus, where a person receives payment from a journalist for information supplied, it is submitted that such amount will constitute income fully liable to tax based on the decision of the court in Kotze's case. The gross income definition is extensive and applies even though there may not be an employer/employee relationship between the parties concerned. Thus, payment for information supplied by one party to another will generally constitute gross income liable to income tax at the rate applicable to the recipient concerned.

In addition, where payments are received for the use of materials such that the press or advertising agencies pay an amount for the privilege of filming in a person's home, those amounts will also constitute income on the basis that the amounts are paid for the use of the taxpayer's assets. Clearly, where a taxpayer disposes of an asset and is not a dealer in such asset, the amount received will constitute proceeds for the purposes of capital gains tax which will result in the gain realised on that disposal being subjected to tax at a favourable rate, currently a maximum of 13.3% for natural persons.

However, where a person receives consideration for information supplied or for the use of their assets, such amounts will constitute gross income fully liable to income tax at the rate applicable to the person concerned, such that the rate could amount to 40%. Where the recipient of the consideration can show that expenses were incurred relating to the income generated for the information received or other similar payments, such expenditure should be deductible under the general deduction formula contained in the Act.

Taxpayers must remember that when they complete their tax returns, that they make full disclosure of all amounts received by them, failing which they would be subjected to the imposition of penalties under the Tax Administration Act, which can range from 0 to 200% of the tax that would otherwise have been payable, depending on the precise circumstances and when the amount that should have been subjected to tax is identified by SARS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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