Business Law & Tax (BD October 2021)

BUSINESS LAW &TAX

OCTOBER 2021 WWW.BUSINESSLIVE.CO.ZA

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

VAT audits a taxing process

are often the victims •ofVendors Sars’s random time frames Annelie Giles ENSafrica

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he SA Revenue Service (Sars) has set its sights on noncompliant taxpayers through an active and focused compliance programme.

It seems that Sars has realised the enormous powers it enjoys under the Tax Administration Act, 2011 (TAA) to administer tax laws and enforce compliance and it has been going from strength to strength ever since. This is particularly evident when it comes to the audit and verification of VAT refunds.

But is the law allowing Sars perhaps too much power when viewed against taxpayers’ rights to conduct business?

ENTITLEMENT VS ENFORCEMENT

The design of the SA VAT system is such that it entitles a vendor to claim VAT on expenses that have been incurred in the course or furtherance of its taxable enterprise. A vendor’s entitlement to a VAT refund claim is subject to certain requirements and the vendor bears the burden of proof.

BEAR THE BURDEN

On the other hand, Sars’s right to conduct an audit of a taxpayer’s tax affairs is embedded in Chapter 5 of the TAA, which contains various enforcement tools ranging from verification to audit to criminal investigation. In practice, however, there seems to be difficulty in distinguishing between errant compliant taxpayers and errant criminal taxpayers.

The result is that a broadbrush approach to enforcement is emerging that is affecting the timing of VAT refund payments, with trends reminiscent of the findings from the erstwhile Nugent Commission.

MUSTS VS NEED NOTS

Section 190(1) of the TAA requires that Sars “must” pay a refund if a person is entitled to it together with interest thereon. However, section 190(2) provides that Sars “need not” authorise a refund until such time that a verification, inspection, audit or criminal investigation of the refund has been finalised. In other words, the subsection preserves Sars’s right to initiate and finalise an audit of a refund before the refund is paid out.

The trouble is that there is no prescribed time period

/123RF — RUDALL30 within which Sars is required to finalise any such audit activities. The TAA is silent on this aspect and the ValueAdded Tax Act, 1991 (VAT Act) merely provides that interest starts accruing on the outstanding refund if it is not paid within 21 business days from the date on which the particular VAT return was received

by Sars.

Even so, interest may be suspended in certain prescribed instances (for example, if a vendor has any outstanding tax returns or has not furnished its banking

details to Sars).

GENERAL AUDIT VS AUDIT OF THE REFUND

Notwithstanding that the audit must be “of the refund” before Sars is entitled to withhold payment thereof, section 190(2) of the TAA is often (erroneously) interpreted to mean that Sars is not required to pay a VAT refund if any aspect of that person’s tax affairs is under audit, until such time that the audit has been finalised.

This practice has coincided with a recent increase in

the use of special “stoppers” on the Sars system that block the payment of any VAT refund claims made by the vendor after the date on which an audit has been initiated, even if such subsequent VAT refund claims fall outside the period that is under audit.

This notion has also had the effect that VAT refunds are being withheld on a large scale where Sars is conducting an industry-wide audit as opposed to an audit “of the refund”.

Recent trends noted that support this notion include: whose VAT ● Vendors returns are frequently in a net VAT refund position will receive a verification request each and every time they submit a VAT return to Sars.

The VAT refund will not be paid out until the verification is finalised. This carries on for multiple tax periods without any indication that the vendor is able to build up a good compliance history that could relieve it from constant Sars scrutiny. ● The initiation of a VAT refund audit will in all likelihood mean payment of any subsequent VAT refund claims will automatically be withheld until the audit of the initial VAT refund is finalised.

When a vendor inquires with the Sars call centre, it is usually informed that a stopper has been placed on the system with no indication as to when the stopper will be

lifted or when the audit will be finalised. ● It has also been noted that a vendor will receive a notification of audit and a related request for relevant material in respect of the same VAT returns that were previously subjected to verification requests, even though the verifications were finalised and no adjustments were made.

IN SOME INSTANCES, AN AUDIT WILL BE CONTINUOUSLY EXTENTEND ● In some instances, an audit will be continuously extended to include an additional tax period each time the vendor submits a VAT return to Sars (for example, an audit may start off as relating to VAT refund “A to E” but will be extended to include VAT refund “F” the moment this VAT return is submitted).

DELAYED VAT REFUND CLAIMS

But VAT is a tax on the final consumer. By design, VAT is not intended to be a cost to business. It merely has a cash flow impact where goods or services are acquired by the vendor for taxable business CONTINUED ON PAGE 2

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BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX VAT audits a taxing process CONTINUED FROM PAGE 1 purposes as the vendor is entitled to claim the VAT back from Sars. VAT refund payments are needed to stimulate business activity, but where VAT refunds are continuously locked up in audit activities, the much-needed cash flow to business is delayed, sometimes for months on end. It is not surprising vendor frustration is mounting where VAT refund claims are constantly met with suspicion and intensely scrutinised at length.

The current lack of timeframes within which an audit must be concluded creates the impression of a lack of commitment to finalise audits, even where no indication of wrongdoing has been advanced (audits can be kept in abeyance seemingly for years without progression to any kind of end).

It seems a taxpayer’s only option is to seek recourse from the courts to compel Sars to finalise its audit within a reasonable period of time or to pay out any VAT refunds that do not fall within the scope of the audit.

In the recent matter of Rappa Resources (Pty) Ltd v C:Sars, the high court cautioned that “Sars cannot be allowed an indefinite time to complete an audit” and, accordingly, directed Sars to conclude the audits by no later than a particular date.

The Supreme Court of Appeal reinforced this judgment by declining Sars’s application for leave to appeal.

BALANCE OF AUDITS AND BUSINESS

The taxpayer may have won this round, but litigation is costly, lengthy and not without risk. It simply is not a feasible option available to all and, in some instances, vendors may not emerge intact on the other side. What is needed instead is a balance, in law, between Sars’s right to conduct an audit and a taxpayer’s constitutional right to conduct business. Clear and reasonable time frames need to be outlined and extensions should be the exception and only invoked when warranted.

It is welcoming to note that various stakeholders are currently engaging with the National Treasury and Sars in this regard. But until Sars’s powers in this area are curtailed and the balance restored, there will continue to be a tug of war between Sars and taxpayers on the payment of VAT refunds, with the vendor at a distinct disadvantage.

What’s needed for boom in African power projects

IPP procurement can succeed •if certain conditions are fulfilled Shamilah Grimwood-Norley Bowmans

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A businesses that have endured onoff rolling blackouts for the past 12 years are not alone in their power supply woes.

Nearly 80% of businesses across Africa suffered up to nine interruptions a month to their power supply between 2006 and 2016, according to the African Development Bank. Almost half of businesses maintain their own generation equipment to keep operating during blackouts, which occur for an average of 90 days a year, the World Bank says.

Adding insult to injury is the high cost of electricity for industry in Sub-Saharan Africa, at about $0.20 per kilowatt hour, which is four times higher than industrial rates in the developed world.

While African governments are acutely aware of the impact of energy insecurity on economic growth, they lack sufficie nt capital to invest in new power generation and network capacity.

The Programme for Infrastructure Development in Africa estimates the power sector in Africa needs an annual investment of $42bn across the supply chain, generation, transmission and distribution.

As a result, governments are increasingly looking to private sector investment in independent power producer (IPP) projects.

IPPs vs PPPs

IPPs are often referred to as “public private partnerships” (PPPs) given the offtake arrangements between the IPPs and the power utility, which is usually state owned or has significant state ownership.

Interestingly, recent largescale IPP procurement programmes have been procured outside the formal PPP regulatory frameworks, which generally entail the handover of the infrastructure assets built for the PPP to the procuring state authority at the end of the PPP term.

PPPs entailing significant private investment in capital assets are typically structured as build own operate transfer (BOOT), build operate transfer (BOT) or build transfer operate (BTO) concessions (or variations of these concession types), with

POWERING THE FUTURE

the mandatory handover of these assets occurring on expiry of the PPP term.

In countries where the power supply chain is still largely vertically integrated and the private sector is seeking reform that will ultimately see widespread privatisation of power generation assets and end-consumer choice of generation supply, the structuring of IPPs as PPPs where the IPP assets are transferred to the state does not make much sense.

Power generation is naturally competitive business and the ownership thereof should ideally be widely distributed, not monopolised by the state.

MISSED OPPORTUNITY

Transmission and distribution of electricity is a natural monopoly. Private ownership of network assets, particularly in developing economies which require expansive building out and strengthening of network capacity and improved interconnection, is not optimal given that the interconnected network system is a nationally strategic asset.

Where public funds are constrained, though, private investment in the network system undertaken on a PPP basis should be considered.

Although many governments across Sub-Saharan Africa

THE LITMUS TEST FOR INVESTMENT IS BANKABILITY, MEANING THE ABILITY OF THE PROJECT TO RAISE THIRD-PARTY DEBT have paid considerable attention to utility-scale IPP procurement in the past decade, no procurement of private sector investment in national network systems has been undertaken by governments in the region.

To my knowledge, no African jurisdiction has pursued the procurement of private sector investment in network services, through PPPs or otherwise, save very recently for Kenya, and this seems to be a missed opportunity.

Although Kenya launched the first of its IPP procurement programmes two decades ago, being the first

/123RF — NINEFOTO country in Sub-Saharan Africa to do so, it has only now commenced its first competitive procurement for the upgrade of its transmission system. If Kenya succeeds in banking the Kenya Transmission Project, it may be a game change for new investment in the African power sector.

BANKABILITY IS KEY

Given the capital-intensive nature of utility-scale infrastructure investment, private developers will be heavily reliant on third-party debt funding from financial institutions.

It is clear from the utilityscale IPP projects that have achieved “commercial close” in single buyer markets (being markets for utilityscale supply only to stateowned off-takers), that private investment in the form of shareholder equity and thirdparty debt can be leveraged for new power generation.

The litmus test for investment is bankability, meaning the ability of the project to raise third-party debt.

Third-party lenders want to be sure that the cash flows generated by the project (in the case of an IPP, the payments received for the electricity delivered or available to be delivered by it) from the utility off-taker will be sufficient to pay their costs, and that these cash flows are adequately protected against all project risks.

In the case of a transmission PPP, the cash flows will principally be the unitary charges received by the private transmission contractor for the network services made available by it to the

transmission system owner.

In IPP projects with state utility off-takers, a prerequisite for raising third-party debt is for host governments to protect IPPs from credit risk, specifically the risk of nonpayment by the off-taker.

Credit risk is a challenge for many African jurisdictions, where state utilities often have credit ratings that are subinvestment grade or close to subinvestment grade.

STRUCTURED APPROACH

Apart from government credit support where there is a clear or potential credit risk, host governments also need to pay attention to other critical factors for a successful IPP or PPP procurement.

These include a properly structured planning process (which requires unequivocal state sponsorship), a well-run and timely procurement process (adequately resourced) and a commercially reasonable pricing approach that allows for the recovery of the investment costs plus a reasonable return.

The procurement process must incorporate strict discipline around timelines and evaluation criteria, consistent and open engagement with bidders, and welldeveloped procurement documentation.

THE PROCUREMENT PROCESS MUST INCORPORATE STRICT DISCIPLINE AROUND TIMELINES AND EVALUATION CRITERIA

REASONABLE RATES OF RETURN AND RISK ALLOCATION

Pricing is crucial for successful implementation of IPPs or PPPs in single buyer markets.

The pricing parameters in the request for proposal document need to be aligned with pricing policy that supports rate-of-return or cost-ofservice tariffs to allow investors to cover their costs and earn a reasonable return.

In such markets, an IPP or PPP only works if the tariff methodology of the regulator supports rate-of-return or cost-of-service tariffs.

Most importantly, the regulator should not be allowed to reopen and review tariffs once the contract has been awarded. To be bankable, the off-take agreement should lock in a fixed term, fixed price and fixed price escalation, as well as commercially balanced risk allocation.

A rule of thumb for governments, in my view, is that an IPP should not be required to assume any risk the utility off-taker’s own generators do not bear in their own generation businesses.

IPPs should generally not be required to take on costs a state generator is entitled to recover from its customers.

That is a key principle African governments and investors should consider.

IPPs can be effectively leveraged in the African power generation landscape if they are properly planned, well run, transparent, properly priced and bankable.

Governments should consider exploring PPPs for transmission and distribution networks, which are at present a missed opportunity.

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BUSINESS LAW & TAX

Customs and excise disputes

The ins and outs of Sars and •alternative dispute resolution Rudi Katzke Webber Wentzel

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here are various mechanisms to resolve disputes with the customs and excise divisions of the SA Revenue Service (Sars). Here, we consider the alternative dispute resolution (ADR) procedure.

ADR is a formal procedure provided for in terms of chapter XA of the act, read with the rules for section 77I. Sars has discretion to decide whether or not a matter is appropriate for ADR. A potential applicant should carefully consider, in consultation with a customs and excise legal expert, whether to spend the necessary time and money to apply for ADR at all.

It requires a formal ADR application to be made to Sars within 30 days of being notified of the outcome of the appeal. Sars must, within 20 days of receiving the ADR application, inform the applicant whether the matter is appropriate for ADR and may be resolved by way of the procedures contemplated in the rules for section 77I. (Note that all references to “days” have a similar meaning to the ordinary concept of business days, but there is an excluded period between mid-December of one year and mid-January of the next year, as in the definition of “day” in section 77A of the act.)

The aggrieved person is not obliged to submit an internal administrative appeal and may directly institute judicial proceedings against Sars, subject to the prescribed time frames. (We will consider this mechanism in the final instalment of this series.) If the aggrieved person appealed, but their appeal was disallowed, they may also institute judicial proceedings against Sars.

In either case, Sars may

notify them that the dispute is appropriate for ADR within 10 days of receiving the relevant litigation notice. After that, the aggrieved person must advise Sars within 10 days whether they agree to proceeding with ADR. Whether an unsuccessful appellant applies for ADR, or a prospective litigant agrees with Sars to first proceed with ADR, the relevant aggrieved person must submit an ADR application to Sars under cover of form DA 52. This is not only required by law but is administratively important, because the reverse side of the DA 52 form contains the terms governing the ADR procedure.

Signing that form indicates the ADR applicant’s acceptance of those terms, so it is important to take careful note of them.

Those terms are also set out in Schedule A to Rule 77I. They cover aspects such as the distinction between ADR following the disallowance of an internal administrative

AN APPLICANT SHOULD CAREFULLY CONSIDER WHETHER TO SPEND THE TIME AND MONEY TO APPLY FOR ADR AT ALL appeal and ADR as an alternative to judicial proceedings; the obligations, objective and authority of the Sars facilitator appointed to manage the ADR process; and the rules for the ADR meeting.

It is crucial to ensure the ADR application is properly drafted and completed, including a supporting schedule setting out the detailed grounds for applying for ADR. These grounds should include the relevant background facts, an

AGREE TO DISAGREE

/123RF — ENDIG overview of the applicable statutory provisions or case law, and the applicant’s motivation why ADR is appropriate. The ADR application should also be supported by the relevant background documentation, including the Sars “decision” at issue (for example the appeal committee’s written disallowance of the appeal) and the most pertinent correspondence with Sars on the dispute.

Given these complexities, it is advisable for an aggrieved person in a customs and excise dispute to brief a legal expert timeously to: ● Advise them whether Sars is likely to deem the dispute to be appropriate for ADR; and ● If there is a reasonable prospect that Sars will deem it appropriate, to prepare the ADR application and submit it to Sars.

If Sars agrees to proceed with ADR, the legal expert should also be briefed to represent the successful applicant at the ADR meeting.

There they will have the opportunity to make oral submissions to the ADR facilitator and respond to any questions.

The Sars-appointed facili-

tator is in charge of proceedings at the ADR meeting. The aggrieved person must be personally present and may be accompanied by their chosen representatives (who should include their appointed customs and excise legal expert). The aggrieved person and the Sars representatives may, if the facilitator agrees, lead or bring witnesses to the ADR meeting.

At the conclusion of the meeting, the facilitator must record all issues that were resolved through the ADR process; any issue on which agreement or settlement could not be reached; and any other point they consider necessary. The facilitator must deliver a report to the aggrieved person and the Sars representative within 10 days after completion of the ADR process.

The facilitator may also, if requested at the start of the ADR process, make a recommendation at the conclusion of proceedings, if no agreement or settlement is reached between the parties.

From an evidentiary perspective, all representations made in the course of the ADR meeting are without prejudice. Any representation

made or document tendered in the course of the proceedings may not be tendered in any subsequent proceedings as evidence by any other party, subject to limited exceptions. Also, no person may subpoena any person involved in the ADR process to compel disclosure of any representation made or document tendered in the course of the proceedings (subject to the same limited exceptions) or subpoena the facilitator of the ADR proceedings to compel them to disclose any such representation made or document tendered.

The ADR procedure may have various outcomes. The first is that the dispute is resolved by agreement (Rule 77I.18), where Sars or the aggrieved person accepts, wholly or partly, the other party’s interpretation of the facts or the law applicable to the facts, or both. This is the best possible outcome, as it delivers some level of satisfaction to both parties and finalises the dispute.

The second is where the parties are, despite all reasonable efforts, unable to resolve the dispute by agreement, yet Sars is of the opinion that the circumstances

comply with the requirements for settlement in section 77M of the act (Rule 77I.19). This presupposes the aggrieved person has formally applied to Sars for the dispute to be resolved by compromising the disputed liability. (This mechanism is known as a settlement application, and it will be dealt with in the next instalment.)

In that case, the parties will attempt to settle the matter in accordance with the provisions of part C of chapter XA of the act (sections 77J to 77P).

The third possible outcome is no agreement or settlement is reached, or the ADR proceedings are terminated by the Sars facilitator on the basis of any of the specific grounds listed in paragraph 7(g) of Schedule A to Rule 77I. (Those grounds include the failure by any person to attend the ADR meeting or that the facilitator is of the opinion that the dispute cannot be resolved.)

If this third outcome arises, Sars must inform the aggrieved person of their further rights regarding the institution of judicial proceedings within 10 days of the conclusion or termination of the ADR proceedings.

Any agreement or settlement reached through the ADR process has no binding effect on any other matters relating to that aggrieved person that are not actually covered by the agreement or settlement, or any other person (Rule 77I. 22). Though it has no precedent-setting effect, ADR is still a less costly and time-consuming dispute resolution mechanism than litigation against Sars.

An aggrieved person should carefully consider, in consultation with a legal expert, whether to apply for ADR after an unsuccessful appeal or as an alternative to litigation. If there is a reasonable likelihood that Sars will deem the matter to be appropriate for ADR (based on prior experience of Sars’s stance in similar matters), it might well be worth pursuing it.

SA firms in China need to take note of new privacy law Peter Grealy & Cindy Liebowitz Webber Wentzel

Alex Roberts Linklaters (Shanghai) SA businesses with links to China need to be aware of the country’s recently passed Personal Information Protection Law, which comes into force in November 2021.

SA Revenue Service (Sars)

statistics show that China is SA’s main trading partner. In July 2021, imports from China accounted for the majority of SA’s imports (19.4%), while exports to China from SA accounted for the majority of SA’s exports (12.6%).

In addition, Chinese investment in the SA economy has been steadily increasing over the years.

Chinese organisations have injected funds into some of

SA’s key economic sectors such as energy and electricity and other infrastructure development initiatives. The relationship between the two countries is likely to be further strengthened in the immediate future after the China-SA Trade and Investment Roundtable, which took place in China in July 2021.

China’s laws and regulations are of significance to SA organisations that do busi-

ness with organisations in and from China. Of particular importance is a new privacy law which has been passed in China, the Personal Information Protection Law, which will come into force on November 1 2021. In many respects, the Personal Information Protection Law is similar to the EU’s General Data Protection Regulation and SA’s Protection of Personal Information Act. How-

ever, the Personal Information Protection Law contains some unique features.

SA organisations that fall in the categories below will need to consider the Personal Information Protection Law. We have included some key considerations, though the list is not exhaustive. ● It is unclear what type of companies will be classified as CII operators but they may include, for example, public

communication and information service providers; military suppliers and so on.

SA organisations that engage in trade relations with China or form part of a Chinese group of companies or have other business ties with China should be mindful of the compliance requirements contained in the Personal Information Protection Law, in light of the impending compliance deadline.

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BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

What next if you have been slow on Popia

SECURE SOURCES

media attention helps to ensure it will •notTheberecent easy to avoid liability once called out Zamathiyane Mthiyane Werksmans

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ith the attention on complying with the Protection of Personal of Personal Information Act No 4 of 2013 (Popia) by July 1 2021 having subsided and most of us having received and approved our fair share of consent notices, we consider the consequences, if any, for responsible parties as defined in the act, who have not as yet heeded the advice to comply with the act.

As a first point of call one usually considers the offences and penalties section of any legislation to ascertain the consequences of noncompliance. This holds true for Popia. In this regard, section 100 lists specific acts considered to be offences: ● Hindering or obstructing or unlawfully influencing the information regulator;

● Failing to comply with an enforcement notice; ● Lying under oath or failing to attend hearings; and ● Unlawful acts by responsible parties or third parties in connection with account numbers.

The act, in our view, takes a peremptory approach in obliging responsible parties to protect a data subject’s right to privacy by, inter alia, registering an information officer and processing personal information in terms of the eight conditions of lawful processing set out in the act.

However, on a review of the offences listed in section 100, a failure or omission to

THE NECESSITY OF AN INITIAL CONTRAVENTION OF THE ACT CREATES A LEGAL LACUNA FOR RESPONSIBLE PARTIES

comply with the substantive provisions of the act, including those that require responsible parties to collect personal information directly from a data subject or notify a data subject when collecting personal information, are not included in the listed offences in section 100.

The legislature may have identified the above gap in the act and attempted to rectify it through the inclusion of section 109. This section empowers the information regulator to impose an administrative fine in instances where a “responsible party is alleged to have committed an offence in terms of this act”.

As section 109 does not, as opposed to section 100, refer to specific sections in the act to which it applies, in our view, section 109 may be applicable to a contravention of any section of the Protection of Personal of Personal Information Act. Although section 109 appears to provide us with an

/123RF — OKSKAZ appropriate answer in response to the query on the consequences of noncompliance, section 109 is not without flaws. In this regard: ● The penalties set out in section 100 are criminal in nature and must, thus, be handed down by a court and are, in our view, more severe; ● The powers of the information Regulator are limited only to section 109. In terms of section 109 the information regulator may only impose a fine; ● However, to impose the fine or act in any manner in terms of section 109, the information regulator must first issue a responsible party an infringement notice; and ● The above infringement notice must “specify the particulars of the alleged offence”.

Thus, a responsible party must first have contravened

the act and a data subject must then bring the contravention to the attention of the information regulator. The regulator may then deliver the infringement notice with the necessary details of the contravention and then investigate the alleged offence and determine an appropriate fine.

Arguably, the necessity of an initial contravention of the act creates a legal lacuna for responsible parties. In this regard, insofar as a responsible party’s noncompliance with the act is never reported by a data subject, the responsible party may, arguably, escape the obligations imposed by the act and, in turn, the possibility of being levied with a fine.

However, section 89 of the act empowers the information regulator, at his/her own initiative, to assess whether or not a person is

processing personal information in accordance with the act. Whether or not the information regulator is resourced to conduct such investigations, deal with reported alleged contraventions, as well as initiate its own investigations without first receiving a request from, inter alia, a data subject to do so, remains to be seen.

However, taking into account the recent media attention the act has received and that consumers are more aware of legislation aimed at protecting their rights, a responsible party who intends to avoid liability on the basis that “I will never get caught” may find themselves on the receiving end of an infringement notice, followed by an administrative fine but also a possible sentence of imprisonment. ● Reviewed by Neil Kirby.

CONSUMER BILLS

SA laws should not be made the IFRS way

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s the financial affairs of corporations become increasingly complex and cross border, there is increasing reliance on international rules. The question is to what extent these rules can be imposed on an SA company.

A good, and bad, example is the IFRS Foundation.

According to its website this is a not-for-profit, public interest organisation established to develop a single set of high-quality, understandable, enforceable and globally acceptable accounting standards. The IFRS standards are set by the International Accounting Standards Board. If you have read the IFRS standards you might vehemently disagree with the word “understandable”. IFRS 17 discussed below is 100 pages of arcane language. But what this article is about is the other word — “enforceable”.

Publicly listed companies

PATRICK BRACHER and many financial institutions are legally required to publish their financial reports according to the IFRS accounting standards. The Companies Act requires it. The Insurance Act requires insurers to prepare their annual financial statements in accordance with these standards.

The Accounting Standards Board is a group of experts based in London said to have recent practical experience in setting accounting standards and broad geographical diversity. The standards are constantly under review but you are unlikely to know that a

revision is being undertaken until the amended standard is published.

Take for example IFRS 17 on insurance contracts, which was amended in June 2020 and is now being imposed on SA insurers.

There are two difficulties here besides the worldwide problem of enormous overregulation.

DIFFICULTIES

SA is a consultative democracy and laws affecting the public are not supposed to be enacted without consultation. The IFRS standards have the force of law because they are introduced into SA legislation and they have tax consequences for those who are subject to the rules.

There is no public consultation before any new or amended rule is introduced by the standards board. Even now, if you look for IFRS 17 you will find it

described as a “project in progress” but with no consultation involved.

Second is the problem of access to the law. If you want to read any particular standard you need to be registered on the IFRS site, provide an email address and sign in using a password.

If you want the premier products in the form of IRFS books you need to buy them.

A set of the IFRS standards issued at January 1 2021 will cost you about R1,600. The major publication bundle costs about R6,000.

CONSTITUTION

We have already moved into a situation where law is no longer found in a gazette.

Local regulatory standards are published on the website of the regulatory authorities.

Although they are difficult to find (I was looking for a specific law recently and was offered 8,097 possibilities on the regulator’s website) they

are available free of charge and without being a subscriber.

No matter how geographically diverse the standards board is, they cannot know what is happening in the law of the many countries in which the rules are imposed.

For instance, in IFRS 17 the definition of what is an insurance contract differs from the more progressive definition in the SA Insurance Act. This leads to a tussle between insurers and auditors as to how to account for some of their insurance arrangements.

According to section 43 of

THERE IS NO PUBLIC CONSULTATION BEFORE ANY NEW OR AMENDED RULE IS INTRODUCED BY THE STANDARDS BOARD

the SA constitution, the legislative authority of the national sphere of government (which includes laws governing financial institutions) is vested in parliament, which can assign legislative powers to another legislative body in SA but not to a committee in London.

There is no doubt the IFRS standards promote international consistency and are valuable benchmarks for financial institutions, listed companies and others who rely on them. There needs to be a method, however, to ensure they are understandable, available without restriction or cost, subject to public comment and compatible with SA law if they create binding obligations here.

That’s what the constitution demands. ● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

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BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

Which court handles credit default issues?

COURTING SUCCESS

Appeal court clarifies forum of choice for legal •proceedings against delinquent customers Tracy-Lee Janse van Rensburg Werksmans Attorneys

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t is common practice for consumers to take up mortgages and purchase motor vehicles on credit from financial institutions. But what happens if, somewhere along the line, these consumers default on their repayment obligations to such financial institutions?

Typically, legal proceedings will be instituted, in terms of which orders for the repayment of the outstanding indebtedness or leave to specially execute the mortgaged properties will be sought by such institutions.

This all seems simple.

However, the question which has recently come under scrutiny is in which forum such legal proceedings should be instituted?

Ordinarily, it is the financial institution (as plaintiff or applicant, as the case may be) who elects the relevant court with competent jurisdiction within which to institute legal proceedings.

Our courts have had to consider whether in circumstances where a financial institution has elected to institute proceedings in a high court, such high court may refuse to hear the matter on the basis that another court has concurrent jurisdiction, specifically where (1) the high court and a magistrate’s court both have jurisdiction in respect of the same proceedings, or (2) where the main seat of a division of the high court and a local seat of such division both have jurisdiction in respect of the same proceedings.

In addition, a question has been raised as to whether a financial institution has an obligation to consider the cost implication and access to justice of financially distressed persons when electing a particular court of competent jurisdiction within which to institute proceedings.

These matters, among others, came up for consideration by the Supreme Court of Appeal (SCA) in the judgment of The Standard Bank of SA Ltd and Others v Thobejane and Others and The Standard Bank of SA Ltd

v Gqirana NO and Another.

Given the outcome of this judgment, consideration of the above factors will be of relevance to financial institutions when instituting legal proceedings against delinquent customers.

Relevant matters in issue before the Gauteng division of the high court, Pretoria, and the Eastern Cape division of the high court, Grahamstown, meanwhile, related to claims brought by financial institutions against customers (ie debtors) due to the nonpayment of their indebtedness.

The SCA unsurprisingly set aside the orders. First, the judgment of the Gauteng court, which held that the high court has the authority to

A HIGH COURT HAS NO POWER TO REFUSE TO HEAR A MATTER BEFORE IT WHICH COULD HAVE BEEN BROUGHT IN THE MAGISTRATE’S COURT decline to hear a matter, despite such matter being within its jurisdiction and having been properly brought before it, purely on the basis that another court has concurrent jurisdiction is incorrect.

As correctly pointed out by the SCA, this flies in the face of established case law authority indicating the contrary. A high court has no power to refuse to hear a matter before it which could have been brought in the magistrate’s court.

Furthermore, the SCA confirmed that a plaintiff who initiates litigation proceedings has the right, as dominus litis, to decide in which court he or she wishes to enforce his or her rights. There is simply no principle pursuant to which a high court may refuse to hear a litigant or to entertain proceedings in a matter within its jurisdiction and properly placed before it.

The judgment of the Eastern Cape court which sought to summarily oust the high court’s jurisdiction to hear matters relating to the

National Credit Act was also found by the SCA to be wrong. The SCA stated there is a strong presumption against an ouster of the high court’s jurisdiction and the mere fact a statute vests jurisdiction in one court is insufficient to create an implication the jurisdiction of another court is ousted.

With reference to the Gauteng Court’s judgment, the SCA held it is longstanding law that when a high court has a matter before it which could have been brought in a m,agistrate’s court, the high court has no power to refuse to hear such matter. The high court does not have the inherent jurisdiction to refuse to hear a litigant in a matter within its jurisdiction, properly brought before it.

This similarly applies where there is a jurisdictional overlap in divisions of the high court that have local seats and main seats, and where concurrent jurisdiction is enjoyed by a local seat within its area of jurisdiction, and the main seat, which has jurisdiction over its entire province.

The SCA was further of the view there was no abuse of process when a plaintiff (including a bank) instituted proceedings in the high court in circumstances where they deemed it more favourable to sue out of such court.

The SCA accordingly confirmed it is beyond the reach of a court to refuse to hear any matter falling within its jurisdiction.

In respect of the Eastern Cape Court’s judgment, the SCA found that as there is a strong presumption against the ouster of a high court’s jurisdiction, the mere fact that a statute vests jurisdiction in one court is insufficient to imply the jurisdiction of another court is thereby expunged.

Following an analysis of the legislative provisions relied on by the Eastern Cape court in finding that the magistrate’s courts enjoyed exclusive jurisdiction as the court of first adjudication in respect of National Credit Act matters, the SCA found there is no indication of an implied ouster of jurisdiction within

/123RF — TOLIKOFFPHOTOGRAPHY the confines of the act and that the relevant provisions of the Magistrates Courts Act are premised on concurrent jurisdiction and as such do not carry with it an implication the jurisdiction of the high court is correspondingly decreased.

The SCA further held that the National Credit Act expressly recognised the concurrency of the jurisdictions of the high court and the magistrates’ courts and was accordingly of the view that the Eastern Cape court’s judgment was wrong and fell to be set aside.

A PLAINTIFF WHO INITIATES LITIGATION PROCEEDINGS HAS THE RIGHT TO DECIDE IN WHICH COURT HE OR SHE WISHES TO ENFORCE HIS OR HER RIGHTS In light of the SCA’s findings, the orders of the Gauteng court and the Eastern Cape court were replaced with the following orders: (1) The high court must entertain

matters within its territorial jurisdiction that fall within the jurisdiction of a magistrate’s court if brought before it; (2) the high court is obliged to entertain matters that fall within the jurisdiction of a magistrate’s court because the high court has concurrent jurisdiction; (3) the main seat of a division of a high court is obliged to entertain matters that fall within the jurisdiction of a local seat of that division because the main seat has concurrent jurisdiction; and (4) there is no obligation in law on financial institutions to consider the cost implications and access to justice of financially distressed people when a particular court of competent jurisdiction is chosen in which to institute proceedings.

In view hereof, a high court may not decline to hear a matter which is within its jurisdiction and is properly brought before it.

National Credit Act matters are not the exclusive purview of the magistrate’s court as the court of first adjudication, as the high court enjoys concurrent jurisdiction. The established position that it is for the plaintiff (in legal proceedings) to choose

a court of competent jurisdiction remains intact and, as such, there is no abuse of process where proceedings are instituted in the high court, where the alternative exists of suing out of a magistrate’s court.

Importantly, financial institutions are not saddled

THE SCA CONFIRMED IT IS BEYOND THE REACH OF A COURT TO REFUSE TO HEAR ANY MATTER FALLING WITHIN ITS JURISDICTION with a legal obligation to consider the cost implications and access to justice of financially distressed people when determining the appropriate forum within which to initiate legal proceedings.

Accordingly, the findings of the SCA go a long way in clearing up the position for, inter alia, financial institutions, in respect of the institution of legal proceedings in the forum of their choice against defaulting customers.

7

BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

Who will tax changes hurt?

and mining among those that will bear •theAgriculture brunt of proposal to limit assessed tax losses Kristel van Rensburg & Simon Weber ENSafrica

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he National Treasury published its draft Taxation Laws Amendment Bill with accompanying explanatory memorandum on July 28.

By now it is well known that the draft bill contains a fairly radical proposal: section 20 of the Income Tax Act, 1962 will be amended to limit the amount of an assessed tax loss that may be set off against taxable income.

The proposal is to limit the assessed loss to 80% of the “taxable income” derived in any one year of assessment.

For example, a corporate taxpayer with taxable income of R500 and an assessed tax loss carried over from previous tax years, will only be able to set off a maximum of 80% of that loss against its taxable income (thus, a maximum of R400 will be allowed as a set-off, regardless of whether the actual assessed tax loss is much greater). The effective date is proposed as April 1 2022.

Treasury has explained the rationale for the amendment as follows:

● The tax base will be broadened and, concomitantly, the corporate tax rate reduced.

Readers are reminded that the corporate tax rate will be reduced to 27% (from 28%) with effect from April 1 2022.

The question arises whether the planned one percentage point reduction in the corporate income tax rate will sweeten the deal. ● Corporate income tax collection is volatile. Thus, limiting assessed losses will secure a steady stream of tax revenue for the fiscus. ● The amendment will aid in curbing tax avoidance.

What has not been analysed in detail is the specific impact this proposed amendment will have on specific sectors of the economy. The amendment will not result in a minimum tax for all corporate taxpayers.

However the change will be material to many cash-

THE AGRICULTURAL SECTOR IS PARTICULARLY SUSCEPTIBLE TO EXTERNAL FACTORS, SUCH AS DROUGHT

FRUIT OF FARM LABOURS

strapped businesses that have weathered the economic gloom. This proposal could be particularly adverse to start-ups, micro and small businesses, and companies in the agricultural and mining sectors.

IMPACT ON THE AGRICULTURAL SECTOR

The agricultural sector is of particular concern. Agriculture is by its nature cyclical: yields span over many years.

For example, fruit orchards may take up to eight years to bear fruit and to start generating income. The set-off of assessed tax losses from one year to the next aids in financing much-needed investment for the next cycle.

Thus, limiting the set-off of assessed losses against taxable income earned could severely impact further investments and exacerbate the cash flow constraints already experienced in the development years.

This is likely to be particularly harsh to new and emerging farmers.

Aside from the seasonal nature of yields, the agricultural sector is particularly susceptible to external factors, such as the drought that has plagued the Northern

/123RF — AKSAKALKO Cape for the past couple of years. We understand from our agricultural clients that the proposed amendment will be adverse to food security and may lead to an increase in food inflation.

IMPACT ON THE MINING SECTOR

Not too dissimilar from agriculture, the volatility of the price of commodities also makes the mining sector vulnerable to the proposed limitation of setting off

assessed losses. The sharp increase in commodity prices and exports over the past year, for example, has secured a windfall for the

THE CHANGE WILL BE MATERIAL TO CASH-STRAPPED BUSINESSES THAT HAVE WEATHERED THE ECONOMIC GLOOM

state’s coffers in both corporate tax and mineral royalties.

The cycle won’t last forever.

As the Treasury recognises, the collection of corporate income tax is volatile. This is especially the case in SA, where the agricultural and mining sectors contribute significantly to the economy.

It will be interesting to see what submissions are made in relation to this proposed amendment and whether it is enacted into law in its current form.

When CCMA commissioners go rogue Johan Botes Baker McKenzie Employers and employees rely on employment tribunal commissioners to discern between appropriate and inappropriate conduct, and to remedy the incorrect classification and consequences attached to employee conduct.

If an employee committed misconduct, the commission is tasked with considering the facts afresh and determining the appropriate sanction in deserving cases.

Faith in the statutory dispute resolution system hinges on the sound exercise of judgment by commissioners every day. Our legal system even tolerates the fact that a commissioner may occasionally get it wrong. But what happens when the commissioner is the one committing the misconduct?

This was the interesting, if disturbing, question posed to the labour court in the recent matter of Glencore Operations SA (Pty) Ltd v CCMA & others (JR1963/19, delivered

June 28 2021). The employer implored the court to review and set aside an arbitration award that held that the company unfairly dismissed an employee, and that it ought to reinstate him. Furthermore, the business sought to review the conduct of another commissioner who became involved in the matter.

While it is common to cite the tribunal commissioner who issued the award or ruling in review proceedings, it is quite uncommon for other commissioners to find themselves dragged before court in review applications (where they did not preside over a matter).

The scene that played out at the employment tribunal was the employee failed to

FAITH IN THE STATUTORY DISPUTE RESOLUTION SYSTEM HINGES ON THE SOUND EXERCISE OF JUDGMENT BY COMMISSIONERS

arrive for the arbitration at the scheduled time. The presiding commissioner then (correctly and lawfully) dismissed the matter based on the employee’s absence. As the employer and trade union representatives exited the tribunal, dismissal ruling in hand, the procrastinating employee arrived for the arbitration. Another commissioner, Commissioner N, overheard the employee remonstrating and then “ordered” the parties (including the presiding commissioner) back into the venue.

For reasons not clear to the casual observer, the presiding commissioner disregarded his dismissal ruling and proceeded with the arbitration!

The review court dealt with the legal technicalities relating to the tribunal’s lack of jurisdiction to determine the matter after the commissioner had issued a ruling dismissing the employee’s dispute.

The judgment reflects on various higher court utterances on this issue.

The high-water mark for the employee appears to be that, at best, he could have referred the matter to arbitration again, with the ruling having the effect akin to striking the matter off the roll or having it withdrawn.

COMMISSIONERS SHOULD BE HELD IN HIGH REGARD BY USERS OF THE EMPLOYMENT TRIBUNAL’S SERVICES The vexed issue was the conduct of Commissioner N who directed the parties to proceed with the arbitration.

Allowing parties not ceased with the dispute to interfere undermines the integrity of the statutory dispute resolution process.

As found in most organisations, the CCMA has various levels of functionaries who exercise oversight over the presiding commissioners.

One can accept there should be a level of quality control to limit the risk of a rogue commissioner going off-piste. But to allow a commissioner overhearing a discussion between parties to interfere and direct another commissioner to reconsider his findings smacks of misconduct.

Commissioners should be held in high regard by users of the employment tribunal’s services. While there will always be winners and losers in dispute resolution, the CCMA’s function is undermined by commissioners who conduct themselves as a law unto themselves.

Tribunal commissioners are bound by the statutory Code of Conduct for Commissioners. Interfering in an already determined dispute that was not before you, strikes me (and the court) as conduct inconsistent with the code. Commissioners are required “… to act with honesty and conduct in a manner that is fair to all CCMA users and the public at large”.

Had Commissioner N, overhearing the matter,

advised the employee to contact the CCMA, his trade union or legal representative to seek advice on the matter, the employer may not have enjoyed such advice but would hardly have been able to cry foul. One may have even understood if the commissioner advised the employee to bring a fresh application for arbitration.

But in directing another commissioner to rehear the matter under circumstances where the tribunal lacked jurisdiction, he clearly overstepped the mark.

The court ordered the director of the CCMA to investigate the conduct of Commissioner N. On these facts, one could probably also question whether the presiding commissioner should be reprimanded for allowing his colleague to direct him into rehearing the matter.

Ensuring the functionaries empowered to resolve our labour disputes act beyond reproach is critical to our quest for fair labour practices, labour peace and workplace stability in our jurisdiction.

8

BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

Remember the taxman when liquidating

END OF THE ROAD

SARS’S RIGHTS IN TERMS OF THE TAA

What taxes distressed businesses are liable for •when they have begun liquidation proceedings Ntebaleng Sekabate ENSafrica

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n terms of the statistical release on liquidations and insolvencies published by Stats SA in July, there was a 21.5% increase in the number of liquidations in the first seven months of 2021 compared with the first seven months of 2020. This has not deterred the SA Revenue Service (Sars) from collecting outstanding tax debts from defaulting taxpayers.

Generally, when a business is in financial distress, it is not uncommon that the first financial obligations that fall by the wayside are its tax obligations. This is unsurprising as owners likely prioritise payments to employees, suppliers and other creditors to keep their operations afloat.

However, this is not an advisable strategy, as debts to Sars accumulate interest and, where applicable, administrative noncompliance penalties that accumulate monthly.

In addition, where a taxpayer understates its tax liabilities, Sars may impose understatement penalties that range from 10% of the tax debt in a standard case to 200% where there is intentional tax evasion on the part of the taxpayer.

There are several tax

considerations that need to be kept in mind by taxpayers when the business is in financial distress and is no longer able to operate or once liquidation proceedings have commenced and compromises are entered into with creditors.

CESSATION OF TRADE

In the case of a taxpayer whose business is in distress and is no longer able to operate, and where such a taxpayer has an accumulated assessed loss which would otherwise be available to be carried forward to subsequent years of assessment and be offset against any taxable income in such subsequent years of assessment, the accumulated assessed loss would be forfeited in the event that the business does not trade for a tax year.

Should a taxpayer fall on hard times and be unable to carry on its trade for a tax year, the taxpayer would forfeit its accumulated tax losses

OWNERS PRIORITISE PAYMENTS TO EMPLOYEES, SUPPLIERS AND CREDITORS TO KEEP THEIR OPERATIONS AFLOAT

and should the taxpayer resume its trade at a later date, any profits would be fully taxable.

SARS’S RIGHTS IN A LIQUIDATION

Once a taxpayer undergoes compulsory liquidation or a voluntary liquidation, Sars would be a preferent creditor in the liquidation proceedings and would be entitled to receive distributions in preference to concurrent creditors.

TAX IMPLICATIONS OF DEBT COMPROMISE

The process of liquidation itself may trigger adverse tax implications for the taxpayer undergoing liquidation. It is highly likely that most, if not all, of the debts of the taxpayer undergoing liquidation would be compromised, and creditors would receive only a portion of the amounts owed to them by the taxpayer. The compromise of the debts would trigger the debt concession or compromise provisions set out in section 19 and paragraph 12A of the Eighth Schedule of the Income Tax Act, 1962.

Section 19 of the Income Tax Act provides for the tax implications which would arise for a taxpayer where a debt owed by such taxpayer is cancelled, waived, extin-

per Interpretation Note 91 published by Sars.

/123RF — STEVANOVICIGOR guished or capitalised as envisaged in that section, and such debt funding was used by the taxpayer to fund taxdeductible expenditure (ie operational expenditure).

Where a taxpayer is released from the obligation to make payment of a debt (or part of such debt) that was used to fund tax deductible expenditure, the amount of the debt in respect of which the taxpayer has been relieved of the obligation to make payment would constitute a recoupment in the taxpayer’s hands. This would give rise to a tax obligation in the taxpayer’s hands where the taxpayer does not have an accumulated assessed loss.

Similarly, paragraph 12A of the Eighth Schedule to the Income Tax Act provides for the tax implications in the instance where a taxpayer is relieved of the obligation to make payment of a debt or part of a debt, and the debt funding was utilised to acquire capital assets.

Paragraph 12A of the Eight Schedule to the Income Tax Act makes provision for any amount of debt utilised to fund capital or allowance assets, which is reduced or forgiven, to be applied first to

reduce the base cost of the capital asset or allowance asset, and thereafter provides for the triggering of capital gains tax once such base cost has been reduced to zero.

There are several exemptions to the application of section 19 and paragraph 12A of the Eighth Schedule to the Income Tax Act, which are set out in section 19(8) and paragraph 12A(6) of the Eighth Schedule. The exemptions provided by section 19(8) and paragraph 12A(6) of the Eighth Schedule to the Income Tax Act should therefore be kept in mind by a taxpayer who embarks on liquidation proceedings, whether voluntarily or compulsorily.

Where the debt concession or compromise provisions set out in section 19 and paragraph 12A of the Eighth Schedule to the Income Tax Act are applicable to debts that are compromised as part of the liquidation process, any additional tax obligations that arise as a result of such liquidations would be triggered on the date of confirmation of the final liquidation and distribution account.

It must be taken into account in the final liquidation and distribution account,

Recently, Sars has exercised its powers in terms of section 177 of the Tax Administration Act, 2011 (TAA), which provides that a senior Sars official may authorise the institution of proceedings for the sequestration, liquidation or winding up of a person for an outstanding tax debt. The provisions of section 177 of the TAA were invoked by Sars against a taxpayer in the case of Commissioner for the SA Revenue Service v Zikhulise Cleaning Maintenance and Transport Services. In this case, the taxpayer was indebted to Sars in an amount in excess of R122m and had repeatedly failed to honour its commitments to make payment of its outstanding tax debts, despite submitting returns reflecting its tax obligations and undertaking to make payment.

Sars was granted leave to institute liquidation proceedings against the taxpayer in terms of section 177 of the TAA. In a media release dated October 16 2020, Sars commented that the judgment is precedent-setting and empowers Sars to act decisively against taxpayers who attempt to circumvent their fiscal obligations by using court processes to restrict Sars’s ability to collect outstanding debt.

Sars commissioner Edward Kieswetter said “Sars will act within the law and will pursue without fear or favour any taxpayer who is bent on evading their legal obligations”.

Sars is committed to collecting outstanding tax debts and will not be deterred from collecting such tax debts by instituting liquidation proceedings against defaulting taxpayers. Taxpayers should keep in mind the applicable tax considerations upon experiencing financial constraints and upon embarking on liquidation proceedings.

Property: environmental duties apply to all Gary Rapson & Tendai Bonga Webber Wentzel Landlords, landowners and property managers often overlook their environmental duty of care obligations, which attracts significant environmental liability risks.

Operators in the real estate sector routinely deal with a slew of challenges, related but not limited to construction defects or delays, injuries to tenants and liability claims due to property damage.

Landlords, landowners, and property managers, however, typically overlook

their environmental duty of care obligations in this respect, which attracts liability risks arising from environmental pollution or noncompliance events at their owned and/or managed properties.

A common misconception is that the statutory duty of care obligations, applicable in terms of both the National Environmental Management Act 107 of 1998 and the National Water Act 36 of 1998, do not extend to landowners, landlords and property managers, given that none of these parties is typically involved in the dayto-day running of their tenants’ businesses and are

naturally not involved in the management of potential and actual environmental pollution or noncompliance.

However, the reality is each of these actors carries a degree of legal responsibility, despite the arm’s-length relationship with tenants, due to the notoriously wide scope of the duty of care statutory framework.

Regulators frequently issue enforcement action, most commonly in the form of directives, to landowners, landlords and property managers for breach of duty of care obligations, following an environmental contravention committed by a tenant.

Failure to comply with a directive is a criminal offence, in which case regulators may elect to remediate the environmental harm and claim the related costs proportionally from the relevant party or parties.

The material risk of (personal) director liability in this context presents a particularly strong case for landowners, landlords and property managers to comply with their duty of care obligations, not to mention the associated reputational impacts, among other considerations.

Landowners, landlords and property managers must therefore take reasonable

steps to discharge their respective duty of care obligations — even more so in instances where tenants conduct high-risk business activities. These could include the production and or storage of hazardous substances, activities resulting in the generation of noxious discharges or atmospheric emissions, or the use of large quantities of harmful agrichemicals or fertilisers (in the case of agricultural tenants), all of which typically carry environmental pollution risks.

The manner and extent of the measures which must be employed by landowners, landlords and property man-

agers in this context must be determined on a case-bycase basis.

In each instance, they should consider the nature of the relationship between each of these parties (and the tenant), as well as the manner of the business activities conducted at the relevant property. This requires taking a balanced approach, combining practical and contractual measures that are tailored to ensure each party navigates and adequately complies with the relevant duty of care landscape, while avoiding the associated and inherently significant environmental liability risks.

10

BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

It takes two to tackle mental health trouble

ON-THE-JOB OVERLOAD

Employers and employees both have responsibilities when workplace performance is affected Justine Del Monte Caveat Legal Panel Member

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here has been a marked increase in employers seeking legal advice on how to lawfully and fairly deal with employees suffering from mental health illness, which is negatively impacting on their behaviour or performance.

While mental healthrelated issues in the workplace are not new, the stresses of the pandemic and the isolation of working from home have exacerbated existing conditions, and in other instances resulted in new diagnoses such as anxiety and depression.

Employees suffering from mental health issues often do not disclose them to their employers for fear of discrimination. Often the condition comes to light only when the employer seeks to discipline the employee for misconduct or to address their poor performance.

It’s often not appreciated that, in the employment law context, mental illness can trigger the operation of a number of different rules and procedures. For example, and depending on the circumstances of each case, it could trigger the rules relating to ill health or incapacity as a result of ill health, or even the rules relating to poor performance and misconduct.

Because of this overlap, it is

A HEALTHY, HAPPY AND ULTIMATELY PRODUCTIVE WORKFORCE IS THE DESIRE OF ALL EMPLOYERS not always clear how employers should proceed.

Where an employee alleges that their unsatisfactory performance is due to mental illness, the employer would not be acting unreasonably to request proof of

this from the employee in instances where there is no evidence of the employee suffering from such condition prior to the performance investigation.

If the employee fails to produce any evidence of their own when called on to do so, I propose that, unlike in instances of misconduct where the employer is permitted to proceed without further investigation, there is some obligation on the employer to initiate its own investigation into the existence of a mental illness.

Should this investigation fail to produce any reasonable evidence of an existing condition, the employer would be justified in continuing with the dismissal process provided that it has complied with Items 8 and 9 of the Code of Good Practice: Dismissal, found at Schedule 8 to the Labour Relations Act 66 of 1995.

Where the investigation returns evidence of a psychological condition and that such condition has an effect

/123RF — BESTDESIGN36 on the employee’s ability to satisfactorily perform the functions for which he or she was employed, the employer would be advised to continue in accordance with Items 10 and 11 of the code.

A healthy, happy and ultimately productive workforce is the desire of all employers, but this can be achieved only with the commitment and constructive participation of both parties. Employers will be well served by investing in creating a work culture that does not promote “presen-

THE STRESSES OF THE PANDEMIC AND THE ISOLATION OF WORKING FROM HOME HAVE EXACERBATED EXISTING CONDITIONS

teeism”, is devoid of the stigma associated with mental illness, is transparent in how it deals with cases of potential employee capacity, and maintains the strictest confidentiality in relation to an employee’s personal or medical information.

Employees have an equally important part to play, and this includes reporting difficulties as soon as they arise as well as actively and constructively participating in any investigation which the employer may initiate.

Comesa commission takes a stronger line Burton Phillips & Elisha Bhugwandeen Webber Wentzel On September 6 the Comesa Competition Commission issued its first fine for failure to notify a transaction to the commission within the prescribed time under Article 24 (1) of the Comesa Competition Regulations of 2004.

The fine was imposed in relation to the proposed acquisition by Helios Towers Ltd of the shares of Madagascar Towers SA and Malawi Towers Ltd. The Committee Responsible for Initial Determinations (CID) imposed a fine of 0.05% of the parties’ combined turnover in the common market in the 2020 financial year.

In terms of the regulations, a party to a notifiable merger must notify the commission in writing of the proposed merger as soon as it is practicable but no later than 30

//123RF — ANTARTIS days of the decision to merge.

In this instance, the commission considered the decision to merge as occurring on the date that the share sale and purchase agreement was signed. The agreements were

signed on March 23, but the commission was only notified of the merger on July 2.

Though the commission had issued a notice in 2020 indicating that interim measures were in place as a result

of the Covid-19 pandemic, including a slight relaxation of the 30-day rule if the merger parties engage with the commission timeously, it is not clear if these measures are no longer in place, or if the parties did not engage the commission early enough.

It is important to note that the CID considered mitigating factors when determining the penalty. It noted that the maximum penalty of 10% was not applicable since the breach did not result in any loss or harm in the market, and that the parties co-operated with the commission and had no record of contravening the regulations. The commission emphasised that this does not impact its review of the transaction, which is ongoing.

Earlier this year, in a podcast discussion with Webber Wentzel, acting director and CEO of the commission Dr Willard Mwemba

signalled a warning to firms operating in the Comesa Common Market that the commission will adopt a stricter stance to ensure compliance with competition laws in the region.

Since the commission began its operations almost 10 years ago, it has followed a soft enforcement approach, focusing on advocacy and raising awareness within the business community.

The imposition of this fine indicates the commission is sharpening its enforcement activities and that businesses operating in the common

SINCE THE COMMISSION BEGAN OPERATIONS 10 YEARS AGO, IT HAS FOLLOWED A SOFT ENFORCEMENT APPROACH

market must be aware of, and apply, the applicable merger control and restrictive business practice laws, or risk facing harsh enforcement action.

The commission’s registrar said the commission wishes to remind undertakings in the common market to be cautious of the prescribed timeline for notifying mergers.

In instances where parties wish to acquire businesses or expand operations in Africa, regulatory requirements, such as deadlines for submitting merger filings, must be flagged in the early stages of a potential transactions.

Such factors may impact several aspects including the suspensive conditions, proposed closing dates and the conduct of the merger parties until such time as the transaction has been approved by the relevant competition regulator.

11

BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

Can unjabbed be barred from venues?

NEEDLE OR NOT?

The rights of the unvaccinated must be weighed •against the interests of public health amid pandemic Dario Milo, Lavanya Pillay & Bernadette Lotter Webber Wentzel

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he SA government may introduce pass“vaccine ports”, following moves by authorities in other jurisdictions, and the limitation of constitutional rights is arguably justifiable.

On September 12 2021, President Cyril Ramaphosa announced that the government will be “providing further information on an approach to vaccine passports, which can be used as evidence of vaccination for various purposes and events”.

This followed an announcement by sport, arts & culture minister Nathi Mthethwa, that South Africans will have to be vaccinated to be allowed into sporting arenas and other entertainment venues.

There had also been an earlier statement by health minister Joe Phaahla, speaking to the National Council of Provinces, that the use of public amenities may be limited to those who have been vaccinated.

Deputy President David Mabuza has also said that “if we so desire to return to our stadiums, to our theatres, to our concerts, to our fashion shows, it lies with us to go out and mobilise our people, our communities, to vaccinate”.

He also said “a vaccinated nation is what it will take to again open the stadiums for the popular Soweto derby we

know, our Cape Town Jazz Festival, to go back to Macufe, the Joy of Jazz, the Durban July”.

Countries around the world have been grappling with the issue of whether access to public amenities and venues such as restaurants, bars, stadiums, cinemas and even liquor stores can be restricted for the unvaccinated.

New York City requires that all people over the age of 12 show proof of at least one dose of a Covid-19 vaccine to access indoor dining, indoor fitness or indoor entertainment facilities.

On September 9 2021, President Joe Biden announced vaccine requirements for federal employees

PUBLIC INTEREST IS A CONSIDERATION OUR COURTS USE TO BALANCE COMPETING INTERESTS AND RIGHTS that would affect as many as 100-million people in the US, where mandatory Covid-19 vaccinations have withstood the scrutiny of the courts in at least two cases.

In Indiana, the court refused to block Indiana University from implementing a vaccine mandate when students return this year. In Texas, the court dismissed a challenge by hospital

employees to a policy that required them to be vaccinated as a condition of continued employment. The court’s reasons included that vaccine mandates do not violate public policy.

France has implemented a Covid-19 pass, which demonstrates proof of vaccination or a recent negative Covid-19 test to allow entry into movie theatres, museums, theme parks, restaurants, cafes, visiting a hospital and for all passengers on domestic flights and longdistance trains. From the end of September, these requirements will apply to all people over the age of 12.

Employees who are required to produce a pass but fail to do so can be suspended without pay.

France’s Constitutional Council has accepted that Covid-19 regulations represent a “balanced trade-off” between public health concerns and personal freedoms.

Other countries have taken a different approach.

For example, UK secretary of state for health and social care Sajid Javid announced on September 12 2021 that plans for an England vaccine passport have been ditched for the time being. According to earlier proposals, people would have been required to show proof of double vaccination or a negative Covid-19 test to enter crowded events.

Restricting access to public spaces or employment to those who have been vaccinated raises important and

/123RF — SSILVER complex constitutional questions. Such a restriction may be imposed directly on individuals by government through legislation, or legislation may be enacted to empower public venues to lawfully restrict entrance to those who can demonstrate they have been fully jabbed.

While the method of restriction is still uncertain, it is clear this restriction will infringe certain constitutional rights. These rights include: ● The right to equality, which includes the right not to be unfairly discriminated against; ● The right to bodily integrity, which includes the right to security in and control over one’s body; ● The right to privacy, which includes the right to have one’s personal medical information remain private and the right to decide whether to disclose such information; and ● The right to freedom of thought, belief and opinion.

These rights are indeed important. But no right is absolute. Under section 36 of the Constitution, rights may be limited in terms of a law of general application if it is reasonable and justifiable in an

open and democratic society based on human dignity, equality and freedom.

The test for determining whether a limitation is justified requires an overall assessment of the particular circumstances of a case and a balancing exercise of the implicated rights.

Our constitution provides that limitations on constitutional rights will pass constitutional muster if, considering the nature and importance of the right and the extent to which it is limited, this is justified in relation to the purpose, importance and effect of the limiting provision, taking into account the availability of less restrictive means to achieve this purpose.

In this instance, the rights of those who choose not to be vaccinated must be weighed against the government’s obligation to take steps to

THE TEST FOR DETERMINING WHETHER A LIMITATION IS JUSTIFIED REQUIRES AN OVERALL ASSESSMENT

protect its citizens from the continuous spread of Covid-19.

Scientific evidence shows that when more people in a community are vaccinated, it is difficult for the disease to spread1.

Restricting access to public venues for the vaccinated could be argued to be a reasonable and justifiable limitation of constitutional rights as this limitation would be in the broader public interest.

Public interest is a consideration our courts use to balance competing interests and rights. What constitutes the public interest is decided on a case-by-case basis.

Restrictions that are taken in the interests of public health and safety are patently in the public interest. The intention of such restrictions would be to prevent the spread of Covid-19 and protect the health and safety of the public. In addition, the limitation on rights in this instance would be proportionate in the circumstances.

The alternative (that is, restricting access to public entertainment and leisure venues entirely to contain the spread of the virus) would be a far more restrictive measure.

While the restriction of constitutional rights is a controversial topic that rightly raises concern, the seemingly never-ending spread of Covid-19 infections and the development of newer and possibly more hazardous variants necessarily require drastic interventions by governments to save lives.

When the rights of nonvaccinated individuals to access public entertainment venues are weighed against the public health considerations at stake, these rights must, in our view, give way.

The seriousness of the pandemic far outweighs the interests of unvaccinated persons in accessing public entertainment venues and amenities. Those who choose not to be vaccinated should be prepared to sacrifice their access to such amenities in the interests of saving lives, as long as the limitation on their rights is as minimal and proportionate as possible.

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nicd.ac.za

SA’s gig workers suffer unfair labour practices Jonathan Goldberg & Grant Wilkinson Global Business Solutions The gig economy is in the spotlight again with Fairwork’s — which is an NPO focused on uplifting the global digital economy — latest finding that SA’s gig platforms do not always employ fair labour practices.

The platform gig economy — in other words, those platforms on which freelancers

are able to register and individuals are able to peruse the selection of service providers who provide the skills they are looking for — experienced a huge upswing during the thick of the Covid-19 pandemic. This trend is set to continue to expand rapidly.

Owing to the scarcity of work and mass retrenchments during the height of the pandemic, the gig platforms provided those unemployed with a means to earn some

income — be it ever so small.

This is backed up by Professor Jean-Paul van Belle of the Department of Information Systems in UCT’s Faculty of Commerce.

“While platforms have long marketed themselves as facilitators of supplementary income streams, the Covid-19 crisis has exposed the complete dependency of most of SA’s gig workers on their platforms as the basis for their livelihood.

PRINCIPLES OF DECENT WORK

In its work, Fairwork rates the gig economy globally according to the five principles of decent work.

These are: ● Fair pay ● Fair conditions ● Fair contracts ● Fair management ● Fair representation It found on SA’s most popular gig platforms workers experience poor pay levels, a

lack of job security as well as poor working conditions.

So how does a country solve this? You cannot have both situations of an overregulated workplace and one which is easy to access for the customer. There are two extremes. The “true guy” worker who takes a job and gets paid for that by the customer. This type of worker needs to remain easy to access but with limited to no protection of the contractor.

There seems to be no easy solution to these types of simple job contracts.

The ones who we think are directly catered for under SA employment law are like the platform drivers. These, in our opinion, are already covered in the definition of employee in both the Labour Relations Act and the National Minimum Wage Act. The real problem in SA for the second type of work is not the protection, but the enforcement.

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BusinessDay www.businessday.co.za October 2021

BUSINESS LAW & TAX

Working from home and the legal factors

SUIT AND TIE OPTIONAL

employers need to know as workplaces •asWhat we have known them evolve Lusanda Raphulu & Sian Gaffney Bowmans

J

udging from what employees around the world are saying in surveys, many want to continue working from home, or remotely at least some of the time, and are reluctant to go back to the office full time.

There have even been reports of employee resistance to back-to-the-office calls by employers in some countries where Covid-19 vaccination programmes have reached an advanced stage and workplaces are ready for pre-pandemic occupation numbers.

SA is still dealing with the pandemic, so it is unlikely employers in general have made firm decisions about whether to go back to the office, move permanently to remote working or aim for something in between, such as a hybrid working model.

If and when they do make such decisions, employers would do well to remember that any workplace changes they make (beyond those necessitated by the pandemic) will have to be done within the confines of the law.

The workplace as we have known it is evolving and is, in

many instances, unlikely to exist in its previous form again, but the fundamental legal principles that regulate employment relationships and employment contracts generally remain the same.

This means the methods or approaches an employer uses to bring about workplace changes within the confines of the law are, or ought to be, the same as those used in the traditional workplace.

Although a move to remote or home working is generally considered a win

EMPLOYERS WILL ALSO NEED TO GRAPPLE WITH HOW TO DEAL WITH PERSONAL EXPENSES by many employees, it could have implications for traditional employee benefits such as car and travel allowances, as well as for information security, intellectual property, health and safety and other compliance matters.

Employers will also need to grapple with how to deal with personal expenses, such as internet access, incurred by employees as a result of

W:26.1079cm H:9.9042cm

working remotely and how to deal with issues of equipment that employees may not readily have at home.

There are two main legal principles employers would need to consider when moving towards making remote working a permanent arrangement: any desired changes must be implemented fairly, and changes must be implemented in accordance with applicable laws — which do not stop at the office door. ● The law reaches beyond the conventional workplace Employers need to consider their health and safety obligations towards employees in terms of the Occupational Health and Safety Act, which requires an employer to, among other things, do everything reasonably practicable to protect employees’ health and safety in the workplace.

In this regard, the employer’s obligations to ensure the health and safety of its employees extend to where the employee is working outside of the convention workplace, including the home office. Similarly, loss of vital data and intellectual property and breaches of security may have far-reaching consequences for a

/123RF — BPLANET business whose employees work remotely.

There are additional obligations with the Protection of Personal Information Act now in full force, and there will be further obligations once the commencement date of the Cybercrimes Act is announced, both of which will be of particular importance for remote working Then there’s the Basic Conditions of Employment Act, regulating working hours, overtime, annual leave, sick leave and the like, all of which need to be considered and applied whether employees work in the office or at home.

As a general principle, a contract of employment, like any other contract, is consensual and so any contractual changes must be agreed to by the parties to the contract. An employer moving towards new post-pandemic working modes would in most cases need to consult with its employees before making any changes to their employment contracts. There are, however, exceptions to this general rule and employers may not always be required to engage in extensive

consultations in respect of the desired changes.

The nature and extent of such consultations would depend on factors such as the size of the workforce being impacted, the nature of the work the employees are doing and, most importantly, the nature and overall impact the proposed changes would have on employees’ current terms and conditions of employment.

The overriding principle is that any changes ought to be implemented in a manner that is both substantively and procedurally fair.

ANY WORKPLACE CHANGES MADE WILL HAVE TO BE DONE WITHIN THE CONFINES OF THE LAW If consultations are required in respect of changes to working conditions, such consultations would either be with the employees th1emselves or, if the employer’s workforce is unionised, with union repre-

sentatives. In a unionised working environment, an employer would also need to ensure it complies with its obligations in terms of any collective bargaining agreement regulating working conditions.

When it comes to implementing the desired changes, employers should ensure these are implemented fairly across the board and that there is no unfair discrimination.

If there is any differentiation of working conditions, the employer must be able to justify these based on operational reasons (for example, where only some are able to work remotely, and others are required to come into the workplace due to the nature of the work being done).

Employers who wish to change their operations to a remote working structure should also be mindful of employees who may not have the means, infrastructure or a conducive environment to effectively perform their services from home (despite that it is possible). ● Manage the challenges and reap the benefits Working from home has pros and cons for employers and employees alike and is likely to become a prominent working model in a postpandemic world.

A good place to start in bringing the benefits of remote working to the fore while managing the challenges that come with them is for employers to look to making any required changes to the employment contracts, as well as developing a remote working policy to regulate new working arrangements.

Even if employees are overwhelmingly in favour of making working from home a permanent feature, any changes to terms and conditions of employment must be done in accordance with applicable law.