Backdating

​​​​​​The question of backdating frequently arises in practice and it is important to understand when it is acceptable and when it is not.​

​Fraud

When documents such as minutes of meetings, contracts, and invoices are backdated purely to avoid tax or to take advantage of tax benefits by portraying a set of facts that never happened, we are dealing with the crime of fraud. The tax cases reports do not seem to contain any examples of the crime of backdating, and the only example I could find was one reported in Special Board Decision 95 heard on 22 July 1998.[1] It so happened that I represented SARS at the tax board hearing which was chaired by Peter Olsen SC who later went on to become an acting judge in the SCA.

Secondary tax on companies (STC) was introduced on 17 March 1993 and applied to any dividend declared and paid on or after that date. It was replaced by dividends tax from 1 April 2012. The financial statements of the appellant close corporation for the year ended 28 February 1994 reflected that all the capital profits of the close corporation which had arisen in 1985 had been declared by way of a dividend of R30 000 on 1 March 1993 and credited to the member's loan account on that date. The fact that all this happened conveniently 17 days before the introduction of STC seemed too good to be true. The declaration of capital profits as a dividend seemed imprudent given the close corporation's financial position, which reflected net current liabilities. It was also the first dividend declared by the company since its inception ten years earlier. The date of 1 March 1993 was unusual because it did not coincide with any date on which financial statements were prepared and the minutes provided no reason for the declaration of the dividend.

It was obvious from these factors and several others that both the minutes and the crediting of the member's loan account had been backdated to 1 March 1993, and the appellant's representative conceded as much at the hearing. He, however, sought to argue that the search for the truth or the facts concerning a company's conduct and affairs begins and ends in the books of the company. In response, the Chairman of the special board (later changed to the tax board) stated the following:

'in my view, and notwithstanding general practice, the purpose of books of account of a company or close corporation is to reflect the affairs of that company or close corporation. The “affairs" of such an entity are constituted by what it did and what was done to it, ie what actually happened. In saying this I am mindful of the fact that accounts are required “fairly" to represent the affairs of a company, and that the use of the word “fairly" recognises the “fact that in respect of many of the matters to be reflected in the accounts there is no absolute truth, or no truth which is ascertainable with certainty." (See Novick and Another v Comair Holdings Limited and Others 1979 (2) SA 116 (W) at 140).

'However this principle does not imply a licence deliberately to record falsehoods'.

In the result, the appeal was dismissed. The appellant and its representatives can count themselves fortunate that SARS did not institute criminal proceedings.

In the United States case of US v Micke[2], the defendant, Norman Micke, a tax advisor and business consultant, was less fortunate. In preparing his client's tax return for the year ending 31 December 1982 he claimed certain allowances for the purchase and leasing of equipment. The purchase and lease agreements, and cheques for the purchase of the equipment and for consulting services were dated 28 December 1982, but it was conceded that these documents were executed only in late January 1983. Micke's counsel argued that the documents merely memorialized a verbal agreement entered into in December 1982 but this was contradicted by the evidence from the taxpayer, Charles Quirt, who confirmed that he had not signed any documents in 1982. Micke was convicted of one count of willfully aiding and assisting in the preparation of the false and fraudulent 1982 income tax return of Charles and Judith Quirt and sentenced to three years imprisonment.

The reason why there are so few reported cases on backdating is probably because it tends to go undetected and can be difficult to prove.

Another case I saw during my time at SARS was one in which the promoters of an en commandite farming partnership were still recruiting partners in August 1988 when the partnership agreement was dated February 1988, no doubt to avoid para 8 of the First Schedule, introduced from the commencement of years of assessment ended or ending on or after 31 May 1988, which ring-fenced livestock losses against farming income. Another matter involved a taxpayer who had been carrying on a trade and when caught for not declaring the income in his personal tax returns, claimed that the income actually accrued to a dormant company which had not yet submitted its tax returns. It appeared that the minutes of the company had been backdated, having been modified with Tippex, but this was difficult to prove.

An area where backdating is, at least anecdotally, rife is in the field of trusts. When the trust accounts are drawn up and the income for the year has been established, the minutes of the trustees' meeting are backdated to reflect that the income was vested in the beneficiaries before the end of the year of assessment, so as to take advantage of s 25B(1), which deems the income to accrue to the beneficiary rather than the trust. Backdating a minute in these circumstances is fraudulent, since any vesting has to be done in real time. Some tax practitioners avoid backdating by passing a resolution before year end stipulating that 'all net income for the year of assessment as eventually determined is hereby vested in the beneficiaries in [specified proportions]'.

With the s 12BA allowance for renewable energy assets due to expire on 28 February 2025, SARS is sure to be on the lookout for taxpayers who have backdated their claims.

Rectification and recording

When I was at SARS, we would often get requests from taxpayers to allow the submission of revised financial statements for a variety of reasons. The usual one was that a company had forgotten to charge interest on a loan to a shareholder, which resulted in the loan being deemed to be a dividend under s 64C(2)(g) and subject to STC. Unless there was a written loan agreement providing for such interest, SARS would not accept such a request as it was simply a case of trying to backdate a transaction which had never happened. But if it could be shown that the financial statements were incorrect, there would be no problem with accepting the revised accounts.

There is also no difficulty in preparing minutes of a meeting after the event as long as the meeting actually happened. But it is best to prepare the minutes as soon as possible after the meeting in order to discharge the onus resting on the taxpayer under s 102 of the Tax Administration Act 28 of 2011.

How does one prove that a document was actually in existence on a specified date? One way would be to have the document stamped by a Commissioner of Oaths. With computer-generated documents, the metadata showing when the file was created and by whom may be of assistance.

Effective dates

It is common in contracts for the sale of a business to have an effective date when the transaction will take place. The SARS Comprehensive Guide to Capital Gains Tax (Issue 9) notes in 6.3.4 that such an effective date does not determine the time of disposal of an asset, which is determined under para 13 of the Eighth Schedule. Unless the sale is subject to a suspensive condition, the time of disposal is when the contract is concluded.

Tax is an annual event

Sometimes taxpayers try to have the tax consequences of a transaction cancelled or brought into account in a previous year of assessment retrospectively. The law in this regard was set out in Caltex Oil (SA) Ltd v SIR in which Botha JA stated that[3]

'income tax is assessed on an annual basis in respect of the taxable income received by or accrued to any person during the period of assessment, and determined in accordance with the provisions of the Act. … It is only at the end of the year of assessment that it is possible, and then it is imperative, to determine the amounts received or accrued on the one hand and the expenditure actually incurred on the other during the year of assessment'.

He continued:[4]

'What is clear, I think, is that events which may have an effect upon a taxpayer's liability to normal tax are relevant only in determining his tax liability in respect of the fiscal year in which they occur, and cannot be relied upon to redetermine such liability in respect of a fiscal year in the past.'

In New Adventure Shelf 122 (Pty) Ltd v C: SARS[5] the appellant company had sold immovable property in the 2007 year of assessment. When the agreement was cancelled in the 2012 year of assessment, the company sought to have the 2007 assessment reopened to redetermine the capital gain. Based on the Caltex case the court dismissed the company's appeal.

With effect from 1 January 2016, the Eighth Schedule was amended to provide specific rules dealing with the cancellation of contracts. Taxpayers that cancel a contract in the same year of assessment can disregard the original disposal under para 11(2)(o) as long as the parties are restored to their original position. When the cancellation relates to a transaction in a previous year of assessment, any earlier capital gain or loss is reversed in the year of cancellation and the base cost is restored under para 20(4).

In Matla Coal v CIR[​6] the appellant had entered into a contract for the sale of coal rights and payment was received on 20 February 1980. However, the contract underwent novation resulting in the payment becoming consideration for a restraint of trade. The question was how the amount should be treated in Matla's year of assessment ending 30 June 1980. The court considered that the matter should be determined either at the time of payment (Mooi v SIR[​7]) or at the end of the year of assessment (Caltex Oil (SA) Ltd v SIR[8]). Since both dates fell within the same year of assessment, the sale was treated as being for the sale of coal rights.

Pre-incorporation contracts

Section 21 of the Companies Act 71 of 2008 enables a person to enter into a contract for a company to be formed. Upon ratification by the company, the agreement is as enforceable against the company as if the company had been a party to the agreement when it was made.[9]

Silke on South African Income Tax[10] notes that s 21(6) does not have the effect that profits earned from the date of the contract to the date of ratification are taxable in the company. Instead, Silke maintains that the vendor is taxable on such profits. Silke states that SARS, by contrast, taxes the trustee on the pre-incorporation profits.

The basis for not recognising the profits retrospectively in the company is the principle established in CIR v Witwatersrand Association of Racing Clubs[11] that income cannot be disposed of after accrual.

Another way of dealing with pre-incorporation profits and profits earned before a partnership is formed is through a contract for the benefit of a third party (stipulatio alterii). Again, the textbook writers seem to be unanimous that pre-formation profits are not taxable in the company or partnership. But Broomberg on Tax Strategy[12] notes that these arguments are 'a little thin' and that 'there are more than interesting arguments to support a view that at least as long as the period of retrospectivity does not cross over the end of any year of assessment, income tax law should recognise the retrospective effect of a contract'. 

The learned author does not say what these arguments are, but I would venture that they are based on the fact that the Caltex case emphasised that 'It is only at the end of the year of assessment that it is possible, and then it is imperative, to determine the amounts received or accrued on the one hand and the expenditure actually incurred on the other during the year of assessment'. In Minister of Home Affairs and another v American Ninja IV Partnership and Another[13] the SCA recognised the registration of two films for subsidy purposes and had no difficulty with a contract entered into on behalf of the partnerships to be formed.

There could be harsh consequences if SARS were to tax both the vendor or trustee as well as the company or partnership on the pre-formation profits, since this would amount to economic double taxation. As David Clegg noted in his 1985 article titled Retroactive Contracts,[14] such contracts are best avoided.

This article was first published in ASA September 2024