The Companies Act 71 of 2008, which came into operation on 1 May 2011, includes new rules and regulations pertaining to the retention and location of company records. More specifically, s24 of the Companies Act requires company records, including books of account and other financial records, to be kept for a period of seven years.
This article explores the potential conflict between the new document retention requirements under the Companies Act as compared to similar provisions under the Income Tax, Value-Added Tax (VAT) and the Customs and Excise Act (Customs Act).
In general, the Income Tax, VAT and Customs Acts require 'records' to be kept for a period of five years, either in hard copy or electronic form. The question arises as to whether a taxpayer will be in contravention of the Companies Act in the event that 'records', specifically relating to the general books of account used for drawing up annual financial statements, are destroyed before the seven year period, if a relevant tax statute requires a shorter retention period.
Depending on the statute in question the concept of what constitutes 'records' may take on a different meaning. For instance, under s73A of the Income Tax Act a taxpayer is required to retain all records relevant to a return for a period of five years - in this case 'records' include anything to do with a taxpayer's books of account. Logically, books of account would include everything necessary to draw up annual financial statements which, in turn, form the base for any company tax return. For purposes of s73B of the Income Tax Act, dealing with capital gains and losses, the record retention requirements are customised to include, inter alia, items such as agreements, valuations and apportionment details.
For purposes of s55 of the VAT Act 'records' include those required to be kept for five years under s73A of the Income Tax Act and additional VAT specific information, such as records relating to the types of goods and services supplied, tax rates applied, and importation documents and manuals describing the accounting system used in each tax period. The Customs Act refers to the retention of books of account and other customs related documentation (eg. bills of lading, bills of entry) for a period of at least five years. It is evident then that accounting records / books of account will bear similar meanings under the various tax statutes and the Companies Act, resulting in overlapping retention requirements.
To the extent that there are overlapping record retention requirements between the Companies Act and the Income Tax, VAT and Customs Acts the next step is to determine which statute will prevail. The potential pitfall for taxpayers is contained in s5 of the Companies Act dealing with its general interpretation.
Specifically, s5(4)(a) of the Companies Act states that in the event of inconsistency between the Companies Act and any other national legislation the provisions of both acts will apply concurrently, but only to the extent that it is possible to comply with one inconsistent provision without contravening the second. The aforementioned provision works on the basis that if a taxpayer complies with the seven year record retention requirement under the Companies Act he would automatically be compliant with the relevant tax statute requirement of five years. If a taxpayer only complies with the relevant tax statute requirement of five years and goes about destroying the applicable records in year six, he would be in contravention of the Companies Act.
Section 5(4)(a)(i) of the Companies Act further lists certain pieces of national legislation that would prevail over the provisions of the Companies Act in cases of inconsistency. None of the acts administered by the Commissioner for SARS are included meaning that the provisions of the Companies Act, as it relates to document retention, will prevail over the Income Tax, VAT and Customs Acts.
The default position for taxpayers from 1 May 2011 would seem to be compliance with the more onerous Companies Act retention period of seven years relating to accounting and other similar records, as that would ensure automatic compliance with the relevant tax statutes. National Treasury should consider possible alignment of the record retention requirements under the draft Tax Administration Bill (currently five years) with the Companies Act to ensure consistent application.