By Andrew Seaber (DLA Cliffe Dekker Hofmeyr Tax Alert)
Following the Supreme Court of Appeal decision inCSARS v Tradehold Ltd (case no 132/2011 Supreme Court of Appeal, handed down on 8 May 2012),much has been written about whether or not SARS will be entitled to levy an exit charge following a person ceasing to be a resident of South Africa, pursuant to the deemed disposal provisions in section 9H of the Income Tax Act, No 58 of 1962 (Act).
In a previous issue of the Tax Alert, we traversed some of the difficulties and anomalies that arose in this judgment. Essentially, a person (whether an individual, a juristic person or a trust) is deemed to have disposed of its assets, subject to certain exceptions, on the day immediately before the day on which it so ceases to be a resident.
On the one hand, certain authors hold the view that the judgment should be seen in light of the unique facts and circumstances of the case that are unlikely to ever present themselves again. On this basis, it is believed that theTradeholddecision should not be seen as offering taxpayers a defence against an attempt by SARS to levy an exit tax following the taxpayer ceasing to be a resident of South Africa.
On the other hand, it is believed that, although premised on a set of unique facts, the judgment nonetheless provides authority for an argument that the relevant provisions of a double taxation agreement be applied in preference to, and has the effect of the overriding the exit tax provisions contained in section 9H of the Act. The proponents of this view thus believe that in the context of an applicable double taxation agreement, section 9H of the Act cannot apply and it is only the contracting state of which the former resident of South Africa is now resident that can levy tax on any gains derived as a consequence of any disposals or alienations. The effect, if this view is to be upheld going forward, is that SARS will no longer be entitled to levy an exit tax arising out of a person ceasing to be a resident of South Africa.
To avoid any uncertainty, the National Treasury has in the Draft Taxation Laws Amendment Bill 2012 (DTLAB) (recently released for public comment) proposed that section 9H of the Act be amended. Essentially, the amendment contemplates that a person’s year of assessment is deemed to have ended the day before that person becomes a resident of another country. It also provides that in the context of persons other than companies such persons will be deemed to have disposed of all their assets immediately before the end of that year of assessment, at market value. Insofar as companies are concerned, the relevant company will be deemed to have been liquidated and to have distributed all its assets to its shareholders. Such company will also be deemed to have re-incorporated a new foreign company on the following day. Foreign residency will thus only commence in the new year of assessment.
According to the Explanatory Memorandum to the DTLAB, the amendments will more closely align the exit charge provisions in section 9H with international norms.
Although the amendment does not favour taxpayers, it is to be welcomed as bringing about certainty in relation to exit charges, if nothing more. If finally brought into law, the proposed amendment will have retrospective effect to 18 May 2012, that is the date on which theTradeholdcase was decided by the Supreme Court of Appeal.